1-18-10

Debt: A Love Story
 

Welcome back to one of the last bastions of sanity, logic, and truth remaining in the world...

What do a scorn woman and debt have in common?

Answer: they are both on a relentless quest to slowly and insidiously destroy you with a smile on their face, and they will not rest until they succeed or you neutralize the threat.

Long time readers will know I believe this next decade to be no normal decade and that nobody will be immune from what happens in it. This will affect everyone and to be ignorant of what's really going on behind the scenes will be very costly.

I'm talking about a totally game-changing event.

It's my belief we're witnessing the end game in an evil experiment that started with the creation of The Federal Reserve in 1913; a conspiracy of private bankers took control of the money supply in direct violation of The American Constitution and got away with it.

Note: The Federal Reserve is a PRIVATE entity, unlike all other central banks around the world, which just posted record profits. Yes, I said profits. No other central bank is a for-profit organization because they are, in theory, there to serve the people rather than themselves. The USA is the exception.

All this happened so gradually, so insidiously, and over such a long period, that the population swallows it whole without question. Since the creation of the Fed, the dollar has lost 95% of its purchasing power. The bankers behind this deception have got richer as a result (as they can create their own money) and the people have got poorer as their dollars are worth less and less while their wages don't keep up with latent inflation.

The path to destruction of an adversary is best achieved through slow, calculated stealth. Only by awareness of the attack can you defend yourself.

Much like guerrilla warfare, such an insidious assault is hard to tackle head-on because you're dealing with a faceless enemy. You, we the people, have to unmask this enemy.

Debt is at the heart of the matter. Americans are (were?) in love with debt. People are so obsessed with their credit score that to have a low one makes an individual seem a failure and even a social outcast; that is to say people are literally measured by their ability to get into debt. Debt was considered a dirty word not long ago; just ask anyone over 80.

Debt can be good or bad. If you borrow money at 5% and then reinvest it at 7% and perhaps have a potential for capital gain this is obviously good debt. If you borrow money at 5% and spend it on a flat screen TV that yields nothing that is bad debt. Even assuming that flat screen TV didn't depreciate it would still be bad debt because you are paying 5% net interest.

A private corporation has very stringent procedures to consider its position with debt on two counts: its balance sheet and its profit and loss statement. The former measures assets against liabilities and the latter measures income against expenses.

Please take the time right now to do what governments and most individuals do not: do your own profit and loss and balance sheet.

If your expenses are greater than your income (probably because of debt servicing), you are by definition insolvent. If this were a corporation you would only last as long as the cash you had available to make up the shortfall.

If your assets are less than your liabilities (again probably because of debt servicing), you have a negative Net Asset Value. If this were a corporation your stock would be classed as junk. Americans appear to have realized this and are paying off debt with gusto according to the latest figures.

On this basis, governments the world over, but especially the US, are insolvent and have junk status.

This is especially the case now and something ultimately has to give. The assumption that America can continue to borrow regardless of the consequences (and many analysts still make this claim) is nonsensical. People will only be taxed so much. The bond market will only swallow so much. What's remaining of the value of the dollar will only take so much before printing leads to final destruction.

If you have a mortgage, inspect the interest component. If you only pay interest you're just treading water; the debt is not going away. And interest alone can consume all your resources.

Interest paid on federal debt in 2009: $202 billion

» Projected interest in 2019: More than $700 billion

» Current federal spending...

» Military: $664 billion

» Social Security: $644 billion

» Medicare and Medicaid: $632 billion
 

At the White House, press secretary Robert Gibbs said that getting the nation out of its $12 trillion hole will require economic growth, job creation and "balancing our fiscal situation."

Gibbs is talking about balancing a checkbook. It's sad that we need a leader to tell us this and to have CNN report this as some sort revelation that could only be born from the lips of an intellectual.

Governments have stepped in to make up for the loss of spending. Murray Rothbard, for one, warned against a long-term reliance on borrowing by government to pay for public goods and services:

Deficits and a mounting debt ... are a growing and intolerable burden on the society and economy, both because they raise the tax burden and increasingly drain resources from the productive to the parasitic, counterproductive, "public" sector. Moreover, whenever deficits are financed by expanding bank credit-in other words, by creating new money-matters become still worse, since credit inflation creates permanent and rising price inflation as well as waves of boombust "business cycles."

If this isn't the first time you've read here about debt, gold, and inflation I make no apology; understanding this conundrum is the key to survival in the upheaval that lies ahead.

The only way forward is to inflate or go under. America and her power-elite do not want to go under; inflation, and thereby the destruction of the dollar, is the only course of action. By making dollars worth less, the debt becomes worth less.

What's happening currently in the markets...?

Right now we have a particularly fierce battle between buyers and sellers trying to gain traction. Short-term technical indicators I rely on point to a further advance but fundamental indicators point to big risks underneath it all. Better opportunities will soon make themselves clear. Be sure to check out last weeks issue for the 2010 forecast.

The 'January Barometer' is one of the most trusted indicators for the year ahead. Historically, if the month of January ends up it portends for an up year. Last year this was proven wrong. In fact, many of these monthly/seasonal indicators were turned on their head last year; 'The January Barometer', 'Sell in May and Go Away', 'September and October are the worst months'. 'The Santa Claus Rally' came true but the usual subsequent 'January Hangover' didn't.

It's a topsy-turvy world. One can only wonder if this trend continues in 2010 that we use an 'up' January as a contrary indicator.

At a time like this I always try to rise above the noise and remember my favorite adage: the market will try to embarrass the most amount of people at any given time.

The bear waits patiently in his cave. Position yourself to profit.

Best Regards,

Mark Patricks

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