‘We Don’t Have a Spending Problem’
Do you know what the single greatest threat to America is? During the American presidential election campaign, President Obama said it was international terrorism. Republican candidate Mitt Romney warned it was a nuclear Iran. Other experts scream that it’s global warming. Border patrol agents say it’s Mexican drug cartels. Perhaps it’s a North Korean nuclear attack, Russia’s military resurgence, or a Chinese cyberattack.
Those threats are real. But there is a danger far greater than all of the above combined.
Adm. Mike Mullen, former chairman of the U.S. Joint Chiefs of Staff, believes he sees the threat. The biggest danger to America today, he says, is our debt. “From a national security perspective, it is the brutal combination of the passage of time and no solution in sight that so intensifies the crisis and the threat” (emphasis mine throughout).
Mullen says that, eventually, our debt will leave us defenseless.
German Finance Minister Wolfgang Schäuble told his parliament in January that America’s debt situation is nearing a crisis. “Britain has a higher state debt than the eurozone average, and I don’t even want to mention the United States of America,” he said. Earlier, he told the Bundestag that U.S. debts were a drag on the global economy, and he questioned America’s political will to deal with it.
America’s enemies can see its glaring weakness. “How long can a government with a $16 trillion foreign debt remain a world power?” Iranian President Mahmoud Ahmadinejad asked in October.
Can anyone disagree? How America handles its debt problem may be the defining issue of the next four years.
The One Thing Washington Can Agree On
According to the U.S. Commerce Department, the economy shrank during the last quarter of 2012. It was the first contraction in gross domestic product since the official end of the recession in 2009. The news came as a shock. America was supposedly on the path to recovery.
What caused the economy to shrink? Analysts blamed a $40 billion cut to federal spending.
If a $40 billion cut to Washington’s massive spending pushes the economy into recession, there is no way lawmakers will stomach $1 trillion in cuts, which is what the country needs in order to balance the budget. They can’t agree on what to cut, and they don’t have the stomach to simultaneously raise taxes and risk an even worse contraction.
A few days after the gdp report, as if on cue, President Obama urged Congress to delay automatic spending cuts to domestic programs that were scheduled to take effect in March. Republicans signaled they would be willing, if the president postponed cuts to the military. It seems that the one thing Washington more or less agrees on is spending massive amounts of money.
America’s leaders don’t have the will to balance the budget.
America owes a record $16.7 trillion. By 2014, the debt is projected to be well above $17 trillion—and that doesn’t include tens of trillions in Medicaid, Medicare, and Social Security benefits that politicians have promised voters. Including all liabilities, America’s debt is over $100 trillion.
No nation in history has ever had such a gargantuan debt, let alone paid it.
What Happened to Mr. Obama?
Barack Obama used to speak out against this financial menace. In 2006, Senator Obama lambasted Republicans for raising the debt ceiling by $3.5 trillion over five years. “The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure,” he said. “It is a sign that the U.S. government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our government’s reckless fiscal policies.”
“America has a debt problem and a failure of leadership,” he said. “Americans deserve better. I therefore intend to oppose the effort to increase America’s debt limit.”
Senator Obama was absolutely right! America’s spending is out of control!
But what happened to President Obama? Since getting elected, he has had a complete mind change!
Back in 2006, he said, “If Washington were serious about honest tax relief in this country, we would see an effort to reduce our national debt by returning to responsible fiscal policies.”
Today, however, debt and deficits no longer matter to the White House. In four years, the president spent $6 trillion this country doesn’t have. He hasn’t passed a budget in almost four years. He recently lambasted Congress for not raising the debt ceiling even faster. And he has stated on national television that his 2006 comments about the danger of the debt were a mistake!
In January, President Obama made an incredible, unbelievable, almost unconscionable statement during the debt ceiling negotiations to Republican House Leader John Boehner: “We don’t have a spending problem.”
We don’t have a spending problem? At the federal level, we are borrowing more than one out of every three dollars we spend—and we don’t have a spending problem? We have promised future retirees around $100 trillion in benefits—money we don’t have—and we don’t have a spending problem? We have the biggest debt in world history—and we don’t have a spending problem?
A Supernova—and Future Black Hole
Pimco’s Bill Gross recently compared America’s debt-addicted economy to a brilliantly burning supernova. America’s debt, including personal, corporate and government debt, now stands at an astronomical $56 trillion, he says. “[I]t is a monster that requires perpetually increasing amounts of fuel, a supernova star that expands and expands, yet, in the process begins to consume itself. Each additional dollar of credit seems to create less and less heat.”
In the 1980s, it took $4 of new debt to generate $1 of real economic growth. Over the last decade, it increased to $10. Today it takes $20 to produce the same result.
“In effect, the initial magic of credit creation turns … destructive and begins to consume credit markets … as well as portions of the real economy it has created,” says Gross. The system is “running out of energy and time.”
We keep going further and further into debt, but are getting less and less bang for our buck. Eventually the whole system is going to turn into a gigantic black hole.
That’s the opinion of Gross, the manager of the largest bond investment firm in the world, with over $1 trillion in assets.
The only question, he says, is how much time we have left.
Time may be shorter than many think. In December, the Federal Reserve announced another emergency program to stimulate the economy. The Fed will create $45 billion per month to buy U.S. treasury bonds. This is in addition to the $40 billion per month it was already creating out of thin air to buy mortgages and artificially prop up the housing market. The latest money-printing measure is dubbed QE4, which follows three other emergency money-printing measures and one “Operation Twist.”
This new announcement means the Federal Reserve plans to create over $1 trillion this year. That’s enough to cover the entire borrowing needs of the U.S. government for the whole year! And the Fed said it will do it again next year. And the year after that, until there is a recovery or to infinity, whichever comes first!
Foreigners Getting Nervous
The Fed says it is printing the money to stimulate the economy, but that is only part of the reason. The primary reason it is printing money is to finance America’s debts.Because foreign nations are refusing to lend money to America!
China is America’s most important foreign lender, but during 2012, for the first time in more than a decade, it became a net seller of American debt. But it is actually worse than that. Not only did China refuse to lend America more money, it has rolled over its existing long-term loans into short-term ones. This is a huge sign that China is losing confidence in America—and in the value of the dollar.
Beijing thinks we have a spending problem.
And China isn’t the only country worried about uncontrolled American spending and how it could pull the whole world into a black hole of debt.
Germany Takes Action
On January 16, the German Bundesbank shocked the financial world by demanding that America return a large portion of German gold reserves held in America (sidebar, page 2).
The Bundesbank’s announcement came just three months after the Federal Reserve refused to conduct an audit on Germany’s gold stored in America. German leaders had to fight to even be allowed to see a portion of the gold that was said to belong to their country.
Why is Germany even storing gold overseas? The answer to that question has deeply troubling ramifications.
Bundesbank executive board member Carl-Ludwig Thiele said it was because of the historical importance of the dollar as the world’s reserve currency.
“Gold stored in your home safe is not immediately available as collateral in case you need foreign currency,” Thiele said. “Take, for instance, the key role that the U.S. dollar plays as a reserve currency in the global financial system. The gold held with the New York Fed can, in a crisis, be pledged with the Federal Reserve Bank as collateral [for dollars].”
Now that Berlin has begun bringing its gold home, does that mean Germany no longer sees the need for having access to extra U.S. dollars?
Or does it signal something worse?
Astounding Breakdown in Trust
According to the Bundesbank, the Federal Reserve will begin returning 330 tons of Germany’s gold—but it will take seven years! That is an incredibly long time to return what is essentially just a bunch of bricks that don’t even belong to you in the first place. Why the delay? Does America actually still have the gold it says it does? Surely Germany must be getting suspicious that it does not.
Veteran gold trader Jim Sinclair said the Bundesbank’s announcement was a warning that investors should take physical delivery of their gold—that in an atmosphere of skyrocketing debt and slowing economies, counterparty risk was growing: “This sends a message about storing gold near you and taking delivery no matter who is holding it.”
According to Sinclair, the announcement signaled an astounding breakdown in trust between Germany and America. “When France did this years ago it sent panic amongst the U.S. financial leadership,” he said.
Sinclair is referring to the notorious failure of the Bretton Woods currency system in 1971. By order of President Nixon, America defaulted on its gold obligations. From then on, America used only paper currency to pay its debts. Foreign nations, led by France, balked, but they lost the battle. America went off the gold standard and onto today’s fiat, floating currency system.
Has America finally printed one too many dollars out of thin air? Has Germany finally had enough of America’s monetary shenanigans?
Think about this statement from Sinclair: “History will look back on this salvo as being the beginning of the end of the U.S. dollar as the reserve currency of choice.”
The end of that status for the dollar will be a deathblow to the American economy.
A Modern-Day Gold Rush
According to Phoenix Capital Research, Germany has just fired a major warning shot at the Federal Reserve. The reason Germany has gone from just wanting to audit its gold reserves to actually removing them from the Fed’s care and reversing a policy in place for over 30 years is that it has decided it no longer trusts the Fed.
“Germany is now openly telling the Fed that it is done playing around. This will have severe consequences in the financial system” (Phoenix Capital Research, January 16).
Now factions in the Netherlands, Austria and Azerbaijan are pushing their governments to take their gold back too.
It’s beginning to look like a modern-day central bank gold rush.
For the first time in many years, central banks became net buyers of gold in 2010. Since then, bank gold-buying has accelerated. This year, central banks will purchase an estimated 550 tons of gold—up from 85 tons in 2010. In 2012, Ecuador asked its banks to repatriate one third of its gold stored overseas. Forbes reported that China imported 76 tons through its new gold center in Hong Kong—up 22 percent from a year earlier. In November, the Bank of Korea announced it had increased its gold supply by 20 percent. In November, it was reported that Brazil’s central bank had purchased 19 tons.
The last time China reported its gold holdings in 2009, they showed an increase of 500 tons to 1,161 tons. Some analysts believe China’s gold holdings have probably doubled or tripled since then—perhaps even surpassing Germany’s stash.
Why the rush out of the dollar and into gold? Do you think it has anything to do with someone’s spending problem?
While average Americans might still think U.S. government debt and, by implication, the dollar are still solid investments, Germany’s and China’s strong moves show that foreign governments are no longer buying the propaganda. Instead, they are buying gold.
They’re buying gold because they don’t trust America. America’s spending problem is destroying the dollar and destroying the credibility of its central bank.
As President Ahmadinejad summarizes: “The Americans have injected their paper wealth into the world economy, and today the aftermaths and negative effects of their pseudo-wealth have plagued them.”
The Biggest Threat to America
Ahmadinejad’s opinion is strangely in line with former U.S. President Bill Clinton. During the 2012 Democratic National Convention he said America could no longer put the debt issue off. “We have to deal with it, or it will deal with us.”
But America is not dealing with its spending problems—because as President Obama articulated in 2006—we lack the will and character to do so. We refuse to change. Instead, America is trying to cheat its way out of its deficit-spending addiction by printing money and hoping it will all work out.
What is the single greatest threat to America? Ourselves! Our debt is billowing. Our economy is shrinking. The dollar is in jeopardy of massive devaluation. The world sees it and is openly preparing for the end of the dollar as the reserve currency. Trust in America is at an all-time low. Our central bank’s credibility is being destroyed. America’s way of life is on the line.
And all of this is because, to put it lightly, we do have a spending problem.