Buckle Up & Hold On, Folks, It’s going to be Bumpy

One of the largest financial services companies in Europe has recently warned clients that the economic crisis may get much worse. In a rare public admission of what has previously only been discussed by contrarians on the fringes, Societe Generale admitted to customers of the bank that all of the problems in the private sector from the last few years have merely been transferred to governments and this could trigger a far worse problem in the years to come.

The bank is admitting what many experts have been saying for years; that government spending on welfare programs has exploded and the debt will eventually have to be paid. Well, the massive stimulus programs, bailouts and the corresponding drop in tax revenues has hastened this crisis. Like a consumer using credit cards to finance the lifestyle he can’t really afford and then getting his hours at work cut back, the situation is dire. Right now the official public debt of the US is about 125% of national income. That’s the equivalent of owing about 15 months of your income in debt, except for two very big problems. The first is that the official number released by the US government is a lie, because it ignores the debt we have to the Social Security trust fund and to Medicare.

The US government claims that because this is not a ‘legal’ debt to a creditor, like a bond or a bill, which it does not count as a debt. The problem with that is that those benefits have already been promised to generations of future Social Security and Medicare beneficiaries. What do those promises amount to? About $70 trillion. That would mean the actual debt to income ratio is about 900%, not 125%. Ask your banker if he’ll give you an unsecured loan equal to nine times your gross income. Try not to smile when you do this.

The other problem is that the public debt numbers don’t take into account private debt. So you can’t really think about the 125% ratio as you might your own personal debt to income ratio, because this is in addition to that debt to income ratio. Let’s say for example that your income is $50,000 a year. If you owed $60,000, your debt ratio would be 125%. But the government debt is another 125%. That means the actual debt to income ratio is 250%.

But of course, that sounds bad, so they don’t tell you that, they just measure total national income as though it were not already pledged to private debt. It’s not much different than going to two banks simultaneously and asking to borrow money and pledging your paycheck to both, without disclosing that you are doing the same thing at another bank. What has the big banks so scared now is that the demographics are changing while these market forces are starting to pressure our finances. As baby boomers start to retire, they’re not going to be making as much money. That’s not a surprise to anyone; they’ll leave behind higher paying jobs, begin to live on retirement, savings, and Social Security. Instead of private insurance many will receive Medicare.

This means that instead of paying a lot in taxes and depending on private resources, a significant portion of the population will now pay less into the system and start taking out a huge amount. The problem, of course, is that nothing is there… all the money that has been paid into Social Security has already been spent on other programs… important stuff like midnight basketball and paying ACORN workers to register dead people to vote in Chicago. It’s no different in any way than what Ponzi and Madoff did, except that the government did it, so it’s ‘legal’.

In short, we’re already in the middle of the worst economy in 70 years and one of the biggest banks in Europe has just realized that the crisis is likely to get much worse. After all, the US Government and all the others are relying on rosy economic figures that actually show tax rates continuing to rise in the coming years and economic growth to get back on track. They’re not taking into consideration that the largest population group in history are all going to retire, or at least work and earn less, and simultaneously hit the ‘system’ for benefits. Kind of like the government saying that people who have given up ever getting a job aren’t really unemployed. You heard about that, right? Google “real jobless rate” for the whole story.

The most likely way governments around the world will deal with this is by devaluing the currency. If you print a lot of money, you can theoretically repay your debts, but the problem is that the rest of the world recognizes those dollars as being worthless. They might get unhappy, and since we’re still borrowing more than we make, they might stop lending. Oops! What do you do when your employer cuts your hours and your credit cards are maxed out? Move in with Mommy!

This is already happening; the dollar has lost 30% of its value in recent years, 70% since Nixon took us off the gold standard, and has lost 98% since the creation of the Fed. From the banksters’ standpoint, the plan is working perfectly. They got the dollars and spent them before they were devalued; now you and I are going to be ‘repaid’ with dollars that are worthless.

The situation in Europe and Japan is actually worse because their populations are dying. They don’t have the younger generations to pay the 86% federal income tax rates that will be necessary to hold it all together. In the US women are still having children and a steady flow of immigrants have kept our population growing. Habla Espanol? Societe Generale needed 68 pages to explain this. I can do it in one sentence: “Buckle up and hold on folks, it’s going to be bumpy”.