Graham Summers: The U.S. Debt Spiral

As the mortgage foreclosure scandal spreads like wild-fire it is now clear that the alleged housing boom which made us all rich was in fact backed by nothing but loose monetary policy, systemic fraud, and rampant corruption.

Indeed, it now appears that banks were not only signing foreclosure notices without bothering to even verify the information ON the foreclosure (including WHO owns the house), but that some institutions were actually COUNTERFEITING paperwork if they couldn’t come up with legitimate documents.

While most of the mainstream media is absolutely shocked that the housing bubble and bust was/is rife with criminality (allegedly), I have to admit this is not a total surprise for me. Consider this little tidbit from the Miami Herald from 2008:

Between 2000 and 2007, “regulators allowed at least 10,529 people with criminal records to work in the mortgage profession. Of those, 4,065 cleared background checks after committing crimes that state law specifically requires regulators to screen, including fraud, bank robbery, racketeering and extortion.

The article I’m quoting is from 2008. It starts with a story about an ex-convict who ADMITS he’d been convicted of cocaine trafficking ON HIS MORTGAGE LICENSE APPLICATION and was APPROVED.

Of course, not ALL of the housing bubble involved coke dealers and ex-cons, but this tidbit should have been a MAJOR red flag to everyone that the housing bust (which was accelerating at that time) was going to involve a lot more than home prices falling and money being lost.

I’ve said it before and I’ll say it again… the US economy today is not about a recession or a housing bust… it’s about an Empire in DECLINE.

We’ve got all the tell-tale signs: we’re engaged in endless foreign military excursions that bring nothing to the country, we’re depreciating our currency at a rapid rate, we’re trashing the national balance sheet and falling further and further into debt.

Indeed, the US was already bordering on bankruptcy BEFORE the Financial Crisis began. And SINCE the Crisis began the “powers that be” have done the following:

• The Federal Reserve cuts interest rates from 5.25-0.25% (Sept ’07-today)
• The Bear Stearns deal/ Fed buys $30 billion in junk mortgages (March ’08)
• The Fed opens various lending windows to investment banks (March ’08)
• The SEC proposes banning short-selling on financial stocks (July ’08)
• The Treasury buys Fannie/Freddie for $400 billion (Sept ’08)
• The Fed takes over AIG for $85 billion (Sept ’08)
• The Fed doles out $25 billion for the auto makers (Sept ’08)
• The Feds’ $700 billion Troubled Assets Relief Program (TARP) (Oct ’08)
• The Fed buys commercial paper (non-bank debt) from non-financials (Oct ’08)
• The Fed offers $540 billion to backstop money market funds (Oct ’08)
• The Fed backstops up to $280 billion of Citigroup’s liabilities (Oct ’08).
• Another $40 billion to AIG (Nov ’08)
• The Fed backstops up to $140 billion of Bank of America’s liabilities (Jan ’09)
• Obama’s $787 Billion Stimulus (Jan ’09)
• The Fed’s $300 billion Quantitative Easing Program (Mar ’09)
• The Fed buying $1.25 trillion in agency mortgage backed securities (Mar ’09-’10)
• The Fed buying $200 billion in agency debt (Mar ’09-’10)
• Cash for Clunkers I & II (July-August ’09)
• The Fed opening up currency swap lines to European Central Banks (April-May ’10)

All of these sound pretty clever and complicated, but in reality they consist of nothing but throwing VAST amounts of money at every issue that arises rather than allowing the junk debt in the system to be cleaned out. Consequently, NOT ONE move that’s been implemented has been positive for the US Dollar OR the US balance sheet.

At some point, and I cannot tell you when, the US is going to find itself facing a situation very similar to that of Greece. Indeed, if Greece’s numbers are “Crisis Worthy” investors should consider that the US’s fiscal condition is in fact AS BAD IF NOT WORSE than Greece’s.

The US is expected to run a $1.7 trillion deficit in 2010. Assuming that the GDP numbers are accurate (they’re not, but that’s an article for another time), the US economy is in the ballpark of $14 trillion. This means we’re running a deficit equal to 12.3% of GDP. That’s RIGHT next to Greece.

Then of course, you’ve got our Debt-to-GDP ratio. If you ignore unfunded liabilities like Social Security and Medicare, the US already has a Debt-to-GDP ratio of 98.1%. That’s only slightly off of Greece’s Debt-to-GDP of 112%.

Throw in Fannie and Freddie’s mortgage debts (Uncle Sam own $5 trillion of these now too), and we’re already well over a Debt to GDP of 112% (actually it’s 130% or so). And when you include Social Security and Medicare ($45 trillion) this puts total US Debt-to-GDP at 421% ($59 trillion of Debt on a GDP of $14 trillion).

Those investors who believe the US is somehow immune to a debt collapse are in for a VERY rude surprise.

Good Investing!

Graham Summers