Federal government borrowing and spending is a runaway train

The verdict on recent and projected federal government borrowing and spending is universal:

Unsustainable

Who says so? EveryoneGreenspan, Limbaugh, Bernanke, Geithner, Beck, Volcker, Obama. Everybody.

OK. So what does unsustainable mean?

It means economics professor Herbert Stein (Bens father) was right when he promulgated Herbert Steins Law :

If something cannot go on forever, it will stop.

I hereby promulgate John T. Reeds Law:

If something is unsustainable, it will not be sustained.

But what does it stopping mean?

Too horrible to mention

The politicians named above wont tell you the truth, or they wont tell you the whole truth. Because its ugly, illegal, and immoral. Im talking default on the national debt, hyperinflation, draconian cuts in entitlements, order-of-magnitude tax increases, and forcing U.S. citizens to buy overpriced U.S. government bonds.

What the federal government needs to do is obvious: eliminate Medicare and Obamacare entirely, turn Social Security and Medicaid into programs that only the truly destitute can qualify for, cut military and other federal retiree pensions and benefits down to the civilian level, broaden the tax base (that means making the lower and middle classes pay taxes again), eliminate the cabinet departments created since 1960 and their employees, etc. In other words, the over spending has gotten ridiculous. We have to live within our means. Our means at present are tax revenues of $2.105 trillion (2009 revenues from all types of federal taxes) Our projected spending is around $4 trillion plus more to pay off U.S. government bonds coming due each year. That means we have to borrow trillions this year. Where do we get that money? By selling U.S. government bonds.

No one bids on our bonds

What it will stop means is that the buyers of our federal bonds in the U.S. and around the world will eventually say, No, thanks. Your U.S. national debt is so high in relation to your income that we no longer trust you to pay us back and keep the purchasing power of the dollar steady. We think you are either going to default or inflate the dollar or both. When that happens, the U.S. government must stop paying all its bills or pay them by printing money. Printing money causes inflation. Printing lots of money causes hyperinflation.

If we cannot borrow those trillionsand thats just for this yearthe government has to cut spending by $2+ trillion. Thats why they have to eliminate Medicare and so on as I said above. You say Medicare is too popular to cut? The bond market doesnt care. And the politicians and voters squealing like stuck pigs doesnt pay the bills. Only the bond market can pay the bills, and they are starting to complain about the amount of risk they are taking paying bills for Americans. Indeed, the bond market will tell you Medicare is one of the biggest parts of the problem. The bond market will not lend money to us until Medicare and other spending are reduced to reasonable levels. And reasonable levels are WAY below current levels.

Cannot tax our way out

Can we tax our way out of debt? No. The U.S. cannot double or triple its current tax levels.

Cannot grow our way out

Can the U.S. grow out of the debt problem as in the past? No. Its too big. 3% annual growth would be extraordinary. That would be 3% x $14.3 trillion (U.S. Gross Domestic Product ) = $429 billion increase in the U.S. economy. Since World War II, U.S. annual tax revenues have been 18% of GDP no matter who has control of Congress and the White House. 18% of $429 billion is only $77 billion. It would take a long time to pay off a $13 trillion national debt at a rate of $77 billion per year169 years to be exact. Furthermore, that $77 billion additional tax revenue would only go to paying down the debt if we cut spending from about $4 trillion a year to $2.1 trillion this year and thereafter which would mean the $77 billion additional tax revenue would be a surplus that could be used to pay down the debt. In other words, we get out of debt in 169 years only if all future budgets are balanced based on 2009 tax revenues and the $77 billion extra is a surplus available to pay down the national debt. I pause while readers laugh. When the bond market says No thanks, there will be no laughter.

Politicians will cut spendingafter they try everything elseincluding hyperinflation

Are the President and Congress going to cut spending down to $2.1 trillion a year from $7 trillion? No. What if Republicans take control of the White House and Congress in the next two years? No.

The politicians in Washington are going to keep the runaway train going until it crashes. Thus my new book How to Protect your Life Savings from Hyperinflation & Depression .

Get off the train track before you get run over by the federal deficit

This is going to happen. There is no political will to stop it. The public is too ignorant of finance to realize the catastrophe about to happen. All we as individuals can do is get off the train track. How to Protect your Life Savings from Hyperinflation & Depression tells you, in detail, how to do that.

Why both hyperinflation and Depression?

Because my research indicates that it is impossible to predict which we will get. Hyperinflation happens because the government deliberately prints too much money. They do that because they are afraid to cut spending or raise taxes enough to avoid it.

Depression/deflation, on the other hand, is a blunder by the government. It is mainly caused by the government waiting too long to print more money or by the government slamming on the brakes too hard to stop hyperinflation. It can also be caused by stupidity like protectionist laws, wage and price controls, tax increases and so onnone of which are beyond our politicians.

Not gold or TIPS

Most somewhat informed people believe gold and/or Treasury Inflation Protected Securities protect you from inflation. Thats wrong. You have to read the fine print of the pertinent laws. When it comes to gold, if you think its a good inflation hedge, you must not know the history. There are a bunch of reasons why gold is not a good inflation hedge. With TIPs bonds, there are two main reasons why they are no good. How to Protect your Life Savings from Hyperinflation & Depression covers gold in a chapter on Gold and Other Commodities. TIPs are covered in detail in the Bonds chapter.

Condemned to repeat it

Perhaps the greatest danger to Americans today with regard to hyperinflation and depression is the fact that very few have experienced and remember either hyperinflation or depression. So they do not fear it enough. Since they have not experienced it, they unconsciously believe it cannot happen.

Oh, yes it can. How to Protect your Life Savings from Hyperinflation & Depression takes care of that deficiency in your experience and memory with a detailed chapter on the human history of financial crises as well as historical examples all through the book.

Tax law is big in hyperinflation and deflation

Income and property tax law interact big time with hyperinflation and depression. How to Protect your Life Savings from Hyperinflation & Depression explains how. I am also the author of the book Aggressive Tax Avoidance for Real Estate Investors now in its 19th edition. As an expert on both the tax law and the history of financial crises, I recognize interactions that even the top tax lawyers might not recognize. One of the trains coming at you on the hyperinflation track is the income tax law train.

Insurance, pension plans, college savings plans

The same is true of insurance, retirement accounts, and college savings plans. During German hyperinflation in the early 1920s, university endowments, annuitants, owners of insurance policies with cash value, and so on were completely wiped out. Deposit insurance did not exist then, but it would not have mattered because deposit insurance does not protect you from loss of purchasing power. Pension plans like IRAs, SEPs, and 401(k)s did not exist then either. Furthermore, they have never been tested in a real financial crisis. Depending upon the details, the right pension account can save you financially, or destroy you if we have hyperinflation or depression. College plans offered inflation protection initially, but they have almost all collapsed.

Government and institutional reaction is predictable

Generally, its impossible to forecast the future. But when it comes to the way government and banks and insurance companies and so on behave during financial crises, forecasting is possible. How so? There have been national financial crises since 301 A.D. Politicians, kings and dictators do not change their spots. Time and again, the leaders of governments and institutions did almost the same thing repeating the same mistakes initially, then finally doing the right thing when they had no other choice. But they will repeat the mistakes for many years before they are forced to do the right thing. If you get wiped out by the typical behavior of government and institutions before they finally do the right thing, their doing the right thing eventually wont do you any good.

The Consumer Price Index? Forget about it.

The chapter on indices explains the limitations of the main official measure of inflation: the Bureau of Labor Statistics Consumer Price Index. In fact, it does not work for other than moderate inflation. In How to Protect your Life Savings from Hyperinflation & Depression I tell you about warp-speed, real-time market- rather than bureaucrat-based inflation indicators that you can use to try to deal with hyperinflation.

Simple and complex

The list of solutions to How to Protect your Life Savings from Hyperinflation & Depression includes both simple and complex techniques. I am biased in favor of simple. few-links-in-the-chain solutions, but I also discuss the complex ones that involve institutions and financial engineering. Advance Purchase and Sale is one of the longest chapters and will take care of a great deal of the protection you need and do so in the simplest manner.

Barter

Barter is not a Plan A or even a Plan B. But I have to tell you about it as at least a Plan C. In the 1990s, many Argentineans, suffering hyperinflation, were saved from starvation only through barter. There are tricks to it. Tax laws apply to it. Read all about them in the Barter chapter.

Stocks, real estate, foreign currency, bonds, Swiss bank accounts, and all that

Will well-selected stocks, real estate, foreign currency and so on protect you? Sorry, but no. I have a chapter on almost all of those subjects mainly to convince you why their reputations for inflation protection are incomplete at best and totally wrong at worst.

The stuff you do not think about enough

Some of the most important chapters in How to Protect your Life Savings from Hyperinflation & Depression cover stuff you probably rarely think about. Like what? New forms of money that spring up during financial crises like scrip or warehouse receipts. Liquidity. Counterparty risk. Exchange risk. Depository institution risk. Bankruptcy risk.

Risk management

How to Protect your Life Savings from Hyperinflation & Depression is a risk-management book. 99.99% of American have almost no clue about risk management. Yet they are currently marching like lemmings toward our unsustainable financial future blissful in their ignorance of hyperinflation risk, deflation risk, exchange risk, depository institution risk, counterparty risk, tax risk, political risk, index risk, model risk, currency risk, non-recourse mortgages, bankruptcy exemptions, correlated assets, and so on. In hyperinflation or depression, that sort of ignorance can kill you financially, and too often in the past, literally end your marriage, health, and even life. Wise up fast before its too late.

www.cbc.ca/money/story/2010/04/27/bernanke-us-deficit-warning.html. You can also see a translation by me of some of his other comments at www.johntreed.com/Bernanketranslation.html .