Today we saw a typical Buffet move as he surprised everyone by taking a $5B investment into BAC. Everyone is talking about it and praising how good this is for the company, I guess it kind of is, but there are others, like me, who are more worried now than before Buffet made the investment. I do not own BAC and I am not short BAC or any financial firm right now so I have no self serving purpose for this.

What concerned me is the fact that the figure was $5B just like the Goldman deal. This seems to be a figure Buffet is comfortable risking in times of duress. Buffet has billions on hand, but only $5B that could yield him 6% something isn’t right. Now, I considered the pre-Buffet chatter about BAC to be the typical rumor mill stuff, illiuid, cut off from the markets, huge liabilities that haven’t been realized and the like, but nothing real or substantially true. However, I admit the massive selling of pieces of their business did strike me as if they were concerned about things, but it did not strike me as they were going out of business it was merely troubling. However, now with Buffet adding in his now typical $5B ‘petty risk cash’ into the firm does make me concerned about BAC.

Clearly the firm needed the cash as it was presented to and accepted in, what, 12 hours. You do not take $5B paying out 6% when we are in a zero interest rate environment and can issue paper cheaper without raising any suspicions. Frankly, taking a middle of the night cash infusion from Buffet is strikingly similar to 2008 for my taste. BAC got hosed on this deal, as many others have already said, and they are paying way too much for this cash. A case can be made that BAC paid the premium for the Buffet ‘seal of approval’ but that seal did not work for Goldman in 2008.

If one followed Buffet in 2008 on the Goldman deal they lost out pretty bad. After the cash infusion was made Goldman dropped to $48/share, about $70/share below Buffets investment, and the average investor would have probably sold at a loss given the events of 2008. If they were smart they would have doubled up, but come on, it was 2008! Regardless, Buffet was too early and could have done much better if he waited, but more to the point what kind of due diligence did he do back then? I am thinking more than he did with BAC, but no one knows for sure. What I do know is the government had to follow up on Buffet’s investment to the tune of $700B as they had to save the whole system. The government bailed out Buffet in the Goldman deal, basically.

What is different this time is the fact that countries are going broke now, not just banks, and there is risk everywhere. With BAC not only do you have sovereign risk, but you have derivatives risk and a whole bunch of mortgage issues from put backs to just bad loans altogether. I believe this time is very different because it is sovereign risk and we have had this issue before… in the 1930’s. In the Depression Europe had defaults and many countries devalued their currency which hurt the U.S. as we, at that time, were a net exporter of goods. The European issue deepened our Depression and the same thing will happen this time around, unfortunately. Not only may BAC hold European debt on its books, but they might have CDS exposure as well, not that we would know about that, thanks Frankendodd. In any event BAC is one hot mess and the sad thing is that BAC will not drop from $110 to $48 because it is at $7 already, you do the math to see what a similar drop would look like for BAC.

I do not think BAC is finished, it might be, but I doubt it. I do believe it will be stuck in the single digits for a very long time. For crying out loud, they bought Countrywide, just a reminder.

I had made a prediction last year, found HERE, that US Treasuries would be put on negative watch by Fitch and downgraded to junk by China. Well, I was wrong as it was S&P who made the call and actually did downgrade the US to AA+ which is still a joke as the government will never be able to actually repay much of the $14T it has outstanding without just printing money, which IS a form of default. China is now saber rattling about the US dollar again, but this time they are serious, I think at least, asking for a new reserve currency and I think they will get what they want as other countries have raised the same concerns.

The US deserved to be downgraded and we should be downgraded much further than AA+ as we will not get serious about debt reduction. To prove my point all we have to do is look at how the debate is structured. The politicians are all talking about annual deficits and NOT the outstanding debt load. They do all sorts of double talk to make sure the average person only believes we have a trillion or o in outstanding debt, but that trillion is just the annual deficit and no one talks about the big number of $14T in outstanding current liabilities. S&P gets it and that is why they are the first one to downgrade the US.

When the downgrade happened the Treasury Department acted quickly calling the move unjustified, political, terrible lapse of judgment, S&P made a mistake, and these are the same people who rated junk bonds AAA to begin with. While it is easy to criticize S&P for their prior actions, but relative to its sovereign debt ratings those arguments hold no water and anyone with a stitch of unbiased rationale realizes that the US is indeed in big trouble and we do not deserve a AAA rating. The worst part about this downgrade is the fact that the government is now baring down on S&P about this downgrade.

It was just announced that the Senate Banking Committee will be looking into the downgrade. While we do not know if hearings will happen or not the person close to the matter did say all options are on the table. I was under the impression that Congress wanted independent ratings agencies along with an independent Federal Reserve. Silly me I guess as the minute a ratings agency does the right thing they try to crush it with Senate investigations, but the Federal Reserve can monetize trillions in US debt without Congress blinking an eye, unreal.

What Congress is saying is be independent as long as you do what we say and want and if you decide to think for yourself, well, we will hunt you down and skin you alive. The government is acting very much like the old Soviet Union and is sending a message, not matter what we do keep us rated AAA. How can a ratings agency offer an independent review of a security if the government demands that it gets what it wants regardless of what the facts are? It is insane to think that the ratings agencies will remain independent if Congress has investigations if the US is downgraded. Frankly, this is extortion, blackmail or a combination of the two since the government is the one who issues S&P with its ratings license. Will S&P lose its license over this? I do not know, but it is possible and shameful if that is what happens.

As an American you should be angry over the downgrade, but not at S&P. You should be angry at the people who rubberstamps every bill that comes along wasting billions of dollars. You should be angry at their inability to work with each other and address the seriously obvious structural issues that will consume immense amounts of capital in the coming years. You should be angry that the Senate wants to investigate S&P while saying other quasi government agencies are left alone even though they are part of the problem. You should be angry that Alan Greenspan, Mishkin, Bernanke and every other clown out there says the US will never default because we can print our own money to pay the debt, devaluation IS a default.

You should NOT be mad at S&P and you should demand that Congress work on real problems because their lack of dealing with those problems is exactly why S&P downgraded them to begin with. We are not showing the world that we are capable of fixing any real problems. What we are showing the world is that if we do not get our way we will simply create problems were none exists and threaten the “trouble maker” with depriving them of their livelihood or by throwing them in jail. Way to go America.

Listening to the talking heads TV and our political leaders about this debt crisis is merely subjecting you to unneeded heartburn. First and foremost, the USA is not “defaulting” on anything on August 2nd, period. The USA will not be downgraded on August 2nd by any of the ratings agencies, even though we should not be carrying the AAA rating to begin with. Bonds only default is interest or principal payments which will not happen on August 2nd as the Treasury brings in enough money to cover our debt payments on a monthly basis. Social Security checks and Medicaid/care checks will go out and the sun will rise in the East and set in the West.

All that happens on August 2nd is the Treasury Department looses the ability to issue new debt beyond the stated debt ceiling. I have not witnessed such scare tactics in my entire life and the misinformation the media and politicians are giving the public is shameful. In fact this entire debate is shameful as we are not having an honest discussion about debt and the US government. Everything you hear being discussed is merely kicking the can further down the road and I believe the markets will not let this can kicking continue on forever. Everything comes to an end at some point and our crazy spending will have to end and we all need to pay the Piper.

Let’s get real about our debt problem. We are hearing all sorts of nonsense about $4T in deficit reducing spending cuts or a combination of cuts with higher taxes over a ten year period. That means we are raising taxes or cutting spending, or a combination thereof, of $400B a year, big deal. If we subtract the $400B a year from our recent annual deficits we are still running $1 to $1.2T of deficits per year for as far as we can see. These tax hikes and spending cuts are meaningless to our long-term financial health and all the talk we are hearing from Washington or the other experts is meaningless until they lay out the facts like I just did. In my opinion even if we raised taxes and cut spending by $400B a year the USA will be downgraded within 2 years anyhow, which is what should have happened a long time ago.

The talk we are hearing from the left about wasted tax surpluses is so far off base it is ridiculous. The talk from the right about spending controls and how a 4% tax increase will kill jobs is equally as moronic. The surpluses in the late 1990’s and in 2000 were bogus to begin with. We had massive surpluses on Social Security and Medicare which the government simply took and replaced the entitlement surpluses with IOU’s and called them budget surpluses. It was accounting gimmickry and those surpluses should have remained in the entitlement programs. Do tax cuts really spur more jobs? I don’t think so and there is no proof that it does either. What spurred job growth in the 1990’s was technology. What spurred job growth in the 2000’s was housing, both bubbles I might add, but in both cases it was a new “killer app” that spurred economic growth and I do not believe we have anything like that in today’s world. Not to say we couldn’t have a new technology or other “killer app” materializes as fast as tomorrow, but there simply is nothing I see right now that will spur growth and jobs which is the real problem here.

Most people do not want to hear this, but taxes do need to go up, I hate taxes for the record. To prove my point we often hear the right complain that 47% of the USA’s citizens do not pay anything in taxes. Well, if you are going to use that line you simply cannot support tax cuts. Why would I say such a thing? Well, it was the Bush Tax cuts that caused 47% of people to not pay anything, which is not exactly true either, in taxes. The reductions in middle class tax rates were massive and the lowest tax bracket was erased. It is also important to realize that 20-30% of the population will never pay taxes because they do not earn enough to live on.

The Bush tax cuts, all of them, cost the USA $3.7T over a 10 year period or $370B a year, interesting figure don’t you think? The left says the rich need to pay more, but the rich in terms of the Bush tax cuts only account for $700B over 10 years. Raising the top income tax brackets only raises $70B a year which is nothing when we are spending $4T a year. Simply raising taxes on the rich will do nothing to solve our problems as it is the totality of the Bush tax cuts that are part of the problem. I do not like taxes, but let’s get real about this, OK? We cannot reduce our debt with phantom spending cuts and tax increases on a select few people, everyone needs to pay up.

We are in serious trouble and no one has put it all together yet. It is unreal to me that the President can say; “I cannot guarantee that Social Security checks will go out on August 3rd” and no one questioned him about why that would be. Social Security was supposed to be fine until 2036 and self funded but if we cannot issue new debt the checks will not go out… what! Well, our Einstein news anchors and the political talking heads simply do not want you to know that Social Security has no money in it, it is broke. I just talked about this earlier, our political leaders took the surpluses in Social Security and spent it replacing those surpluses with IOU’s. Since Social Security has only IOU’s in order for checks to go out the government must issue debt. That should scare you to death, we have to fund Social Security with debt. That is also why Social Security can never be privatized either. However, no one has put this together yet, unreal.

The fact that the US government cannot do anything without issuing new debt should be a real wake up call for the citizens of the USA, but no one seems to get it. The USA, the so called richest nation in the world, is bankrupt! If we cannot survive without using the credit card we are technically insolvent, if I am wrong what would you call it? The USA has also never paid of our debt, except for when Andrew Jackson was president, and simply rolled over all of our national debt year after year and this was hidden from you by using certain terms like we retired the 30 year treasury instead of we called in and paid off all of our 30 year treasuries, we simply rolled that debt into shorter term debt instruments. The USA also has “grown” our way out of recessions and past debt problems. Growing our GDP is a great way to hide the debt problem and it causes the government to do everything possible to always grow our GDP which is why hedonics accounts for over $2T of our annual GDP, hedonics is made up benefits for certain things like free checking, Google it.

You should be terrified about what you are seeing and not because we are going to “default” but because this whole show is basically telling you how bankrupt the USA really is. If our world shuts down because we cannot issue new debt we are in huge trouble and that is exactly what is happening now. The reasons I have listed here are the reason why everyone should own gold and silver as it is the ultimate hedge against out of control government spending and if the truth was ever told we have already defaulted on our debt through depreciation of the dollar and by simply rolling over old debt into new debt. If we ever really got real about our debt issues I can assure you that the story is even scarier than what I have just laid out. Luckily we have politicians that will always lie to us and hide the truth until it is so obvious you already knew it and it is too late to do anything about it. Good day and good luck.

Insider trading is profiting from the buying and selling of a security based upon information that is nonpublic. Trading on nonpublic information is illegal and if the SEC catches you be prepared to cough up your gains, fines, being barred from the business and possibly going to prison. Well, that is if you are just the average Joe of course because the SEC views Congressional members who trade on nonpublic information as completely legal.

John Edwards said in 2008 that we live in a 2 society system, the haves and the have not’s. He was partially correct as we do live in a 2 tiered society but it is the average person and the political elite. Being an average Joe is no fun since all laws and rules apply to us and if we break them we go to jail. However, being in the political elite class is the best thing that can happen to you as you can write the laws, exclude yourself from those laws or even break those laws and all that happens is you get some bad press a censure from Congress and then reelected again. There is a 97% reelection rate for politicians in America even those who are found guilty of crimes, Charles Rangel is a great example, so getting elected is much like the Soviet system of appointment for life.

The issue of Congressional insider trading first crossed my mind in 2008 when I pulled Mel Watts financial records and saw he was trading leveraged ETF’s during the market crisis that year. The country was on the brink of disaster and Congress was pressed to pass TARP and Mel Watts, who hails from North Carolina surprisingly from Bank of Americas home office, was trading leveraged ETF’s. Did Mr. Watts know that TARP was not going to pass the first time around? Did he know it was going to pass the second time around? When did he know, he is on the Financial Services Subcommittee, that mark-to-market restrictions were going to be gone for banks? Did Mr. Watts profit at all from this information? I do not know and no one will answer the questions. Even more surprising is the SEC does not even care as they do not consider any of that insider information.

That’s right, a sitting member of Congress can know a bill that will benefit a certain company will be passed or failed and buy or short the stock on that information and the SEC says that is fine. I wish I was making this up, but I am not as this CNBC article points out. Even worse is that our elected officials, who are mostly lawyers, outperform the market regularly based on a study by some heavy weight academics. The odds of the best mutual fund manager outperforming the market over the long-term is against them, 95% of fund managers fail to outperform the S&P 500 on the 10 year benchmark, but our Congressional members can do what these professional money managers cannot do… amazing, right?

The funniest part of this is the simple fact that these people can make a killing for themselves but cannot get the country’s finances in order. Perhaps if they wasted less time making money for themselves with, apparently, questionable information we would not have this debt ceiling issue. Apparently I am not the only person who is worried that the political elites are helping themselves to illicit gains as, for the second time, a bill is being introduced that would make it illegal for Congressional members, their staff or their family members from disclosing and profiting from nonpublic information. Good luck with that, who would give up that gravy train.

I think it is pretty clear that we do indeed live in a culture of complete corruption were it really does pay to be the elite. There is also a striking resemblance to the U.S. and the Roman Empire or any other Empire that has failed in the past. As this type of corruption becomes commonplace and the citizens tend to not care or pay attention the Barbarians tend to storm the gates and the bloodbath ensues. Insider trading is terrible whether it is Goldman Sachs doing it or my elected Congressional member, actually it is worse if my Congressman was doing this as they are breaking the law and betraying my trust. It is time we ask for some accountability and stop this king of behavior from our public servants.

For the record, the Democrats tend to have better performing investment portfolios than Republicans so this is not a partisan issue, based on the study.

I suppose it was back in the late fall and reiterated again in mid-winter that I believed the market would simply go up for no real reason until QE2 ended and then it would begin to decline as liquidity ended. It looks as though I was somewhat accurate in that prediction although you did not have to be a rocket scientist to figure that out unless you were a permabull with your blinders on and absolute faith in the government and the Fed in which case please move along.

The Fed knew the same thing I and many others did and that is why at the last meeting they emphasized that they would continue to reinvest maturing paper and interest from the existing portfolio, kind of a QE infinity if you will, but on a small scale. I do believe they will let QE2 go and not announce anything new until the fall when they see the economy really weaken. I think a couple months of sub 100K jobs reports, with a healthy BLS birth/death adjustment, along with softening other indicators such as the PMI and so forth the Fed will get the point and step in with $1T in QE since $600B did not work.

That is how it works as one QE is ineffective the next one gets bigger. The really unfortunate part is that Japan has done the same thing and it did not work but there is a big difference between the US and Japan, we are the reserve currency and they aren’t. In other words, Japan could print all they wanted because their citizens bought their own debt and the world settled trades in dollars. However, the US is limited in what they can really do in QE because as the value of the dollar sinks, and we really had a nice scare a week or so ago, the world will pick a new reserve currency on its own. You know how that story ends.

Ben knows this and he knows that his QE options are limited and he can probably only get away with 1 more so it will be big, it has to be. If that one does not work and spur growth, well, the Fed is done and completely out of bullets in a traditional sense. We would see some new things coming to the table like in 2008 with all the new facilities and such, but I have no idea what they will be or what they will look like since we do not know how things will play out.

What I do know is that we should get a nice bounce in the dollar here sending commodities lower for a bit. This will give Ben and Washington a little relief and you an opportunity to buy, buy, buy every commodity you like. I love silver, still, wheat, gold, palladium, soybeans and corn (unless the subsidy is pulled). If those go on sale buy them either directly or via the growers or agricultural ETF’s.

In the mean time enjoy watching Ben sweat it out as he will not have answers for the weakness in the economy or the weakness is ‘transitory’ which is the longest transitory period I have ever seen. Kind of like this recovery it is the longest start of a recovery ever as it gains steam and loses steam every other week. Good luck.

As many know I have had a bad fight on my hands over the past few years and while the prognosis is now good the war has taken its toll on my body. I have severe chronic pain which makes even this tough guy come to tears every once in awhile and this pain has prevented me from regular work of any kind anymore. Of course with my extensive insurance background I was prepared with disability riders on my life insurance policies and a top of the line disability insurance policy.

Everyone knows that insurance carriers do not make money by paying out claims but some claims are so obvious they have no choice, such as mine. I have medical files thicker than the Holy Bible written in brail so proving my disability was easy, at first. I breezed through the short-term policy of 12 weeks rather easily, which pays you nothing I might add, and hit my long-term policy back in November of 2010. At first there were no problems as the first 3 checks went out on time with no further information needed. However, that changed when I called in to verify my 4th months check and it was not approved.

I had read the prospectus and understood it and by their definitions I could not perform, at a minimum, my job that I was trained for which triggered a benefit payout. Well, I told the nice service person that I wanted to talk with a supervisor for the real reason why my benefit was not being paid, OK, I was yelling at her, but she got me through to a manager. After I politely explained to him that I understand how the denial system worked as I was, at one point, a Director of Insurance Markets and that according to this policy there was no reason for a denial of benefits and my attorney agreed with me the manager said he was just going to approve the claim and more paperwork will be on the way. That was an honest to God true story that I would swear my good leg on and that should tell you something, if you don’t know anything they will deny you right off the bat. Read the prospectus or get a lawyer to read it for you and be prepared.

Now, I got my benefit and the work is all over with, right? Wrong. All long-term disability insurers want you to apply for social security disability because if you win whatever the government sends you will be deducted from the benefit the insurance company sends you. The disability insurance company will provide you with an attorney to help you win, do not take that attorney, go get your own so they are not collecting evidence to deny you benefits either now or at the 24 month review period. There will be a fee for hiring a private lawyer, but so what better safe than sorry. You are also better off going with a local guy who talks to you versus a national firm where you will never see an attorney until your hearing date some 18 to 24 months away.

The social security offset is what really angered me today because I learned that my private insurance carrier will offset any benefit my wife and kids will receive from social security, which they do receive, typically. I was thinking why would the benefit my kids get offset the benefit I get from my insurance company? The check from social security comes in their name and I will need the money to live on so the insurance company is forcing me to break the custodian law by cashing it to by food for the family. I paid premiums based on my income, not my wife’s or my children’s so why would their benefit be reduced from my disability insurance checks? I asked the insurance company that question and their answer was that since my family was pushing my income over 60%, what my disability benefit was, of my previous income it is considered my additional income because they are getting because of my disability.

That is simply outrageous considering that SSDI, social security disability income, family payments were designed to make sure your kids can go to college and have savings not so insurance companies can offset benefit payments. Well, maybe I am wrong since insurance companies contribute more money to Congress than disability recipients, who knows.

I am upset over this because it reduces the value of the policy I paid good money for throughout all those years. I am mad because people who are in a worse position than me will have to deal with the same thing and not have the knowledge, resources or desire to fight the system and it will hurt them. I do and plan on fighting this; I will let you know how I make out I am confident I can win 2 years worth of exemptions, but after that I do not know.

Why do you need to know any of this? Because like me you have a greater chance of becoming disabled at a younger age than dying, look at me, and you might have to go through this mess. I can assure you that I am giving you the very abridged version of everything, but all the information I have given is 100% accurate. Oh, the insurance company I use… Lincoln Financial Group who had no problem taking TARP Funds while it scrambled to dump its toxic assets and was, shall we say, encouraged to sell Delaware Investments among other things because they run such a great operation.

It has been almost 3 years since the collapse of the banking sector and the governments of the world have spent trillions to not only save the banks, but to stimulate the economy as well. We have been told for the better part of 2 years that we are recovering, and we are to a certain extent, but the headlines remain exactly the same over the last few years. They say something similar to: the recovery is on the way, is the recovery in jeopardy, the recovery is in full swing and so forth. Well, we are either recovering or we are not and it is difficult to believe the news when the headlines and underlying story remains the same, a weak recovery.

I view the economic data as severely mixed 3 years into this thing that we are in. Some data is good, but it is largely inconsistent with one month being great and the next being so-so. What has remained constant is the employment situation which is a leading indicator for this recovery. The labor markets stink, to be blunt, and we have only a few good reports to talk about. Unfortunately even those good reports are not enough and do not even keep up with the population growth. We need some 350K jobs created every month to see a real impact on the employment situation. It is clear that we are far away from a number above 300K in the employment report given that we are still seeing initial claims coming in above 400K a week, a few sub-400K claims reports are not encouraging given we are 3 years along and in a “recovery” mode in the economy.

I fear that many companies have learned that you can grow a business with less people. This is apparent with many firms having stellar earnings along with sky high profit margins. If a company can make more or the same with less overhead they know that there is no point in hiring extra bodies until they absolutely have too. That is not good news for the employment situation by anyone’s model and it is unlikely to improve anytime soon.

On top of the unemployment headwind we are now back to $4 a gallon gas. Very few people realize the impact of high gas prices on the cost of living until they go shopping. We are still very much in an oil driven economy and as the cost of oil rises so do the prices on everything from toothpaste to ice cream since some products are made out of oil and all products are shipped by burning oil. This is not news, but it is important to emphasis the importance of energy in our economy since higher prices lead to lower consumption and creates a negative feed loop on everything from jobs to retail sales. Obviously other commodities also play a role and all commodity prices are very high which does not help anything.

So, where are we? I think stagflation is the word we should use. We have a stagnant economy with jobs but rising commodity prices, which is also considered inflation. We are 3 years into this thing and we have been getting beaten over the head with the term “recovery” so much that I believe we have forgotten what a recovery really looks like. I can assure you that this recovery is not normal and for many Americans there is no recovery at all. I remain convinced that we have largely been through a statistical recovery and there has been little improvement in the real, American, economy. Overseas or emerging market economies are booming and largely responsible for US company’s great earnings, but since most of our manufacturing was outsourced this boom is leaving many Americans out in the cold. This also explains why our manufacturing economy, 12% of our GDP, has been doing so well, growth is coming from abroad, not from inside the US economy.

I realize this may not be news for many people but it might be as the permabulls need to understand what is going on. Yes, there is a recovery, but not for most Americans. More importantly this bull market we have is not real. Sure, stocks have done extremely well, but this growth is coming from everywhere else but the US and all the growth is driven by very cheap money. Once external growth slows or the cheap money comes to an end there will be a price to pay when it ends. The question to ask is when will it all end? I do not know, no one knows, but my guess is the tightening in China is a clue that we are much closer to the end than the middle. In fact, even in the US the cheap money may stop in June, unlikely, but possible as QE2 ends.

I had turned bullish a few months ago and stated that once the liquidity from the Fed ends we will have to pay the piper in the form of a correction. I believe that statement to still be true, but I do not believe the Fed will stop its QE programs for very long. Nothing is normal in our economy when we have had the US government spend trillions and the Fed expanded its balance sheet the way it did plus do 2 rounds of QE… that is not normal. But this abnormal behavior saved stocks so keep the bet going until June, but I believe when the VIX is under 18 one should be a buyer and at 15 everyone needs to own the VIX in some way. Since everything remains abnormal be cautious, buy protection through the VIX, buy commodities on the dips and look for dividend yield in stocks.

We had some SQL, database, issues and we are now back up and running. I will be posting more in light of feeling better and much better reports from the doctors… which is why I am feeling better. Thank you!!

Mutual assured destruction, M.A.D., is the term du jour out of Washington and Wall Street over the past 3 or so years. Regardless of who is in charge there seems to be fear mongering for every situation in today’s world. The latest MAD scare is over the debt ceiling and if it is not raised the world will stop and we all will die. I can assure you that none of this is true and the sun will surely rise and set the day after if the debt ceiling is not increased.

I am not saying that by not increasing the debt ceiling everything will be fine, but I am saying it is not as bad as we are all being told. It is insane to believe that the world will shut down if the debt ceiling is not increased and the fear mongering must stop. If the debt ceiling is not raised it simply means that government spending would slow down and be limited to what the Treasury Department collects everyday and no debt can be issued in excess of the designated debt ceiling. However, the debt that matures, since most interest is paid before maturity (I am simplifying this) the debt that has matured can in fact be rolled into longer term bonds. Basically, nothing major would happen right away but in time there may be issues.

What would happen is many federal employees would be fired and many agencies would close. Obviously this is not good news, but it is not horrible news either. The government collects some $200B in taxes or fees a month which means that all our debt servicing costs would be covered in just one month’s tax collection, obviously interest payments are spread out, but you get the idea. Interest rates will not rise out of control and we are not defaulting on our debt, don’t forget the Federal Reserve is our largest creditor and they hand over 95% of their profits to the treasury which reinforces my point since the government is paying interest to itself on over a trillion dollars of our debt.

If the debt ceiling is not raised things will be tough and unemployment, from government employees, will rise but life will go on and much of the private sector will remain untouched. In fact the private sector might just flourish since many regulations could not be enforced because government agencies are closed down. Subsidies would end and waste would be purged from the system, again I see no downside here. The government would be forced to live on what it collects and this clearly bothers the powers that be since they are buying political favor through wasteful spending.

Contrary to popular belief Social Security checks would go out and Medicare payments would still be paid since FICA withholdings cover these costs for now. Well, in theory that is what would happen, but since the government raids those programs excess reserves all the time they are not technically solvent. Even though these programs are safe through their own taxation Washington is telling you the exact opposite which is a lie unless they used those tax withholdings for something else. This is how MAD works though, scare you to death so you don’t question anything and do what you are told.

You see if the debt ceiling is not increased the house of cards begins to waver and that is the problem. The government and the powers that be do not want you to realize that this whole thing is very wobbly and unsound, meaning our economy. They do not want you want you to know that money is debt and the Federal Reserve cannot print money without being paid interest from the treasury department. They do not want you to know that things can get done on less money. They want to scare you into keeping the status quo which is on its last leg anyhow because debt cannot increase forever. Eventually everything comes to an end, look at Greece and Ireland.

Ultimately the debt ceiling will be increased without much of a fight some grandstanding of course, but no real resistance will come and the vote will come and go quietly. What is so crazy is the use of the MAD policy that is used for everything nowadays. No matter what is happening we are told that we are all going to die if so and so bill is not passed which is not true, ever. Why we all fall for this is beyond me, but most Americans do and insist that the wrong decision be made, i.e. preserving the status quo. However, the status quo is unsustainable even in the short-term and is completely evident when one looks at the value of the dollar and the price of commodities.

To be clear on my stance, I know longer term the debt ceiling must be increased as we would eventually default, but I am confident that the US could make it much longer than anyone thinks without issuing new debt. It is just most people who depend on the system for their survival would not like this and that is why the MAD card is being played. We should all be appalled that our leaders are using the MAD card so often and it should be perfectly clear to everyone that when the MAD card is played it is to preserve our leaders and it usually is not in our best interest to continue with their status quo. In time we must start to call our leaders out and see what would really happen if they do not get what they want and I am very sure that MAD will not happen.

I rarely wear my beliefs on my sleeve and I do not mean to start doing so now, but I have been doing a lot of thinking and praying for the people in Japan. The images we are seeing and the reports we are bombarded with are horrifying to say the least. It also proves that we are all interconnected and what happens abroad does indeed impact us here in the US, even earthquakes and tsunamis. I hope that all who read this will take a minute to at least think a few kind thoughts of well being for the people if not outright say a prayer, donations to the Red Cross would not hurt either.

With all that said it is shameful for many of the pundits to hop in the TV and talk about how good this tragedy is for the Japanese economy. It is not a good thing and it will not bring prosperity to anyone let alone to the US. First and foremost, Japan likes to keep its business local so I can assure you Caterpillar will not win out on contracts versus its local competitors. Over and above that this horrible event will create a huge drag on global GDP as the number 3 player is out of the game and who knows how the nuclear situation will turn out. That means Apple should have saved its $200 on its press release announcing its plans on postponing the launch of the iPad 2 in Japan since everyone knew that already and, frankly, who really cares about the iPad launch in Japan when the locals are being exposed to radiation.

With the number 3 player out of the game the economy in the US, China and the world will slow, I am sure of this. It also means QE 3 is a given and the next one will be a fairly sizable easing program. I am so sure about more QE because the Japanese will have to sell treasuries at some point to cover the rebuilding effort. Their central bank have added an astounding 55 trillion Yen, $700B USD, of extra liquidity, but not even the Japanese can print their way out of this thing. They will have to sell and there is no one to pick up the slack for US treasuries right now, to the level of selling that will come. On top of that I believe Japan selling may be the trigger for China to unload some holdings as well, we will see about that. The Fed is the only one around to pick up the slack and give the US Treasury interest free loans, since earnings must be repaid to the treasury department.

Even before this tragedy I was perplexed about the Fed’s QE 2 program. It was not needed, in my opinion, as rates were low already and capital was flowing again. The only reason I could see QE 2 being needed for was to prop up the stock market and by Bernanke’s own admission that is what it did since bond yields have only gone north since the start of the program, the opposite of what Ben wanted to happen. Besides the markets needing a boost the only other reason I could think of for this type of easing program was that the end of the line was here. What I mean is that the Fed may have known that the market was going to want higher interest rates from the US since we have piled on the debt in the last few years.

Basic mathematics tells you that the US cannot handle higher debt servicing costs which is why the treasury rolled out over 50% of our debt to mature in less than 7 years. On top of that every 1% increase in debt servicing costs adds about $120B a year to the budget which is also known as the debt death spiral. However, with QE 2 the Fed can jump in and buy up this higher yielding paper and kick back 95% of the interest back to the treasury department, almost an interest free loan, which explains why the Fed is monetizing, sorry, buying just issued higher yielding paper. This signals to me that the US government may have reached a breaking point in its debt load.

I am not saying the US cannot issue more debt, not at all, what I am saying is people will want higher rates to hold the paper. No one believes that there is no inflation out there and the only time we see any interest is when things really hit the fan like right now. Think back a couple of weeks ago when the Middle East was revolting treasuries sis nothing and the dollar sank. Compare that to now treasuries are going up but only on the short end of the curve and the dollar, what you really should be watching, is not doing well at all. It is very odd because as treasuries rally the dollar should be seeing some decent strength and here we are sitting below 77 on the DXY still.

This all signals trouble to me as we have seen many revolutions combined with a major economy stopped due to a tragedy and the only thing going up is the short end of the treasury curve. The dollar is not the safe haven it once was and I am not sure what is anymore. I believe gold and silver offer a better alternative than the dollar at this point, but there is volatility there as well. At the end of the day though, precious metals are still the place I would rather be as I see no end in sight for easing and I see higher inflation. I believe this is the end of the line and the Fed has no choice but to monetize more debt. The sad thing about all this is that rates will continue to climb anyhow because it is just too risky to loan money to the US government at this stage of the game.