By Dr. Jack Wheeler

Benjamin Disraeli (1804-1881), one of Victorian England’s most prominent Prime Ministers (1868/1874-1880), once commented to a friend: “There are two things that the public should never be allowed to see how they are made: sausage and the law.”

We are witnesses today of just how immortally trenchant Disraeli was back in the 19th century. For in truth, observing our politicians handling the current “debt crisis” is a far more repulsive sight than the inside of a sausage factory.

Yet if Disraeli were here now, he’d smile sardonically and remind us that (he was fluent in French) plus ça change, plus c’est la même chose – the more things change, the more they stay the same.

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By William H. Gross

That adorable skunk, Pepé Le Pew, is one of my wife Sue’s favorite cartoon characters. There’s something affable, even romantic about him as he seeks to woo his female companions with a French accent and promises of a skunk bungalow and bedrooms full of little Pepés in future years. It’s easy to love a skunk – but only on the silver screen, and if in real life – at a considerable distance.

I think of Congress that way.

Every two or six years, they dress up in full makeup, pretending to be the change, vowing to correct what hasn’t been corrected, promising discipline as opposed to profligate overspending and undertaxation, and striving to balance the budget when all others have failed. Oooh Pepé – Mon Chéri! But don’t believe them – hold your nose instead! Oh, I kid the Congress. Perhaps they don’t have black and white stripes with bushy tails. Perhaps there’s just a stink bomb that the Congressional sergeant-at-arms sets off every time they convene and the gavel falls to signify the beginning of the “people’s business.” Perhaps.

But, in all cases, citizens of America – hold your noses. You ain’t smelled nothin’ yet.

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By Moses Kim

Regular readers of this blog know that I love delving into psychology to understand how we end up in crisis after crisis. The normalcy bias explains why people don’t buy gold since they can’t see major crises coming. The bandwagon effect explains why people believed homes were viable investments even in a no doc, adjustable rate, negative amortizing loan environment. Cognitive dissonance explains why people can’t recognize the government bond bubble. It’s time to face the truth that we as humans have some serious biases that need to be recognized- otherwise we are doomed to suffer the full consequences of the oncoming debt crisis.

I am an American citizen, so trust me, it’s hard for me to believe what our government is doing. But my natural disbelief does not change the fact that our government is acting irresponsibly. Allow me to make a quick analogy between the U.S. government and Bernie Madoff.

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By Terry Coxon

It was Otto von Bismarck who explained that “politics is the art of the possible.” We can thank him for that much, but he didn’t tell the whole story. I’ll give you the rest of it. Politics is the art of the possible fictions you can get away with.

Politics is mostly dissembling, and the dissembling is mostly about dodging personal responsibility for the messes governments make. It works out that way because making messes is most of what governments do. So when we ponder how the U.S. government will go about defaulting on its debts, a good way to approach the question is to consider how a default might be presented.

At this point there is no room for doubting that the government will renege on the commitments it has made to give people money. The $9.2 trillion in Treasury securities held by the public is just the tip of the iceberg. Estimates differ, but if you add in the unfunded obligations for Social Security and Medicare, it’s hard to avoid getting a total that exceeds $80 trillion. That works out to $260,000 for every man, woman, and child in the country, including the two-year olds. It can’t be paid, so it won’t be paid.

But don’t expect any clarity about the matter. Whatever happens, you can count on it not being called a default. No one in the U.S. government is going to say, “Tough luck, Treasury bond investors. We’re not going to pay you another dime. Go pound sand.” And no politician is going to tell the 51 million Americans on Social Security, “If you’re fit enough to pump that rocker, you’re fit enough to work.” It will all be done far more diplomatically.

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By Mark Alexander

There’s currently a lot of talk about deficits and debt among the new House Republican majority; much of it is contentious intraparty debate about whether to raise the “debt ceiling.”

For the purpose of clarity, let me reiterate a few definitions.

The national budget deficit is the difference between the total spending budget (including interest on debt) authorized by Congress for each year, and total tax receipts. For this fiscal year alone (October 1, 2010, to September 30, 2011), the shortfall is projected to be 1.15 trillion dollars.

The national debt is the total of all outstanding U.S. Treasury obligations held by domestic and foreign individuals, institutions and governments, and is currently 14.05 trillion dollars.

The debt ceiling is the self-imposed limit Congress sets for what it can legally borrow to pay for all the government services that it can’t afford. A year ago, Congress increased that limit to 14.29 trillion dollars. But since Congress has authorized spending almost five billion dollars a day more than it takes in, that debt ceiling will be hit sometime between the end of March and mid-May.

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By Dr. Jack Wheeler

So how is John Boehner going to do make his bones? Hold on to those undies now… he plans to get Zero to sign, not veto, a bill to repeal ObamaCare.

Yes, repeal, repeal the whole damn thing, Zero’s pride and joy. Here’s the strategy.

First, the fallback remains: defund it, refuse to appropriate any money to implement any of it. But to go for the jugular means repeal. Of course, any stand-alone repeal bill such as HR 2 passed by the House will be blocked in the Senate, or if passed faces a certain presidential veto that cannot possibly be overridden.

HR 2, the “Repealing the Job-Killing Health Care Law Act,” takes 36 words to eliminate 2,000 pages of ObamaCare legislation: “Effective as of the enactment of Public Law 111-148, such Act is repealed, and the provisions of law amended or repealed by such Act are restored or revived as if such Act had not been enacted.”

It will be voted on and passed by the House next week. It is only a warning shot. For its destiny is not to be a stand-alone bill, but an amendment to two other bills.

These two bills form the sides of a vise in which Dem cojones are inextricably trapped. They are: the CR (Continuing Resolution) to fund the government past March 4 when the current CR ends; and the bill to raise the debt ceiling (call it the DR, the debt raise).

These bills are “must pass” bills – for if they don’t pass, the government shuts down, no checks go out to pay for anybody or anything, and government debt gets defaulted on.

Thus the repeal strategy: HR 2 will be appended to the next CR and the DR by the House. That’s step one. Step two is for McConnell and DeMint to block any passage of either in the Senate unless HR 2 is appended.

And to keep those Dem cojones in an ever-tightening vise, both the CR and DR will be very short term – say 60 days for the former and $100 billion instead of a trillion for the latter, maybe less. This forces the Dems to fight the battle for more spending over and over again.

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By Gary Gibson

As you read this, the U.S. government owes just a sliver under $14 trillion dollars to various suckers who’ve lent it money. And it wants to borrow more.

Timothy Geithner warned that a failure to raise the debt limit would mean the government would not be able to make the payments on the current debt in the very near future.

Consult the official record and you’ll read that the U.S. has never defaulted on its obligations. That’s technically true…but then what about when France’s prime minister Charles de Gaulle politely asked the U.S. to hand over the gold it promised was backing the U.S. dollars held by France and other nations?

“No gold for you!” Nixon was heard to say.

Nixon knew back in 1971 that there was no way the U.S. could make good on the dollar at the official rate. The official rate was a lie. If every yahoo with $35 U.S. were to show up at the gold window then, only a small percentage of them would get their gold. So Nixon “closed the gold window.”

But a default by any other name apparently isn’t really a default.

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By Expected Returns

There is a human fear of standing apart from the crowd that is at times necessary, but at other times debilitating. We are taught to conform in school and just memorize the facts our teachers give us like good students. I was always the type of student that “did my own thing”, which of course got me in a lot of trouble. Even in college, I considered my reading assignments an utter waste of time and instead spent all my free time reading books I found stimulating. I am not one to follow the crowd because I have complete faith in my ability to think critically. I would rather be wrong once in awhile thinking for myself than to be a mindless robot swayed by the wind.

You would think that in Wall Street, herd behavior would be eliminated since the incentives are huge against this irrational behavior. Yet Wall Street serves as perhaps the best confirmation of herd behavior. The industry is obsessed with diversification and the idea that risk is determined by volatility. Money managers are rewarded for diversifying and being average. Those who can be average while attaining lower levels of volatility are the stars. To me, this is a big farce. The whole idea of diversification is ludicrous; it serves as a protection against ignorance. If I bought government bonds to diversify my clients’ portfolios, I would be doing them a great disservice. If I blindly bought government bonds for Boomers, I would be doing them an even greater disservice since they need to protect their assets for retirement. All these pension funds stuffing their portfolios with “risk-free” Treasuries are making a huge mistake. Why the unjustified fear of stocks? Historically, it is the bond market that always wipes out capital, not the stock market!

Those who stand apart from the crowd are mocked, until of course, they are proven right.

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By The Expected Returns Blog

I have warned that a debt crisis of a magnitude we have never experienced before is approaching. States and municipalities are going bankrupt along with the Federal government. Economists foolishly applaud sub-3% growth in GDP when it took a $1 trillion budget deficit to produce. There is some serious misunderstanding of the fundamentals of our economy right now, and this is going to create some crazy volatility.

States are in horrible shape; suffice it to say that they are going to encounter a major crisis soon. What people don’t realize is that states received billions of dollars in aid as part of the American Recovery and Reinvestment Act of 2009. The influx of government money encouraged states to ignore structural debt issues. In fact, expenditures in states grew in 2009 and 2010 while general fund spending was down both years. In other words, states revenues have still not recovered to pre-recession levels, which means states have been relying very heavily on Uncle Sam. States have also increasingly turned to the bond market (up over 20% from 2009) to fund their budget gaps. These are nothing more than delay tactics.

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By Ron Paul

Perhaps the biggest media story of 2010 was the influence of Tea Party voters on the congressional landscape. The new congress comes to Capitol Hill with a mandate to end profligate spending and restore fiscal sanity, we are told. But when the House and Senate convene in January, the newly elected members will face tremendous pressure to maintain spending levels for entitlement programs. Even the most modest proposals to trim Social Security or Medicare spending will be met with howls of indignation and threats of voter revolt. Legislators who propose any kind of means testing or increased retirement ages can expect angry visits from senior citizen lobbyists ready to fund a candidate back home who supports the status quo.

But millions of Americans now realize that the status quo is an illusion that will not last even another 10 or 20 years. The federal government cannot continue to spend a trillion dollars more than it collects in revenue each year, because we are running out of creditors. Fiscal reality is setting in, and the consequences may be grim even if Congress finds the courage to take decisive action now.

Courage begins with a commitment to see things as they are, rather than how we wish they were. When it comes to Social Security, we must understand that the system does not represent an old age pension, an “insurance” program, or even a forced savings program. It simply represents an enormous transfer payment, with younger workers paying taxes to fund benefits.

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By Dr. Jack Wheeler

Ah… you may think this is about Barry Soetoro’s dream to ruin America. Nope, this is about another Barry, who once upon a time was also a US Senator who ran for president. His dream was to rescue America.

Americans were disastrously bamboozled into electing one Barry and just as disastrously not the other.

Fifty years ago, the other Barry wrote down his dream. Just think of how much greater, how much safer, how much richer, and how much freer we would all be today if Americans had the brains and courage back then to put him in the White House instead of his precise opposite. Here is Barry’s Dream:

I have little interest in streamlining government or in making it more efficient, for I mean to reduce its size. I do not undertake to promote welfare, for I propose to extend freedom.

My aim is not to pass laws, but to repeal them. It is not to inaugurate new programs, but to cancel old ones that do violence to the Constitution … or have failed their purpose … or that impose on the people an unwarranted financial burden.

I will not attempt to discover whether legislation is ‘needed’ before I have first determined whether it is constitutionally permissible.

And if I should be attacked for neglecting my constituents’ ‘interests,’ I shall reply that I was informed that their main interest is liberty, and in that cause I am doing the very best I can.

This was the dream, the pledge to America, of Barry Goldwater (1909-1998). You’ll find these words on page 15 of his book, written in 1960, The Conscience of a Conservative.

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[This is our first two-part post. The attempt is to make one coherent argument about the instability and coming collapse of both municipal and state governments. File this under 'default' because these defaults are coming and they're barreling down the tracks at breakneck speed. - Ed.]

Part I: State Pension Funds Will Soon Run Out of Money

By Gus Lubin

Here’s a shocker: The most immediate state pension crises aren’t in New York or California. They’re in Middle America.

Illinois is just 8 years away from exhausting its pension fund and creating a yearly $14 billion hole, according to data from Kellogg professor Joshua Rauh [PDF].

That’s a projected 32 percent of the state’s revenue going to fill a pension hole. Every year.

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By Moses Kim

One of the hardest things to do as a grown, “educated” adult is to learn from others. The inability to learn from others is what guarantees you will have a very childish perspective of the world. If the only books you’ve read were forced on you by the public education system, then your perspective is skewed. It was only when I expanded my realm of knowledge that I saw the world in a whole new way. I realized that there are recurring themes in history that humans consistently ignore because fundamentally, human nature never changes. No matter how much you warn people about the disaster that’s coming, they won’t listen. Call it what you may- naivete, ignorance, or outright arrogance- but this is just my experience. By definition you must be humble to learn.

There is a psychological phenomenon that explains the human tendency towards disbelief and inaction: the normalcy bias. If people haven’t directly experienced an extreme event before, they are prone to believe that it can’t happen. The normalcy bias explains why people refused to evacuate their homes when Katrina was clearly going to leave a swath of destruction. The normalcy bias explains why most people get destroyed by hyperinflationary events. And the normalcy bias explains why people refuse to get out of their dollars and buy gold. Most people alive never experienced a gold standard or a bond default; hence most people will be caught totally off-guard by the events of the future. However, people really shouldn’t be caught off-guard because governments historically never pay off their debts! They always default in some form.

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By Duane Stoffel
I Don’t Feel Sorry for Californians Anymore.
I used to feel sorry for Californians, myself included. I felt sorry for them because, with the exception of a couple of years in the early eighties, our beautiful state had been hijacked by the brain-dead Democrats who had been running things in Sacramento [...]

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By Mac Slavo

Do you have an account at Bank of America? If so, you may want consider the latest warning about the bank’s stability from Wikileaks’ Julian Assange. In a series of tweets on Saturday (12/18), Wikileaks warns that Bank of America may be unstable and that users should consider moving their money to another banking institution.

The warning from Wikileaks comes on the heels of Bank of America’s reported refusal to process payments for the web whistleblower, joining Paypal, Visa and Mastercard in making it more difficult for the organization to raise funds for day-to-day operations and legal defense.

According the the tweets posted on Saturday, account holders should start taking action against the banking behemoth:

# We ask that all people who love freedom close out their accounts at Bank of America.

# Does your business do business with Bank of America? Our advise is to place your funds somewhere safer.

Following the release of some 250,000 pages of confidential and secret State Department documents in November, founder Julian Assange was interviewed by Forbes magazine and warned that sometime in the first quarter of 2011 his organization would release sensitive information on at least one, possibly two, major U.S. financial institutions.

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By Porter Stansbury

Our current total debt is now close to $14 trillion. The number is so large it’s meaningless. No one can comprehend how much money $14 trillion really is. A better way to think about it is that each American taxpayer owes $125,000. That’s like a whole additional mortgage for most people.

I want to be clear about this: These debts are real. These debts are money we owe today. They must be financed (we have to pay interest on them). And they DO NOT include any future promised payments.

And the money Congress officially owes fails to include other significant debts. Regardless, Congress is likely to end up repaying these debts. Debt at the state level now totals $1.1 trillion, and local government debt is another $1.6 trillion. Investors have long assumed Congress effectively guarantees these debts (Investors trusted the federal government would step in to prevent state and local governments from defaulting).

In addition to these debts, Congress has guaranteed the assets of Fannie Mae and Freddie Mac on an unlimited basis. Losses at these two companies, by my estimate (which was once thought ludicrously large and is now a mainstream prediction), total $800 billion. And then there’s a slew of TARP-related investment and guarantees, the costs of which are unknown. If you throw on an extra $3 trillion, that brings the total debt package up to much more than 100% of GDP.

Adding up all the numbers and applying a market-based rate of interest (6%) to these debts, you’ll find that the real (i.e. not manipulated by the Federal Reserve) cost of servicing these $17 trillion in debts would be a little more than $1 trillion. Total annual federal revenue from income taxes and corporate taxes over the last year was $1.1 trillion.

These are all real numbers. You can verify all of them. What they tell me is… absent the Federal Reserve’s intervention in the Treasury bond market… and absent the myth of “off balance sheet” obligations… our federal government would already be bankrupt.

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By Vedran Vuk

In 2008, a lot of educated individuals justified the bailouts by warning of riots and social upheaval. Hence, the bailouts were absolutely necessary. If the unemployment rate rose, people would take to the streets. They’ll elect a new Hitler. Society will come to a halt.

Even conservatives and libertarians sometimes make the same argument against their own proposals. If the government lowers welfare benefits, there will be Molotov cocktails flying through the air. I call BS. First of all, economic hardship around the world is nothing new. In fact, it’s the norm. And unfortunately, the average person has an extremely high tolerance for unemployment, scarcity, and tyranny.

Threats of social unrest are always presented as one-way streets. We’re always told, “If we don’t bail out the banks, people will riot.” But why not another version, “If we bail out the banks, people will riot.”

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By Matthew Brown

Investors will face defaults on government bonds given the burden of aging populations and the difficulty of securing more tax revenue, according to Morgan Stanley.

“Governments will impose a loss on some of their stakeholders,” Arnaud Mares, an executive director at Morgan Stanley in London, wrote in a research report today. “The question is not whether they will renege on their promises, but rather upon which of their promises they will renege, and what form this default will take.” The sovereign-debt crisis is global “and it is not over,” the report said.

Mares said debt as a percentage of gross domestic product is a false indicator of an economy’s health given it doesn’t reflect governments’ available revenue and is “backward- looking.” While the U.S. government’s debt is 53 percent of GDP, one of the lowest ratios among developed nations, its debt as a percentage of revenue is 358 percent, one of the highest, the report said.

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By Doug Hornig

Bud Conrad, chief economist at Casey Research, has been predicting (rather correctly) the dire economic consequences that will result from our mushrooming national debt. Of particular concern is the debacle yet to come, from the future’s unfunded liabilities.

Now, however, he is going to have to pass his Mr. Gloom hat to another contender. Namely, Boston University economics professor Laurence Kotlikoff.

In an article published on Bloomberg.com, Kotlikoff writes, “Let’s get real. The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills.”

This is not a news flash. Former U.S. Comptroller General David Walker has been barnstorming the country for the past several years: appearing on every television show that will have him, delivering the same message, trying to educate the American people about the seriousness of our plight.

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By Mario Rizzo

The Keynesian worldview seems to have led to increasing stridency and dogmatism about economic stimulus, which has dominated the headlines for several months. There used to be a joke that you can teach a parrot economics—all it needs to say is “supply and demand.” Now it is even easier to teach a parrot the policy prescription to prevent a major recession: All it needs to say is “stimulus.”

Things have gotten so bad that no dissention can be tolerated.

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