RATES FLASHING AMBER
Last week we read the following piece from Sovereign Man’s Simon Black, with the context of rising rates in mind and thought it worth sharing.
Remember, the US 10 year treasury rate has already doubled from 1.67$ to 2.97% in the last 18 months.
Think about a million dollar mortgage going from 4.5% to almost 9% then just add the 0’s, for effect, 9 for a billion, 12 for a trillion, on the short scale, of course.
Another nice titbit on this matter is, at a little more than 0% Japan’s interest bill soaks up 30% of its governments revenue!!
February 27, 2018
Santiago, Chile
Earlier this month, the United States government released its annual financial report for the year 2017.
This is something the government does every year, similar to how large companies like Apple, or Warren Buffett’s Berkshire Hathaway, publish their own annual reports.
Unlike Berkshire and Apple, though, whose financial reports typically show strong, positive results, the US government’s financial statements are a complete horror show.
Right at the beginning of the report, the government explains that it’s “net loss” for the year was an unbelievable $1.2 TRILLION.
Read that number again.
$1.2 trillion. That’s simply staggering.
It’s larger than the size of the entire Australian economy… and constitutes a loss of more than $2.2 million per minute.
This is not a conspiracy theory or irrational fantasy.
This is the Treasury Secretary of the United States of America publicly announcing that the federal government lost $1.2 trillion on page ‘i’ of its annual financial report.
What’s even more alarming is that 2017 was a great year.
There was no war. No recession. No epic financial crisis.
In his introductory letter, in fact, the Treasury Secretary proudly stated that “[t]he country enjoyed a pick-up in [economic] growth in 2017. Unemployment is at its lowest level since February 2001, consumer and business confidence are at two-decade highs, and inflation is low and stable.”
In short, everything was awesome in 2017.
Even the government’s overall revenue was a record high $3.3 trillion for the year.
Yet despite all that good news… despite all those positive developments and record revenue… they STILL managed to lose $1.2 trillion.
If the government loses $1.2 trillion in a GOOD year, how much do you think they’ll lose in a BAD year? How much will they lose when they actually do have a recession to fight? Or another war. Or a major banking crisis?
More importantly, how long can something so unsustainable possibly last?
But the fun doesn’t stop here.
Further in the report, the government reviews its own assets and liabilities… effectively calculating its “net worth”.
It’s just like how an individual might calculate his/her own net worth– you add up the value of your assets, like your home, car, and bank account balances. Then subtract liabilities like mortgage and credit card debt.
The end result is your net worth. And hopefully it’s positive.
The government’s is hopelessly negative: MINUS $20.4 trillion. (See page 55 of the report.)
And that’s worse than its result from the previous year’s MINUS $19.3 trillion– meaning that the government’s net worth decreased by about 6% year over year.
To be clear, a net worth of negative $20.4 trillion means that the government added up the values of ALL of its assets. Every tank. Every aircraft carrier. Every acre of land. Every penny in the bank.
And then subtracted its enormous liabilities, like the national debt.
The difference is negative $20.4 trillion, i.e. the government has far MORE liabilities than it has assets.
If the government were a business, it would have gone bankrupt long, long ago.
On top of that, though, the government separately calculated its long-term liabilities from Social Security and Medicare.
As we frequently discuss, both Social Security and Medicare are running out of money.
And according to the government’s own calculations (on page 58), the “total present value of future expenditures in excess of future revenue” for Social Security and Medicare is MINUS $49 TRILLION.
Essentially this means that the two largest and most important pension and healthcare programs in the United States are insolvent by nearly $50 trillion.
Altogether, the government is in the red by almost $70 trillion.
It’s remarkable that this is not front page news.
There has not been a single utterance from mainstream media about the pitiful, dangerously unsustainable finances of the federal government.
I’m certainly not suggesting that the sky is falling, or that there’s some imminent disaster that will strike tomorrow morning.
But any rational person needs only look to the pages of history to find dozens of examples of once dominant powers who were crippled by their excessive debts.
It may take several years to feel the full impact. But it would be utterly foolish to believe that this time is different.
Had to laugh at the “no war” or “financial crisis” in Simon’s piece above but hey, things could always be worse!!
If you’ve swallowed the well-presented musings above, we’ve made some other observations below, from different perspectives that we found interesting over the last week or two.
One was an excellent read from renowned Economist, Author and serious China watcher, Dr. Stephen Leeb. He continues to remind us that the race is well and truly intensifying for control of scarce resources throughout the globe, again, especially from a Chinese perspective.
Not a mind blowing observation by itself but put in combination with the potential effects of the last nine years of money printing coming down the pipeline, in the (potential) form of inflation, one starts to sense some momentum building.
And, as we pointed out in our last note, with commodities relative value to equities at an all time low, the value in commodities is compelling.,
To add to this, it was with sadness that we watched Jim Grants final interview series on RealVision this week. (sad that he can’t continue to do it every week).
The Final interview of his series was a one on one with Leigh Geohring, whom Jim refers to as the best commodity analysts on “the street”, contrarian as he may be.
Leigh painted a very interesting picture on Oil, Gas, Copper, Nickel and Uranium, all with upside potential, from a current price/demand perspective.
At the same time, a negative one on Aluminium.
And……..this is the guy who called gold in 2001 to be $2 500 an ounce within 10 years and gets criticised for it only getting to $1900, from $230 when he made this call!
His sincere comment to Jim Grant was that this time, as result of the monetary “backdrop” we know operate in, is now a much better outlook for gold than 2001!
So …..his call for this next leg up is…….$13 000.
Most owners of current main stream rhetoric will laugh but this guy has a track record in commodities like no other!! Oh, and the deep respect of Jim Grant!
How long Central Bankers remain fearful of the message that a rising gold prices sends re their epic economic “fix” remains to be seem.
Certainly, as Stephen Leeb so interestingly observes, the Yuan and China itself, seem to care more about the price of bullion and less about the dollar as time goes on.
Play on!
We enjoyed some of the answers to this below. Maybe you can add to the “international conversation”!
Finally, this one for economic geeks to debate.
