Essential Read: WingNuts and Dead Man Walking

For some who closely follow the economic situation, it is obvious that we are headed for a disaster. There can be no happy ending. It will be a tragedy! Only the timing and shape are unknown. However, most disagree, believing this crisis is merely another recession like so many before. How can there be such a discrepancy in beliefs? Is the former group merely populated by a type of loose wingnut, spouting their own form of Armageddon Economics?

I don’t consider myself a wingnut (of course it is likely that no wingnut does), yet I do fall into the first camp. About four months ago I undertook the task of teaching a course entitled “Surviving the Crisis” at the University of North Carolina in Asheville. The class was a group of talented and eager middle- to upper-age students, mostly retirees with highly diverse backgrounds. The course was dominated by “non-wingnuts,” members that believed that, yes things were bad but no worse than other downturns in their lifetime. Fortunately for me, I did not have to present my case in 1 – 2 hours,  but was able to lay it out over six weeks and 12 hours of class time plus much internet correspondence. My guess is that at the start of the class, perhaps 95% were “non-wingnuts.” By the end, I suspect that 60 – 75%, possibly more, had become “wingnuts.” Most of the class had no background in economics (perhaps that gave them an advantage). Was I able to convince them based on bullying with economic theory? No, we did not deal with theory other than tangentially. So why did so many change their perspective? The answer is relatively simple: data, data and data combined with elementary level mathematics!

At some point, I would like to reduce the course to a presentation for the Internet. At this point, the task appears overwhelming because I have no experience in such matters and the data changes every month. I am teaching the course again in January. Perhaps then, time permitting, I will undertake the task.

Until then, all you “non-wingnuts” should read the report from Sprott Asset Management to get some of the data that leads “wingnuts” to their position. If you don’t become a “wingnut” after this read, you either did not get enough data, learn enough elementary mathematics or are an ostrich with your head below the surface. Seriously, if nothing else, it should make you more cautious in some of your planning and investment decisions.

Here are a few excerpts from the report with my emphasis:

The bottom line is that there is serious cause for concern here – and don’t be fooled into thinking this crisis will fix itself when (and if) the economy recovers. Just how bad is it? Below we outline the obligations of the US Federal Government from 2004 to 2009. We present two sets of numbers, as government accounting can vary widely depending upon the source. In column A, we outline the Total US government Obligations, using actuarial reports from the Social Security Administration and the Medicare Trustees Reports. In column B we identify Total Federal obligations according to GAAP accounting provided by Shadow Government Statistics, calculated on a US fiscal year end basis with estimates for 2009. The differences in the absolute amount of total obligations ($114.7 trillion vs. $74.6 trillion in 2009) are a function of timing, the calculation timeline for Social Security and Medicare, and other obligations included under GAAP rules. Either way we choose to calculate it, the total number is preposterously large. From 2004 to 2009, US unfunded obligations increased by an average of almost 50% over this six year period under both calculation methods, while US government revenue increased by only 12%.6 No company or government can increase its liabilities by more than four times the rate of its revenue and stay solvent for an extended period of time.

Hemingway wrote that a man goes broke “slowly, then all at once”. We believe the same sentiment can be applied to governments. If fiscal abuses continue unabated, confidence eventually erodes until investors just stop lending. It happened famously to Lehman in September 2008, and it is happening now to the US government. The Q2 Flow of Funds Report published by the Federal Reserve revealed that the Federal Reserve purchased as much as half of the newly issued treasuries in the second quarter.14 This means that the Federal Reserve isn’t merely supporting the market for US treasuries… it is the market for US treasuries. Printing new dollars to support an almost $9 trillion dollar budget deficit that stretches out over the next ten years puts the US on the road to ruin, and the major governments of the world have noticed and are taking action.

Like dead men walking, the US government is merely biding its time until the moment of truth. Unlike Fannie Mae, General Motors or Citigroup, however, there is no one left to grant a reprieve.

The full report can be found here.