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Daily Dispatch: In the Shadow of the Castle - Feb 03, 2010
Published:
February 03, 2010
by Nrtadmin
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| February 03, 2010 | www.CaseyResearch.com | In the Shadow of the Castle
Dear Reader,
As you are aware, it takes very little to set me off on yet another rant against the American political class – a proxy for governments the world over.
On occasion, I’m tempted to apologize for these rants. Not so much for the message, but for the frequency.
Unfortunately, when surveying the landscape on which our hovels rest, the king’s castle looms large in the foreground.
I am not an envious person by nature and so wouldn’t begrudge the king his fine trappings, provided they were honestly earned.
But therein lies Ye Olde Rub.
Ever more frequently these days, the drawbridge comes down and a troop of the king’s finest sallies forth to extort from me more than half of my crops, and to read new royal proclamations whose net result is to add to the daily burden of trying to provide sustenance for family and jobs for workers.
Should I protest, say, by grabbing a pitchfork and telling the soldiers to clear off my land, or refuse to fill their wagons with the best of my crops – each leaf of which represents time and investment on my part – they would grab me by the shoulders, drag me to the king’s dungeon, and confiscate my property.
In fact, all that has changed since the days of yore is that the king’s knights tend to no longer rape, as well as pillage.
To be fair, the annals of history contain rare instances of kind and intelligent monarchs, the sort who understand that overburdening the peasants ultimately reduces crop production, leading to unnecessary and unproductive hardship and, in time, even revolt. Though, by temperament, I resist authority of any description, I suppose I could live comfortably under the rule of a fair and benign monarch.
The problem with that notion, of course, is that the corruptive nature of power leads to the near certainty that Baldash the Not So Bad will be followed by Norbit the Nasty.
And all of a sudden, instead of politely requesting I kick in some reasonable percentage of my crops to help maintain a constabulary, courts, and maybe the highways, Norbit’s men are kicking in my doors and we’re back to ox carts full of my produce being confiscated to provide a new set of gold plates and to pay the cost of invading neighboring lands.
While some among you will protest (and may do so by writing to David@CaseyResearch.com), there is, I would contend, little difference between a degraded monarch and a degraded democracy. In the monarchy, a single leader directs his minions in their ruinous acts; in a democracy, the directions come from professional politicians, as well versed in gaining and keeping power as any royalty of a bygone era. (Sir Robert Byrd held high office in this nation for 57 years.)
Far from being benign, the nation’s leadership, masters at appealing to the self-interest of an unprincipled voter class has led us to a perilous situation where the fields are being left unplanted.
And an increasing percentage of the citizenry is now muttering angry curses as the king’s men ride by in their shiny black limo-horses.
For a clear understanding of just how poorly ruled this country has been, look no further than the latest budget projections. In his recent article, “America’s Impending Master Class Dictatorship,” Stewart Dougherty does just that, analyzing the government’s wanton spending and penning some notable, and quotable, words on the topic.One stark and sobering way to frame the crisis is this: if the United States government were to nationalize (in other words, steal) every penny of private wealth accumulated by America’s citizens since the nation’s founding 235 years ago, the government would remain totally bankrupt.
And this…Furthermore, with the budgetary equivalent of a straight face, the Office of Management and Budget reports in its long-term, inter-generational budget projection that the United States government will experience massive, non-stop deficits for the next 70 (SEVENTY) years, requiring the issuance of tens of trillions of dollars of additional debt. The OMB does not project even one year of surplus during the entire seventy year budget period.
You can read the entire article here.
Yesterday, our stalwart CEO Olivier Garret sent over an insider doc from the Republicans’ Study Committee that provides talking points for candidates to use in the unending struggle for control of the castle. While I think the color of flag flapping over the battlements is at this point almost irrelevant, the document contains some interesting data points.
For instance…
- $13.5 Trillion of New Debt: The president’s budget proposes to increase the national debt from today’s level of $12.3 trillion to $25.8 trillion in FY 2020 – an increase of $13.5 trillion or 109.8%. The amount of new debt proposed by this budget is larger than the total amount of debt accumulated by the federal government from 1789 to today (even including the $3.6 trillion of new debt over the last three years).
- $2.8 Trillion Tax Increase:The president’s budget submission increases taxes by $2.8 trillion over ten years. This includes allowing many of the 2001 and 2003 tax cuts to expire at the end of this year, such as allowing the top rate (which is often paid by small businesses) to increase from 35% to 39.6%, and allowing the top capital gains tax rate to return to 20%. These tax increases would take effect in an economy that, according to many economists, will still have an unemployment rate around 10%.
- Mandatory Spending: Increases from last year’s level of $2.1 trillion to $3.4 trillion in 2020, an increase of $1.3 trillion or 59.4%. Within that amount: Medicare spending increases from $425 billion in 2009 to $953 billion in 2020 – an increase of $528 billion or 124.2%; Social Security spending increases from $678 billion in 2009 to $1.20 trillion in 2020 – an increase of $523 billion or 77.1%; and Medicaid spending increases from $251 billion in 2009 to $487 billion in 2020 – an increase of $236 billion or 94.0%.
- Interest Payments on the Debt: Increases from $187 billion in FY 2009 to $840 billion in FY 2020 – an increase of $653 billion or 349.2%.
As mentioned yesterday, the projection on interest costs is far too conservative. While the government’s always flawed projections don’t anticipate it, both Bud Conrad and Doug Casey see strongly rising interest rates as a certainty in the foreseeable future. At that point, the debt death spiral begins in earnest, and the whole charade begins to come apart.
But it won’t take soaring interest rates to bring the economy down. That’s just going to accelerate things. And, of course, the worse things get, the worse the monarchy will act – demanding ever higher taxes and further debasing the currency, as they now certainly must.
How can you protect yourself? It really depends on where you are from.
One obvious solution would be to move to a different kingdom, one that treats you and your money better. Or that pretty much ignores you altogether. For those of our many readers from the U.S., the king’s tax collectors will follow you wherever you go – but even so, there are modest tax advantages you can gain by expatriation. Ask your tax counsel for details.
If, on the other hand, you live in a kingdom that doesn’t tax foreign-derived income (yet), becoming a citizen of the world can offer serious advantages and is well worth considering. The situation in most of the developed kingdoms, where easy money and quick mortgages greatly exacerbated the levels of debt, is only going to get more dire as the rulers cast a wider and stronger net in the quest for more revenue.
Even if you aren’t in a position to move, however, you’ll benefit from clearly understanding one key point about the king. While he may dress well and speak in dulcet and pleasing tones, he doesn’t actually produce anything. What money he has to spend must first be taken off the productive elements of the peasantry.
But there are limits to how much he and his men can squeeze out of the citizenry. We are nearing those limits.
That means that all that is left to the monarchy is for it to issue IOUs. And given the levels of their debts and ongoing spending, lots and lots of IOUs. Those IOUs are called dollars, or pounds, or pesos, or yen, or….
While there will be no straight line up or down for any asset class in the unsettled times we will live through, using periods of weakness to build your exposure to tangible assets – most notably gold, whose primary and best use is as sound money – is the only way to protect yourself from the Great Debasement that’s coming.
(If you are still in the learning stage when it comes to precious metals, seriously consider a subscription to our Casey’s Gold & Resource Report – at just $39 a year, and with our three-month risk-free trial, it’s your single best way to get up to speed on what’s going on with this important asset class. More info here.)
Straws in the Wind
Foreclosure troubles gathering steam. On January 30, Special Investigator Neil Barofsky, whose job it is to oversee the Troubled Assets Relief Program (TARP), gave testimony before Congress echoing our concerns that the debt that ranks as the root cause of the 2008 crisis remains unaddressed. And, on many levels, has even worsened. As he so colorfully put it…“…we are still driving on the same winding mountain road, but this time in a faster car.”
You can download his full testimony by following the link here, and you should.
Quoting our own Bud Conrad, who forwarded the link to Barofsky’s testimony…The section on housing starting on page 107 shows how much of the market has been taken over by the government. Socialism is here. We need to deal with it.
The effect of this takeover of the mortgage market and its ultimate consequences are largely being overlooked in the popular (populist?) media. Commenting on Barofsky’s testimony, our “go to” person on real estate, Andy Miller, had to say this…The problem now is that they have waited too long. Even if they came up with some magical solution tomorrow, I suspect that the commercial real estate problems have progressed enough that it may be difficult to have any meaningful impact on them. I suppose they can still manipulate the residential market with Fannie, Freddie, and FHA, but even that doesn’t seem to be mitigating the housing problem.
The most obvious exposure, in my opinion, is rates. The fact that maturities are shifting to the shorter end of the curve and the continual gigantic auctions of Treasuries is playing with dynamite. If the long end of the curve moves up 100 bps, it is over.
Andy
Last night I learned that a friend had just purchased a house that qualified for a “conforming” mortgage. The bank didn’t even require an appraisal.
Let me repeat that, in case it didn’t sink in. The bank didn’t even require an appraisal.
Why?
Because it had absolutely no intention of hanging on to the mortgage for more than a day or two, but every intention of selling it on to someone else who would package it up along with other conforming mortgages, all of which are fully guaranteed by the government, to be securitized and sold on.
The bank and the debt packager earn their origination fees, and the taxpayers take all the risk. Sound familiar?
Is it any wonder that defaults on government-backed mortgages are soaring? This from the Washington Post…The share of borrowers who are falling seriously behind on loans backed by the Federal Housing Administration jumped by more than a third in the past year, foreshadowing a crush of foreclosures that could further buffet an agency vital to the housing market's recovery.
About 9.1 percent of FHA borrowers had missed at least three payments as of December, up from 6.5 percent a year ago, the agency's figures show.
Although the FHA's default rate has been climbing for months and eating into the agency's cash, the latest figures show that the FHA's woes are getting worse even as the housing market shows signs of improvement. The problems are rooted in FHA mortgages made in 2007 and 2008. Those loans are now maturing into their worst years because failures most often occur two to three years after a mortgage is made.
If the trend continues and the FHA's cash reserves are exhausted, the federal government would automatically use taxpayer money to cover the losses -- a first for the agency, which has always used the fees it charges borrowers to pay for its losses.
Full article here.
Watch your retirement assets. Our own Doug Casey has been warning for several years now that as the government’s fiscal woes mount, it won’t be able to resist laying hands on the trillions of dollars now residing in individual retirement accounts. There are increasing signs this is now under consideration – dressed, of course, in the guise of being “for the public good.” The following is from ZeroHedge…Yes, slowly but surely it is happening. In a federal notice filed earlier, the DOL and Treasury are soliciting a response on what has been on many investors' mind, namely the process of converting 401(k)s into annuity-like products. To wit:
The Department of Labor and the Department of the Treasury (the "Agencies") are currently reviewing the rules under the Employee Retirement Income Security Act (ERISA) and the plan qualification rules under the Internal Revenue Code (Code) to determine whether, and, if so, how, the Agencies could or should enhance, by regulation or otherwise, the retirement security of participants in employer-sponsored retirement plans and in individual retirement arrangements (IRAs) by facilitating access to, and use of, lifetime income or other arrangements designed to provide a lifetime stream of income after retirement. The purpose of this request for information is to solicit views, suggestions and comments from plan participants, employers and other plan sponsors, plan service providers, and members of the financial community, as well as the general public, on this important issue.
Read the full entry here.
Mark the Dates
There are a couple of events coming up you might want to circle on a calendar and, more importantly, plan to attend. First up is…
La Estancia de Cafayate’s Harvest Celebration & Investment Seminar, March 25 – 28. Held in the picturesque wine town of Cafayate in Salta Province, Argentina – just named among the 12 “must see” places in Frommer’s Top Destinations: 2010 – the Harvest Celebration offers a relaxing respite from the Northern Hemisphere winter and an abundance of activities designed around the annual grape harvest.
Among those activities is an investment seminar featuring Doug Casey and senior members of the Casey Research team, including Marin Katusa (energy), Louis James (metals), and Alex Daley (tech). A very modest $150 fee for the activities applies, but there is no separate charge for the seminar. If you’re planning to attend, make your plans right away as the best hotel rooms in the small town always go fast. Details here.
The Casey Research Crisis & Opportunity Summit, Las Vegas, Nevada, April 30 – May 2. As subscribers of any duration know, these summits are not held on a fixed schedule, or even a fixed location, but only when we think the time has come for a comprehensive review of the economy and the best investment moves.
With big trends in motion – perhaps the most important of our lifetimes – we believe the end of April is an opportune time to get together, and Las Vegas is a fun place to do so. While the program is still a work in progress, it’s our intention for this summit to have each of our senior team members construct their “dream team” of faculty, to cover their areas of specialty, and to answer all your most pressing questions – about specific investments and the coming risks and opportunities in the economy and investment markets. The registration site isn’t set up yet, so for now the only action to take is to circle the calendar. More soon.
And with that, I will bid you farewell for the day. As I do, I see stocks and commodities – which have been moving in lockstep lately – are coming under modest pressure. While I am as certain as can be that taking advantage of periods of market weakness to build your inflation hedges is not just smart but crucial in the short term, there’s the very real potential for things to get seriously out of kilter.
It’s a time for extra caution. And don’t be afraid to hold a larger-than-normal commitment to cash. With price inflation subdued and interest rates low (reducing your lost-opportunity costs), the liquidity and safety advantages of cash are nothing to sniff at just now. In time, as the price inflation from the massive currency debasement becomes problematic, cash will become a hot potato. For now, however, it’s a comfort.
As always, thanks for reading and for being a Casey Research subscriber. I hope to see you in Argentina, where we’ll sample some fine wines and enjoy a sunny respite out of the shadows of the castle.
David Galland
Managing Director
Casey Research
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