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We now face the gravest financial dangers — and the greatest profit opportunities — in two generations.
But before I tell you about what the future could bring, let me tell you how my family and I have come to this place and time.
Over a half century ago, my father founded our Sound Dollar Committee, a nonprofit organization with a clear mission — to promote a balanced budget, avoid the erosion of America’s credit, and defend the U.S. dollar.
And nearly four decades ago, I founded my company, Weiss Research, with a parallel goal — to help protect investors from the consequences and be there for you in case the Sound Dollar Committee failed in its mission.
Today, I look back on those years with both pride and regret.
In its first major endeavor, our Sound Dollar Committee led a nationwide grassroots movement of historic dimensions. It motivated 11 million Americans to write, phone, or send telegrams to Washington, protesting fiscal imprudence and demanding a balanced budget.
And for a short time, we transformed Washington. We won a major victory in Congress. We helped President Eisenhower deliver the last true balanced budget — without smoke and mirrors — of our lifetime. We thought we had won the war for the safety of our financial future.
However, in the years that ensued, not only did we fight fewer battles, but we also lost every one.
We lost the battle with President Johnson, whose guns-and-butter spending gutted the budget and set the stage for bigger fiscal troubles under future presidents.
We lost against President Nixon, who abandoned gold and devalued the dollar.
And we lost with virtually every American president thereafter — each pursuing different political agendas, each digging us into the same, deepening hole.
We — and others more illustrious than us — failed. And as Dad said before he died …
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“The Consequences of Our
Failure Could Be Catastrophic.”
— J. Irving Weiss, Founder
Sound Dollar Committee
Just 35 days ago, Obama’s Office of Budget and Management (OMB) calmly proposed the greatest fiscal nightmare of all time — a $1.6 trillion deficit for 2010, another $1.3 trillion in red ink for 2011, and continuing massive deficits until 2020.
In response, we promptly warned you that there’s something even more disturbing than the OMB’s shocking deficits projections:
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The fact that those projections are severely understated … the fact that they are predicated on aggressively optimistic assumptions about the economy that few outside the White House believe possible.
And sure enough, this past Friday, some of the truth came to light.
In its Preliminary Analysis of the President’s Budget Request for 2011, the nonpartisan Congressional Budget Office (CBO) made it blatantly clear that:
- The Obama team severely underestimated future federal deficits — by $1.2 trillion.
- Their view that federal deficits will fall below 4 percent of GDP by the middle of the decade is wishful thinking. That will simply not happen.
- The deficits will start growing rapidly after 2015, forcing the Treasury to continue borrowing lavishly and sending the national debt soaring to 90 percent of GDP.
Unfortunately, however, even these new, uglier numbers from the CBO suffer from serious deficiencies in their underlying assumptions. They assume:
- No double-dip recession in 2010, 2011, or any other time in this decade — a scenario that a growing number economists consider highly unlikely …
- No significant rise in unemployment benefit costs and no declines in corporate tax revenues — inevitable consequences of a weaker-than-expected economy …
- No selling — or even reduced buying — of U.S. government debt by foreign creditors, and …
- No resulting spike in the government’s borrowing costs — a scenario that’s very hard to imagine in the wake of the huge deficits already cited in their reports.
In sum …
Neither the White House nor the CBO have adequately considered the real impact of the very deficits they themselves are projecting.
They admit the deficits will be off the charts. But they fail to connect the dots from that admission to its obvious natural consequences — no fewer than FIVE ominous, vicious cycles …
Vicious Cycle #1
Surging Interest Rates
- Big deficits drive interest rates higher.
- Rising interest costs create still bigger deficits.
- These bigger deficits drive rates even higher.
Vicious Cycle #2
Credit Squeeze
- Government borrowing and higher interest rates literally shove consumers and businesses out of the credit market.
- Consumer and businesses, unable to borrow, slash spending and gut corporate earnings.
- The government sees tax revenues collapse, rushes to borrow still more to fill the growing budget gap, and drives interest rates surge even higher.
- The cycle accelerates.
Vicious Cycle #3
Unemployment
- Bigger deficits crush the economy, and unemployment rises.
- Rising unemployment forces the government to spend far more for jobless and other social benefits.
- These surging costs bloat the deficit even more, squeezing the economy even further … adding to the ranks of the unemployed … and causing still larger federal deficits.
Vicious Cycle #4
Global Selling
- The dire outlook for the U.S. budget and economy prompt the nation’s creditors — especially those overseas — to reduce their purchases of U.S. government bonds. Or worse, our creditors start dumping their existing holdings. Global demand for U.S. debt — issued by the U.S. Treasury and government-run agencies — plunges.
- The Federal Reserve seeks to replace that demand by buying U.S. government securities for its own account, printing vast amounts of U.S. dollars to finance its purchases. But this rampant money printing sends the signal that the U.S. is, in effect, intent on effectively defaulting by paying back creditors with devalued dollars.
- Fear of the de facto default by the U.S. government drives America’s creditors to dump more of their U.S. bonds … prompting the Fed to print still more money … and pushing creditors into an even greater bond-selling frenzy.
Ultimately, these vicious cycles speed up
beyond the threshold of absurdity.
The government reaches the end of the line, its final day of reckoning.
It cannot borrow without driving interest rates to a level beyond which borrowing becomes virtually impossible.
It cannot collect enough tax money without bankrupting the very taxpayers it’s trying to tap.
It cannot print enough money fast enough to replace the money its creditors are pulling out for fear of money printing.
Its back is against the wall. It has no choice but to do what it should have done from the outset — cut back, and do so massively.
And, alas, it’s these conundrums that lead to …
The Final Vicious Cycle
Massive Government Cutbacks!
- Ultimately, the U.S. government has no choice but to do the same thing Greece has had to do in recent days despite massive labor unrest … the same thing California has been forced to do despite statewide protests last week … and even something similar to what many other states have done in recent months — such as releasing dangerous offenders from prison despite obvious security risks. In sum, the federal government slashes spending and does so aggressively.
- The same government, previously pump-priming the economy with stimulus, now finds itself involuntarily depressing the economy with cutbacks.
- The sinking economy bloats the federal deficit one last time, forcing a final round of Draconian cutbacks.
But in the never-ending yin-yang of history, it’s out of the worst of times that we have the potential to get the best of outcomes.
And it’s in this disaster — no matter how painful in the near term — that I see the greatest hope for America’s long-term recovery.
Yes, it will punish an entire generation of borrowers and spenders. But it will also teach a new generation the value of work, savings, and sacrifice.
Yes, it will push America to its limits. But it will also spur its citizens to rise to the challenge, much as they did in worse wars and deeper financial crises of prior centuries.
And, yes, it will devastate investors who are complacent. But it could also richly reward those who are well prepared and who can transform the greatest of crises into the greatest of opportunities.
Good luck and God bless!
Martin
About Money and Markets
For more information and archived issues, visit http://legacy.weissinc.com
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates
but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Marci Campbell, Amy Carlino, Selene Ceballo, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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