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 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 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 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 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 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 Justice Litle

A number of U.S. states are facing bankruptcy – in fact if not in name – with Illinois and California leading the way.

When an individual goes bankrupt in the United States, it’s usually a Chapter 7. When a business goes under, it’s Chapter 11. Farmers have a Chapter 12, and there is a more complex individual option known as Chapter 13.

But what do you call it when a U.S. state goes under? There’s no official “chapter” for that. But it’s looking more and more like there should be. Your humble editor proposes “Chapter 66,” in honor of a famed stretch of interstate.

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By Tyler Durden

The U.S. will default at least on the unfunded liabilities of Social Security and Medicare at some point in the foreseeable future.

Nothing would spook the markets more than for Paul Krugman’s advice to be accepted by the Obama administration. That might well be the trigger.

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By Steve Saville

Many governments, including those of the US, Japan, and most euro-zone countries, have made extremely costly promises to provide entitlements to their citizens and to repay their creditors. These promises must be broken, firstly because they cannot be kept and secondly because they should not be kept.

It should be blatantly obvious to anyone with a basic knowledge of finance that the promises cannot be kept.

So, what’s the point of pretending that these liabilities will ever be covered?

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By Jacob Hornberger

If you’re an American taxpayer, you should expect to receive a thank-you note from dole recipients in Greece fairly soon. The reason is that Barack Obama, working with his cohorts at the Federal Reserve, is using your money to bail out the Greek welfare state, thereby enabling dole recipients in Greece to continue receiving their dole.

The problem is that for decades the Greek government has been doing what the U.S. government and many other regimes have been doing: borrowing to the hilt to fund dole payments to welfare recipients. In the hope that Euro officials would not discover how bad things were in Greece, Greek officials were falsifying their financial reports. Unlike the U.S. government which has a Federal Reserve central bank, the Greek government couldn’t simply print up the money to pay off its debts. That’s because it’s part of the Euro zone, where German officials have traditionally opposed such a policy.

But finally, the welfare-state chickens came home to roost.

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By Gary North

The bankers’ solution is the tried and true strategy of moral hazard, described by Walter Bageot in the late 19th century. The banks are bailed out by politicians and central banks. Losses are transferred to the taxpayers by way of bailouts and currency depreciation. The day of reckoning is postponed.

For the first time in Western history since the late nineteenth century, a few million voters are beginning to catch on. They don’t understand fractional reserve banking, but they understand when politicians raise the national debt to bail out people who cannot pay their interest on time.

Voters in Germany resisted. This accomplished nothing. As they were going to the polls, Merkel was selling them out to the PIIGS and the banks that trusted the PIIGS, especially French banks, which own a third of Greek debt.

It is beginning to dawn on a minority of voters that the political game is rigged in favor of big banks. It has taken a century for this to begin to register. This is a threat to Establishments everywhere. This was the #1 secret that the Establishments have attempted to conceal.

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By Clayton

My assertion of a Trillion Dollar loan write off came withing $45 Billion of being correct. So much for monetary restraint. The precedent will not go unnoticed by those who would like their chance at profiting from a repeat.

Trichet made it look both dramatic and easy. Much fanfare of resistance and then the sordid giving in. Additionally, it was enacted on the Weekend with help from Washington, New York and Tokyo. (London is sidelined these days.) The trading desks at the connected institutions were ready to leverage up some huge buys and the day traders in their train got on board and made money like there was no tomorrow.

All this orgy of greed and financial criminality was broadcast far and wide so all could see. These people have long passed the point of feeling any shame. The little people will pay. After all, in the Era of To Big to Fail, what choice have they.

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By Clive Cook

At the end of last week, the US looked hard at Greece and was scared. So tiny an economy should not be bringing all of Europe low and even threatening to explode the euro, but it is. What started as a US financial crisis plunged Europe into recession; was Europe about to return the compliment? What, Americans began to wonder, did Europe’s problems tell them about their own?

The cause of the present turmoil, Greek public debt, has aroused fears of a wider sovereign-debt crisis and heightened concern about US government borrowing.

Default looks ever more likely. This can be planned, with some hope of keeping things orderly – though the best chance of that has now been missed. Or it can be unplanned, after a further period of denial in which the problem worsens. Notice the irony. Conventional wisdom holds that early-resolution mechanisms are needed for failing banks and non-banks: the key thing is to get in front of the problem. But a similar logic applies to distressed governments, especially where sharing pain with creditors is concerned. This lesson, evidently, will have to be learnt all over again.

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By Richard B.

This week’s losses were extremely serious, a fact belied by the virtual absence of press coverage. They were the largest in any single week since the failure of IndyMac Bank on July 11, 2008.

IndyMac had assets of about $32 billion and deposits of $19 billion. Its failure cost the FDIC an estimated $8 billion.

The seven banks that failed this week had combined assets of about $25.8 billion and deposits of $19.6 billion. These failures cost the FDIC an estimated $7.33 billion.

Prior to this week, the FDIC’s estimated losses from 57 bank failures in 2010 stood at about $8.6 billion. This week’s failures practically doubled that figure, to $15.93 billion.

This information cannot be reconciled with the MOPE that states the banking sector has recovered. To the contrary, these failures speak of deeply-rooted problems in the banking sector that appear to be getting worse over time.

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By The Daily Bell Staff

Big business pleads for loopholes in financial regulatory reform … Here’s a simple explanation for the financial crisis: Too much cheap credit was extended to households, businesses and even sovereign governments that couldn’t afford to carry that debt or pay it back. The obvious implication is that, going forward, credit and other financial risks should be made more expensive and harder to get.

Now, however, as we close in on the endgame for financial regulatory reform legislation, special interests are crawling out of the political woodwork demanding loopholes and exemptions. And if you strip away their end-of-the-world-as-we-know-it rhetoric, their basic complaint is that the reform bill would make credit and other financial risks more expensive and harder to get – in other words, the bill is doing exactly what it is supposed to.

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By Bill Bonner

While the markets are hot, the economy is cool.

So much of the private sector depends on government spending that, take it away, and the whole economy shrinks. This causes tax revenues to fall by more than the budget cuts. In other words, a multiplier works in the other direction – causing the budget deficit to widen when cuts are made!

What’s the solution? Well, just to bite the bullet. Make the cuts. Default. Be happy.

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