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Investing In A Difficult World

27 August 2010 2 Comments

By Monty Pelerin at www.economicnoise.com

Investing and life are both wonderful challenges. Often they are harder than they need be. The younger generations, through little fault of their own, have been placed into one of the most difficult situations this country has ever faced. Previous generations allowed the government to run wild. As a result, politicians have spent more than they should and made promises that cannot be kept.

Money can be made in any environment so long as you are aware of what you are up against. The following points out some of the realities that will affect lives and investments in the periods immediately ahead. As investors, these conditions are as far away from ideal as one might imagine. They are real and likely will dominate much of the next couple of decades.

The following sentence should captures the problem and should gain your attention:

If the Government confiscated all the wealth in the private sector, the social programs would still be $50 trillion short and the Government would still be bankrupt. Furthermore, no company or individual would be left with anything.

The economy is in bad shape. Some say it is worse than any time since the Great Depression. I believe it is actually worse than the Great Depression because of the level of debt. At the time of the Depression, neither governments nor individuals were deeply in debt. We were a nation of savers. Now we are a nation of spenders, living beyond our means. Individuals and governments at all levels are over their heads in debt, some literally drowning.

The debt problem is intractable. This conclusion is not economic but mathematical. It literally is mathematically impossible to get out from under the level of existing debt. To demonstrate, only the Federal Government will be dealt with. Such a focus greatly understates the actual problem, because it ignores personal debt and lower-level government debt. States and municipalities have grown well beyond sustainable levels and are running large deficits. Some defaults have already occurred. Individual bankruptcy filings are soaring as are foreclosures.

Promises Beyond Reality

The Federal Government admits to over $13 Trillion dollars in debt. In reality, its obligations are multiples of that number. The unfunded promises from Social Security and Medicare total over $100 trillion. That is, to properly fund the forecasted future deficits in Social Security and Medicare, $100 trillion would have to be put in the fund today. This liability is growing at the rate of about $5 trillion per year! The Government cannot honor these promises.

The programs are classic Ponzi schemes that make Bernie Madoff look like Mother Teresa. As evidence, the total net worth of the country (the country’s total assets less liabilities) is slightly above $50 trillion. If the Government confiscated everything from the private sector, the programs would still be $50 trillion short and the Government would still be bankrupt. Furthermore, no company or individual would be left with anything.

Send in an Additional $1,525,000 With Your Tax Return

To further put the problem into perspective, the Federal Government owes about $112 TRILLION in actual debt and social promises. Assuming a total population of 315 million people, the portion of Federal Government debt that is owed by every man, woman and child in this country is about $381,000! Or, a family of four owes $1,525,000 of which they are unaware. This amount is in addition to whatever mortgages, credit card debt, car loans or other loans a family might have.

Would You Give This Man a Mortgage?

The numbers are so large that they are incomprehensible to the average person. Another way to understand the absurdity of the Federal Government’s condition is to reduce it to family terms. The Federal Government collects about $2.5 Trillion in total revenues a year. That is from all sources of taxes and fees. Think of that as an individual’s annual gross salary.

The debt owed by the Government can be looked at as a great big mortgage. Thus, we have a family that has a mortgage 44.8 times greater than gross salary. That would be the equivalent of a man earning $50,000 gross salary having a mortgage of $2,240,000! An interest-only mortgage at 6% would require the family to pay annual interest of $134,000 per year. A conventional mortgage would have higher payments. The example becomes more ludicrous when one recognizes that taxes, food, clothing, savings, etc. all have to be subtracted from gross pay to determine what is left for debt service. It is sort of like when asked if you are in a financial jam? Immediate Cash Loans from MyPaydayLoanCash.com will get instant cash up to $1500 in your checking account within just 1 hour!

When we shift back to the Federal Government, the family analogy becomes even more absurd. The Federal Government has nothing left from their “gross pay.” Their “living expenses” actually exceeded their gross pay by $1.2 trillion last fiscal year. That is, they spent almost 50% more than they made. Comparable results are budgeted for the next ten years, assuming bankruptcy does not intervene.

Debt Death Spiral

The Federal Government is in what is known as a Debt Death Spiral. They are unable to pay the actual and implied interest on their debt. Hence, the unpaid balance is added back to the amount owed, making the problem worse next year. This debt spiral grows exponentially. There is no way to escape a certain mathematical end — BANKRUPTCY.

Do not count on collecting Social Security if you are less than 55 years old. Do not count on Medicare in anything approaching its present form. On top of utterly bankrupt programs they want to impose Obamacare. The Cato Institute estimates the cost of what has been proposed at over $6 trillion for a ten year period. They do not adjust for the fact that no major new government program is lucky to come within 5 times its initial estimate.

Mathematics vs. Politics

Are the politicians nuts? Yes. Is the country heading for bankruptcy? Yes. Is there any way to avoid this end? No! Not unless you repeal the laws of mathematics! That cannot be done, despite legislators’ inflated opinions of themselves.


  • wingtipwalker said:

    Fascinating. I think the inclusion of the unfunded liabilities goes to prove the point that government benefits will have to be reduced. Reduced….abolished…whatever it is, it's not going to be pretty if we hope to attain anything remotely resembling fiscal responsibility.

    If you spread out a tax burden of $318,000 over a working lifetime that would be bad enough. Consider that 40% of Americans don't pay any taxes and that number is even bigger for the "rich people" that pay taxes. While they may try and ruin us in the process, the Govt is not going to be able to tax themselves out of this hole.

    Favorite line: The programs [of the Federal Government] are classic Ponzi schemes that make Bernie Madoff look like Mother Teresa.

  • CD Rates Pro said:

    This article is really interesting and kind of scary. It is a known fact that the country is not economically stable, but not in bankruptcy! I think that the economic time for the younger generations will be a tough one, especially if they don't change their mentality from spenders to savers, as our forefathers where in the Great Depression.