382: The collapse has begun
It’s just that most people haven’t noticed it yet.
Money Printing: The USA’s gigantic money printing spree in a vein attempt to prop up the failed US economy is causing widespread inflation through stealth. Let us explain.
· National governments are switch between RPI and CPI as a measure of inflation to try and kid the markets that inflation is not a problem
· Food producers are filling packages with less produce and not telling the customer
· Interest rates stay at 0.5% whilst inflation rises to 5% - meanwhile food and energy inflation has rocketted to 10-15%
· Savings are being massively eroded - savings rates are ~1.5%
· Taxes are rising as governments take a larger swath of earnings through VAT and income taxes
· Productivity drops and unemployment rises as inflation takes hold
· $2 Trillion of printed money since 2008 has been used by global speculators to pump up oil prices as the banks and super-rich make millions from the commodity bubble
· The dollar declines whilst inflation rises, further damaging the real wealth of Americans
· The Fed and US Administration purposely devalue the dollar in a desperate attempt reduce the real terms value of the $14.3 Trillion debt, thereby attempting to avoid default
US dollar crashes
US Debt Mountain: If normal interest rates were 6% (yes, 1% over inflation), the USA would need 100% of it's tax income to pay interest payments on the $14.3 Trillion debt post QE2. The USA cannot afford QE3 – if the country goes ahead with QE3, there will surely be an eventual default as debt payment simply become too high – the Fed can print all it likes, it just won’t help.
Government Buying It's Own Debt: Before the 2008 crash, 70% of the US debt was purchased by foreign investors, 20% by US investors and 10% by the US government. Now as QE2 ends after the latest $0.6 Trillion printing binge, the government is purchasing a gigantic 70% of this fiat debt, with foreign investors only 20% and local investors 10%. That tells us there is no market for the US debt. When QE2 ends 30 June 2011, we predict interest rates will need to skyrocket to give a decent risk premium to entice foreign investors to purchase US debt in auctions. We expect uptake to be low as continued procrastination on the $14.3 Trillion debt ceiling continues. The US is close to default – it could happen as early as August 2011. Public sector workers might start getting paid late, projects will be put on hold, suppliers will be late getting paid - all possibility in the next six months.
Peak Oil: The underlying reason for these problems we believe is Peak Oil. Sky-rocketting oil prices in part caused by the $2 Trillion of printed money have fed through to inflation that is now out of control. Meanwhile the western nations know that if they put up interest rates, no-one will be able to afford the debt payments, so a massive western debt default contagion will ensue with stock market crash and rapidly rising unemployment. Greece is just the tip of the iceberg. Global oil production has remained flat for the last six years now - and the end of cheap oil has caused food, energy and general inflation. Or stagflation is a better descriptor - namely stagnant GDP growth with high inflation.
Riots: The USA is petrified riots will break out in the USA, like those in Tunisia, Egypt, Greece, Syria and Yemen. The common theme for all these riot stricken countries is that their food and fuel prices have sky-rocketted whilst the countries have been unable to subsidize food or fuel prices because of massive oil import bills. If the standard of living drops, food prices sky-rocket and gasoline prices skyrocket further in the USA, then riots could break out across the country in protest. That’s a key reason the printing presses continue – to delay the day the real crisis breaks out. And remember, the USA has about 300 million guns in circulation, so things can degenerate very rapidly because most of the population has access to guns. The American way of life – the right for cheap fuel, cars, food and guns is being challenged by global forces – and if the country gets into worse trouble economically, there are many ingredients for widespread civil disorder particularly in urban areas.
Potential Default: This is all very gloomy, but the reason to highlight this is that – there is a significant risk of US debt default and the collapse has begun. It initially was triggered after the dot-com bubble burst and years of low interest rates leading to a global real estate bubble. This then collapsed with sub-prime issues and the recession was a short one only because of $2 Trillion of printed money – another short term fix. Interest rates have remained at ridiculously dangerous and low levels since late 2008 as the printed money had been used by speculators to make high short-term returns on commodities, and stocks and shares, thereby further increasing inflation. The Fed has in our view grossly mismanaged the situation, and the bubble is about to go pop.
QE3 Would Only Defer The Crisis: The only way a crash could be deferred for a year or so is if QE3 began, but this would only make matters even worse in 2012 and 2013. It's a very bleak picture of rising inflation, declining dollar, increasing debt, decreasing living standards, potential default, rising oil prices and loss of the US as global economic and military leader. If you are heavily invested in the USA at this time, we have a simple message – get out while you can - because its only going to get worse.
QE2 Was A Waste Of Taxpayers Money: Despite the $2 Trillion of addition money pumped into the system, banks are hoarding the cash because they expect bad times around the corner. The confidence in the Obama Administration is rock bottom – it’s just that everyone's being quiet about it. Massive public sector value destroying projects have failed to reduce unemployment (500,000 people employed to prepare a sensous survey is a classic example). Real estate prices continue to decline. Another recession is just around the corner now, it’s just that the Fed and Government have not told anyone. They continue to play up the market and the investment banks are not much better. Short positions are becoming more common-place, everyone has stop loss positions and not even the Fed will be able to prevent a massive stock market meltdown when the news gets out that another recession has started, or new breaks that another US Bank or State has gone bankrupt. By August, unless the debt ceiling is increased, public sector workers could go without pay.
Banker Bonuses: Record low interest rates mean the banks can rake in record profits temporarily as mortgages cost 6% but interest rates remain at 0.5% - a gigantic rip-off. This allows the bankers to receive record bonuses, before these banks get back into trouble. Why do you think their stock prices remains so low – because everyone knows it's just a temporary phenomena. Let’s be honest, as soon as the crash occurs, the bankers will be the first to head for the hills into retirement taking their million dollar bonuses with them. Nothing changes on this score. There was only one year – 2008 – the bankers did not get fat bonuses. But look at the financial destruction all around – little wander so many people are upset.
OPEC Mess: Meanwhile Iran Presided over the 12 June OPEC meeting with the acting Oil Minister of Iran (who was head of physical education in Tehran a few weeks ago) – the meeting was a mess, nothing was agreed or achieved and the cartel is a shadow of its former organisation. Iran and Venezuela want higher oil prices – of cause this will hurt the USA. But it may also be partial retribution for the deliberate US policy of declining the dollar value – because oil of course is priced in the US dollar, at least for now. Since QE2 began, inflation has risen 15% in the USA whilst the dollar has declined 10% against a basket of currencies – hence the average US citizen’s wealth has dropped a gigantic 25%. This is how the American people have been hit by inflation but they may not have noticed yet.
Shale Gas The Only Hope: Unless the USA can switch rapidly to shale gas production (e.g. powering cars with natural gas, displacing their gigantic oil consumption) then they will continue to be hammered by OPEC and high oil prices with $0.4 Tillion of oil imports per year, almost as much as the recent QE2 programme. But just when it looks like the USA could break its gigantic dependence on imported oil, a new damaging lobby has broken out wanting to try and ban hydraulic fraccing – fraccing is an old technique the oil business has been executing for 30+ years. Talk about shooting oneself in the foot! Gas is cheap, plentiful, low cost, relatively clean with very small environmental footprint with low CO2 and sulphur emissions – now a few (in our view) misguided activists want to destroy the only hope of clean low cost indigenous energy in the USA – crazy. It's already happened in France - a law was passed in May 2011 outlawing hydraulic fraccing (and now the EU is considering an European-wide ban, something the Russians must be quietly praying for in view of their gigantic conventional gas reserves and power games with Europe and the old Soviet block countries).
$192,000 Family Debt: The average US citizen now owes $47,000 of national debt – that’s $192,000 for a family of four. It’s totally unsustainable. Meanwhile Medicare costs have risen to $6500/person per year, that’s $26,000 per person per year. So if there is a family of four, one person working, this family would earn $26,000 of taxable profit to pay for Medicare alone! But meanwhile this money is needed to pay for the $192,000 debt. Get the message - that's insolvent.
$1 Trillion Annual Deficit: US tax revenues are $1.75 Trillion a year, whilst government spending is $2.75 Trillion – that’s 60% more than it should be even before paying for the previous debt. Bottom line is, the USA is very close to bankrupt. It only needs foreign investors to shy away from the US debt auctions in July after QE2 ends to precipitate higher interest rates and a massive recession as private individuals and business fold along with government departments and State. Bankers would flee, investors sell up and head for the hills.
Close to Bankrupt: Bottom line is – its bleak. Up until the last two years, we were always very positive about the USA, it's economy, natural resources, people and it's powers to overcome obstacles. But this is entirely different, we have reached a tipping point as of June 30 2011 when QE2 end. The collapse has already starting and you will see with your own eyes a financial sovereign meltdown that has never occurred in the USA as the ravages of Peak Oil and printed money combined to drive down US living standards to shadow of the roaring 80s and 90s.
Collapse: If you have money invested in the US stock market – warning – it is a bubble – it has started a collapse – get your money off the table now - you aint seen nothing yet!
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