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  1. Wealth
August 2, 2011

America's Deathly Debt Deal

By Spear's

As I have said before, Obama doesn’t do economics, he just spends

Last week ‘It’s Not Over Yet’ blog said the Euro-Summit solution would be lucky to get to September, when Italy runs out of cash, and already contagion has returned to Italy and Spain, and now embraced Cyprus, while everyone is talking about Bailout 3 for Greece being inevitable – all in a week! It was all too little, too late.

This week it’s been the turn of America under the spotlight, but the outcome is the same – ‘It’s not over yet!’ The chart below was at 30 June, 2009, two years ago, since when the Obama Administration’s debts are up by more than $2.0 trillion!

That’s just the Federal Deficit, excluding State, City and Municipality debts – people forget that the Federal Deficit is not comparable for this reason to European National Debts. And the chart shows US private debt as well, which has hardly reduced over two years, despite low interest rates. It’s the total debt situation of America that puts it at the top of the Global Total Debt pile.

As I have said before, Obama doesn’t do economics, he just spends. Yes he inherited the Dubya tax cuts and the global crunch and two wars, but unlike the UK Coalition, he didn’t get to grips with the Federal finances, which he was content to leave with Helicopter Ben and His Printing-Presses, all whirring away out-of-control, while he invested all his political capital in his first half-term in spending even more on healthcare. It is hardly surprising that the neglected deficit looks like a giant veruca on the feet of the recovery.

If Brussels showed the absurdity of lending even more to insolvent and over-indebted PIGS, then the message never got to Washington. Now the House has voted for another $2.4 trillion of Federal Debt over the next 18 months, on top of the existing total of $14.3 trillion, itself equivalent to 100% of GDP. The flip side of the deal was a similar $2.4 trillion of spending cuts, but over 10 years. Well, you don’t even need O-Level Maths to see the absurdity of this deal.

And just as in the EU and UK, and China, the so-called US recovery stalled in July as manufacturing went into reverse, and that’s before you factor in inflation and the massive devaluation of the Dollar to get to real/adjusted GDP.

When national debts increase beyond 100% of GDP, when interest takes more than 12.5% of tax revenues, when GDP declines, you are entering the Irving Fisher Debt Deflation vortex, a land of smoke and mirrors and bankruptcy. And that’s before interest rates inevitably rise, which is what the PIGS are seeing right now.

Hang onto your Gold, and buy on the dips, as it isn’t over yet!

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