Wednesday, May 13, 2009

Triple A. U.S.A. In Doubt?

Front page of the Financial Times this morning reads:

"America's triple A rating at risk."

This probably doesn't seem like a big deal, but I assure you, it is.

We have an economy that is based entirely on borrowing and spending. That's it. We do it on an individual level, corporate level, and government level. We are one nation, under debt.

The country now is feeling what happens when banks lose trust in consumers and corporations. They stop lending. You've probably heard it all over the news lately....."banks are not lending money."

This is obviously a big problem for an economy based on borrowing and spending. We borrow and buy houses, cars, clothes, televisions, everything. Things got a little out of control over the past few years, and we had something called a subprime explosion.

Quickly to save the day, the government has stepped in to make up for the lack of consumer and corporate borrowing. Obama has taken our record deficit last year and pushed it to $2 or $3 trillion this year. He wants increased spending on health care, education, and government jobs. All the things that make a strong Obama economy. Where does the money come from for government spending? Another President will worry about that.

The jobs numbers came out last week and they were horrifying. There was one sector of the economy that increased jobs: The Government. The new census workers, Obama tells us, will be a huge boost to our economy.

Where will Obama get $2 to $3 trillion? The best case scenario is for foreign countries to purchase about $400 billion of that debt. The rest will be paid for by Ben Bernanke who will print the difference.

This will debase the value of the $400 billion or so purchased by the foreign investors and make them strongly reconsider whether they will line up next year at every auction to purchase our worthless debt.

What if they stopped buying?

What a silly question. Many people asked that question a few years ago about subprime mortgages. What if they stopped buying the worthless mortgages every month?

The truth is that they will stop buying, and its going to be a lot sooner than people think. My guess is not only will they stop buying, but they are going to start selling heavily. China has come out loud and clear and expressed their intentions of moving away from the US dollar.

What happens then?

Our entire economy that is based on debt and spending will collapse. Please, please remember this every time you hear on the news about recovery, green shoots, bottoms, and new bull markets.

This is going to happen, it is already built in based on what we've done. All that will change from here is the degree of the pain. Obama and his team are doing everything possible to guarantee we have a hyperinflationary depression, which is the worst possible scenario. Please understand that this scenario will involve a world we could never imagine surrounded by violence and poverty.

Every mistake, every day, only should increase the amount you are protecting your investments from this new oncoming world.

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