Why we should not support any bailout: and what to do

[abumbyanyothername]

This is a pay service article from Chris Martenson:

http://www.chrismartenson.com/themartensonreport


"Our first challenge in confronting this crisis

This crisis is fundamentally one of insolvency (definition below), not a failure to have enough dollars floating around, which means that it is not a liquidity crisis.

Quote:
Definitions:

• Insolvency. A condition where one’s assets are exceeded by one’s liabilities to an insurmountable extent. Distinct from bankruptcy, which is a legal event precipitated by a final inability of cash flow to continue to carry an insolvent entity any further. Insolvency nearly always precedes bankruptcy.

• Liquidity. A measure of how much money exists in a useable form. A person with a $10 million house but no money in the bank is said to be “illiquid,” not “poor” or “broke." A “liquid” market, like the stock market, offers a reliable and fast way to exchange assets for money. When the Fed is said to be adding “liquidity,” they are taking assets from banks in exchange for cash.


The institutions in question are as insolvent as a minimum-wage janitor trying to make payments on a $2 million beachfront house using only his earnings. The aggressive lowering of interest rates by the Fed in their attempt to help provide liquidity to the banks was like assuring that the janitor’s checks cleared at the bank a little faster. But improving liquidity did not help. It couldn’t, because the problem was one of solvency, not liquidity.

But if liquidity won’t do the trick, what will?

Here we must face the hard truth that merely transferring the failed loans from the insolvent banks to an insolvent nation will do nothing but forestall the problem until a slightly later date (when it will be larger and more severe, by the way). The fact that both candidates for president are openly supporting the bailout says that reality has not yet penetrated the inner beltway.

So the first challenge will be recognizing that it really is not possible for an insolvent nation to bail out an insolvent financial system by borrowing more money. This is an absurd notion, and in total it really is no more and no less complicated than that. One cannot solve a crisis rooted in debt by issuing more debt.

Our second challenge in confronting this crisis

On September 23rd, 2008, before the Senate banking committee, Bernanke said, “I believe if the credit markets are not functioning, that jobs will be lost, the unemployment rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover.”

The palpably strong desire by the current politicians to “get the economy back on track” and to immediately return (if possible) to maximum consumption is absolutely the wrong response at this moment in history. We do not need to return to our borrow-and-borrow-more ways of the past. We desperately do need to demonstrate awareness that the future is loaded with challenges that only grow larger and more urgent with time. None of these challenges, ranging from energy dependence, to population, to a broken entitlement and pension system, will be helped by a return to our former credit-dependent ways. In fact, they will be exacerbated.

So our second challenge is to recognize that our first instincts to repair a broken system are wrong.

Instead, we need to have an honest accounting of our current economic condition, matched against the very real warning signs that our consumptive lifestyle is due for a radical overhaul. If we miss this chance to level with ourselves, we will have squandered an enormous opportunity.

Your biggest challenge

Recently, Senator Chris Dodd (CT) stated, “e’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.”

I know that the temptation is to trust that somehow these big players on Wall Street and in Washington DC have this all under control, or that they will fashion something workable to tide us over for a while. While they might be able to limp this along for a while longer, it might also fail sometime next Tuesday, and it will certainly fail sooner or later. When our economy finally suffers a complete meltdown, the resulting calamity will be as individually dramatic to each of us as if our homes burned to the ground. Your challenge is to accept that this crisis is fundamentally “unfixable” and that wherever the future takes us, it will not be a simple continuation of the past. With this acceptance, the challenge becomes assessing what might happen and what you can do about it.

OK, so now what?

The immediate risk that I see here centers on a collapse in the international value of the dollar, which will rapidly morph into a massive financial crisis for the federal government. When all is said and done, I fully expect the federal government to be half its current size, with states, to varying degrees of success, picking up the slack as best they can.

The chance that the US dollar will go into a steep decline from here is very high. I personally place the risk that a major dollar decline will ensue within the next 6 months at 50%. Here’s how that would play out.

In its full wisdom, while times were good, the US government opted largely to finance itself with short-term debt in the form of 3 month and 6 month “T-Bills.” In essence, because these T-Bills ‘roll over’ every 3 or 6 months at whatever the current interest rate is, the US government opted to finance itself with an Adjustable Rate Mortgage (ARM). Hold onto that thought.

Now that the government has embarked on a course of massive deficit spending that is sure to top $1 trillion next year (and possibly go as high as $2 trillion), this money will have to either be borrowed from overseas or printed out of thin air by the Federal Reserve. In either case, there is a very high probability that either/both of these actions will cause interest rates to climb, possibly quite steeply and suddenly.

And here is where the “vicious spiral” comes into play, exacerbated by the short-term (ARM-like) borrowing stance described earlier. The more the government needs to borrow, the higher interest rates will go. The higher that interest rates go, the greater the need to borrow. So more borrowing begets higher interest rates, which beget more borrowing, which beget higher interest rates, which….ah, you get the idea.

If (or when) this dynamic gets started, its self-reinforcing nature will cause both the dollar to collapse in value and interest rates to shoot upwards. Either of these effects alone would provide a serious hit to our debt-based way of life, but together they promise to deliver earth-shaking changes to those who are unprepared. Concurrent with this death-spiral for the dollar will come massive (hyper?) inflation of imported goods, the most important of which, to our daily lives, will be oil. Gasoline at $10 or even $50 per gallon is not unthinkable.

This means that you, individually, need to begin thinking about ways to economically insulate yourself from this possibility, as does each state in the union.

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Hold gold and silver, physical only. How much? That depends on how many of your US-dollar-denominated holdings you’d like to be absolutely sure do not go to zero.

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