“U.S. Federal Budget Deficit Reality. On November 23rd… the Congressional Super Committee is due to announce a mandatory plan for cutting the federal budget deficit. Ostensibly, the package to be produced will provide at least a 1.2-trillion dollar deficit reduction over ten years. Even if the Committee can reach an agreement… the deal will not be meaningful… consider the following:
- Deficit reduction of 1.2-trillion dollars over ten years is little more than statistical noise, given the overly optimistic assumptions underlying the deficit projections.
- The actual annual deficit… likely will be reported in the range of five -to seven-trillion dollars for 2011…”
“Commentary Number 400: Budget Deficit Reality, October CPI, Industrial Production”
John Williams, shadowstats.com, 11/16/11
In all the legitimate concerns over the Eurozone debt and solvency crises, many commentators have failed to adequately focus on the “Elephant” – the debt, spending and solvency crises of the USA.
Those crises are our focus here, and we proffer key antidotes for investors.
A $5 to $7 trillion U.S. deficit for 2011 does indeed qualify the USA as a distressed financial elephant in the international economy.
Consider the following:
“The White House Office of Management and Budget (OMB) assumes positive economic growth into the future, underlying its budget projections… a more realistic outlook would show a contracting GDP for at least the next several years.
The OMB also assumes average CPI-U inflation of 2.0% or less for 2012 through 2015… A more realistic outlook would show higher consumer inflation for at least the next several years.
To the extent that reported GDP growth is weaker than assumed, and that CPI-U inflation is stronger than assumed, the resulting federal budget deficit and borrowing needs of the U.S. Treasury will be worse than projected…
My best estimate for fiscal 2010 remains that the GAAP-deficit… including the net present value of unfunded liabilities in Social Security, etc.—was roughly 5.3-trillion dollars… the GAAP-based federal deficit for fiscal 2011 likely was in the range of five- to seven-trillion dollars.
That would put the ratio of gross U.S. government debt and obligations to GDP closing in on six-to-one, the worst of any major Western power…
It is the GAAP-based deficit that shows the ultimate insolvency of the U.S. government. With an annual deficit in excess of five-trillion dollars, the government could tax salaries and wages at 100% and an annual deficit would remain. The government could eliminate every penny of government spending, except for Social Security and Medicare, and the annual deficit would remain.
A cut of $1.2 trillion dollars over ten years is not too meaningful in such a circumstance…” (emphasis added)
Ibid.
Indeed, that the debt to GDP ratio is “the worst of any Western power” and… reflecting “the ultimate insolvency of the U.S. government”, are realistic appraisals.
So the essential issue is what happens when the markets are forced to acknowledge and act on this reality.
Honest John Williams (Shadowstats.com) and astute trader Dan Norcini give us clues. First, consider Williams further.
“Without consistent and very strong political will—which I see largely as lacking in Washington—and without concurrent extraordinary actions, the U.S. economy remains at high risk of devolving quickly into a hyperinflationary great depression…
The global markets have been in turmoil since the debt-ceiling negotiations ended with the Super Committee solution. It would not take much intensification of U.S. political turmoil to refocus global financial-market attention on the long-range U.S. insolvency—as things stand—and to trigger renewed heavy selling of the U.S. dollar and dollar-denominated assets.” (emphasis added)
Ibid.
Yes, there is a high risk that the U.S. economy will devolve into hyperinflation. Indeed, in our view such a devolution would be to hyperstagflation as price increases stifle investment and economic growth. Moreover, at some point in the hyperstagflation process increasingly less valuable U.S. dollars and other fiat currencies will be traded for increasingly expensive tangible assets.
Indeed, the U.S. economy is already at the threshold of hyperstagflation.
Consider real U.S. CPI of 11.12%, real U.S. unemployment of 22.9% and real GDP “Growth” of a negative 2.89%.
Thus a $1.2 trillion cut over 10 years is well-nigh insignificant.
Shadowstats.com calculates key statistics the way they were calculated in the 1980s and 1990s before official data manipulation began in earnest. Consider
Bogus Official Numbers vs. Real Numbers (per Shadowstats.com)
Annual U.S. Consumer Price Inflation reported November 16, 2011
3.53% 11.12% (annualized October, 2011 Rate)
U.S. Unemployment reported November 4, 2011
9.0% 22.9%
U.S. GDP Annual Growth/Decline reported October 27, 2011
1.62% -2.89%
U.S. M3 reported November 10, 2011 (Month of October, Y.O.Y.)
No Official Report 2.62%
Lest one believe the foregoing commentary is merely a theoretical projection consider Trader Dan’s comment below on what is already happening to commodities prices…
“Funny that on a day when we have to sit and read commentators telling us gold is under pressure because "inflation is benign"…
If WTI Crude continues to show strength, it is going to be a difficult trick for the gold bears to keep up any chatter on ebbing inflationary pressures.
On a different note, take a look at the composite price of wholesale beef. It scored an EIGHT YEAR HIGH yesterday! Don't worry however, this is just a figment of your imagination. The government tells you so…
That is what is particularly galling about the government's numbers. They give the impression that inflation is benign but the truth is that while the CCI has fallen from its peak, it remains at an extremely lofty level nearly 90% above the bottom made back in 2008… commodity prices have nearly doubled since the fall of 2008.”
Dan Norcini, traderdannorcini.blogspot.com, 11/16/11
Crude over $100 and wholesale beef at an eight year highs!
And commodities in general are 90% above the 2008 bottom.
And consider that major U.S. banks still have considerable exposure to the Eurozone. Fitch has it right.
“Fitch… said U.S. banks could be "greatly affected" if Europe's debt crisis continues to spread beyond financially troubled countries such as Greece, Ireland and Portugal…
The benchmark rate on France's 10-year bonds was just 2.54 percent on Oct. 5. It has climbed steadily since then, reaching 3.69 percent Wednesday. That's a reflection of deepening worries that France, the second-largest country in the euro bloc after Germany, could be in danger of losing its triple-A credit rating.
… Fitch said the top five U.S. banks have a total of $114 billion in loans, deposits and other assets tied to French banks. French banks also have large holdings of bonds issued by Greece and Italy.”
“Stocks sink after Fitch warns on US bank exposure”
David k. Randall, finance.yahoo.com, 11/16/11
And note that in France (2nd largest Eurozone economy) the major banks have great exposure to Greece and Italy.
Elephant Antidotes
- Focus on acquisition of tangible assets in relatively inelastic demand. Agricultural products and producers are one central focus here (see recommendations in our portfolios at www.deepcaster.com)
- Real estate in prime (recession resistant) locations with high yield is another excellent choice for profit and protection
- By contrast, energy prices and values tend to be sensitive to overall economic condition. They tend to be dampened in periods of economic weakness.
- Another essential component for portfolios is a high-yield portfolio*. This should aim for a total return (gain plus yield) well in excess of real inflation which in the USA is 11.12% per Shadowstats.com.
- Move assets from banks with large derivatives and/or Eurozone exposure to those with little or no such exposure. In the U.S. this could mean for example, moving assets to credit unions in order to be somewhat removed from exposure to mega-bank vulnerabilities.
- And, of course, buy and take personal possession of physical gold and silver on the dips, and gold and silver shares at the right time. But stay alert for the Cartel price takedowns***.
In this regard, the gold council just reported:
“Central Bank Buying hits 40 Year High in 3rd Quarter” - Gold Council, 11/17/11
So we emphasize our primary recommendation
- Buy and take possession of physical gold and silver, but be mindful of the caveats in notes 1 and 2 below.
Is it not most significant that the Masters of the Paper Game, the central bankers, are now buying record amounts of physical gold?!!
Best regards,
Deepcaster
November 17, 2011
Note 1: ***We encourage those who doubt the scope and power of overt and covert interventions by a Fed-led Cartel of key central bankers and favored financial institutions to read Deepcaster’s December, 2009, special alert containing a summary overview of intervention entitled “Forecasts and December, 2009 Special Alert: Profiting From The Cartel’s Dark Interventions - III” and Deepcaster’s July, 2010 letter entitled "Profit from a Weakening Cartel; Buy Reco; Forecasts: Gold, Silver, Equities, Crude Oil, U.S. Dollar & U.S. T-Notes & T-Bonds" in the ‘Alerts Cache’ and ‘Latest Letter’ Cache at www.deepcaster.com. Also consider the substantial evidence collected by the Gold AntiTrust Action Committee at www.gata.org, including testimony before the CFTC, for information on precious metals price manipulation. Virtually all of the evidence for intervention has been gleaned from publicly available records. Deepcaster’s profitable recommendations displayed at www.deepcaster.com have been facilitated by attention to these “interventionals.” Attention to the interventionals facilitated Deepcaster’s recommending five short positions prior to the Fall, 2008 Market Crash all of which were subsequently liquidated profitably.
Note 2:
- Understand that a Cartel* of central bankers and their mega-bank allies have for years been suppressing precious metal prices.
- Understand that it is now harder for the Cartel to successfully suppress prices, because there is an increasingly severe supply shortage of physical gold and silver, especially of silver, because ever more investors are becoming aware that certain mega-banks do not have the physical gold and silver they claim and thus these wise investors are taking physical possession, and delivery.
- Nonetheless, the Cartel’s price suppression regime is still potent as the recent price takedown of gold and silver show.
- Realize that these price suppression interventions form patterns and reveal tendencies, aka interventionals, which are useful in forecasting the next intervention. They facilitated Deepcaster’s earlier correct forecast that precious metal prices would be taken down as they have been in recent weeks (and that is why Deepcaster recommended taking profits on gold and silver positions several times earlier this year in advance of takedown).
- Develop a strategy for buying at interim lows during takedowns (see below) and taking profits (at least partial profits near interim highs)
- If one chooses to liquidate a portion of one’s paper gold and silver, do so before a takedown begins in earnest
- Use takedowns as an opportunity to convert some paper silver and gold profits into physical silver and gold. Not only do you get to buy these precious metals “on the cheap” but you also give the mega-bank market riggers fits, because they have a greatly diminished supply of these physical precious metals, but unlimited quantities of “paper gold and silver”. Deepcaster has recommended a particular physical form of these metals which is resistant to takedowns.
- The miner shares are subject to severe Cartel price suppression also, but well-timed purchases of share can result in substantial profits. Deepcaster’s weekly alerts aim to give advance notice. Do not give short shrift to gold and silver miners.
