Debt in the U.S. will haunt us eventually

According to the author of this article, the current rally that the US is seeing is one only built on sand. The debt in the United continues to grow and that real unemployment rate is not getting any better. If the US continues on this same route, a collapse will happen eventually.

March 18, 2012
Pocono Record

With Greece temporarily out of the every day headlines and the Fed touting the recovery that is supposedly taking place, we are seeing some nice rebounds in our stock markets. As I stated a year ago on Fox Business, I believe that this is a rally built on sand.

It is really very simple. The economic numbers show that our economy is expanding at 2 to 2.5 percent annualized. That would be ok if the government wasn't running a $1.3 trillion dollar budget deficit, which is around 10 percent of our GDP. Take out the freshly printed money and deficits that we are running and we would be contracting by 7 to 8 percent rather than growing.

According to the Fed's own numbers, our private economy spent $1.3 trillion dollars less in 2011 than it did in 2008 — and that's a recovery?

In addition, even though the official U3 unemployment report (this is the number touted in the media) shows that the "official" unemployment number is going down, the U6 number (more realistic) is still north of 15 percent. I read an article today on by Daniel Amerman that was easy to understand and explains why the number is actually closer to 20 percent. That is probably why more and more of us know people who are out of work, losing jobs and are not able to find another one.

In the bond markets, the Fed and major banks have taken any thought of a free market out. The Fed, along with the major banks, are keeping long- and short-term rates artificially low. This is an assault on all savers and it is potentially a back-breaker for pension plans that are charged with getting returns in the 8 percent area.

While I appreciate that the Fed and our government are keeping our economy afloat and actually are keeping a lot of people employed because of the deficit spending I can't help but wonder what unintended circumstances are going to come out of this.

Because of interventions in the bond market (QE, twist, et al) the value of bonds are being manipulated higher while yields are manipulated lower. This means that investors are not being adequately compensated for the risks that they are taking. Of course, this makes the government's debt easier to pay and delays any day of reckoning. There are more and more people in the media who are calling government bonds "return free risk" rather than risk free return. I have to agree.

Greece, of course, should be looked at closely. The private bondholders lost as much as 86 percent of their value while the ECB (European Central Bank) was made whole. They decreed that their bonds were senior to all others. That means they get paid first. In addition, the Greek citizens were "loaned" 130 billion euros to pay interest due of 100 billion euro, which effectively added 30 billion dollars more debt on to the backs of the Greek citizens.

If they couldn't pay their debt before and their economy is shrinking why would I think they could pay even more debt? Look for Greece in the headlines again in the not-too-distant future along with Spain, Portugal, Hungary, Italy and others.

The longer this goes on without adverse consequences, like bondholders demanding higher interest rates for the heightened risk they are taking, the more dangerous it gets. I say that because people are taking more risks now to get better yields to try and keep up with inflation. Many don't appreciate the level of risk they may be taking because they believe that the Fed or the government will have their backs and bail them out if necessary. Unfortunately, as Greece has shown us, if push comes to shove the first to be bailed out will be the central bank. Second will come those that issued sovereign debt (governments), third will be the major banks and the crumbs will fall to the private bondholders if it plays out the same way as Greece did.

We are told that default would be catastrophic. It probably would be but only for a short time. Iceland is four years removed from a currency crisis and economic meltdown. In the fourth quarter of 2011 their economy started to grow again. Freed from the debt that couldn't be repaid, they started over. Compare that to the European countries that are kicking the can down the road. Eventually, it will more than likely lead to the same destination but the Euro countries may go through a decade or more of austerity, recession, depression and social upheaval to keep the central banks and bankrupt governments propped up.

So far, we have been spared on this side of the Atlantic from the drama but our debt situation is every bit as bad or worse than the countries in Europe. The sooner we all admit that debt is the problem and that more debt won't solve that problem the better off we will all be.

Mike Savage is a financial adviser and president of Savage Financial Group in East Stroudsburg, which offers securities through Raymond James. Opinions are those of Mike Savage and not necessarily those of Raymond James.

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