Rob Slee at MidasNation: “Economic Armageddon Day is Here!” —MidasNation

The U.S. Must Cut $800 or $900 billion From Our Annual Government Spending to Maintain Mid-term Economic Solvency.  And That’s Just the Beginning.    

Flooding the system with trillions of dollars and deficits has bought the U.S. economic stagnation, writes Rob Slee in an August 20, 2012 post at MidasNation.   “What a lost opportunity. One thing we learned in MidasNation over the past few years is that when owners ignore the exponentially changing market and put their heads even deeper in the sand, only bad things result. Further, incremental actions will not change the equation for the better either. Nothing less than a total reconceptualization of the business (country) will make a difference.”

The world is in a peculiar position right now. Europe and the ECB have been busy ignoring their real problems as well, and they have been busy printing euros. When I was in China a month ago, everyone whispered to me that China’s growth had flat-lined, but that the provincial officials feared reprisals from Beijing, so it was safer to report growth than lose their jobs (necks). Japan is going out of business as a country, and seems unwilling or unable to do anything about it. And on and on.

Here is the situation, as I see it:

1. Spain is facing a banking crisis as well as a regional crisis. Italy is next.

2. The ECB cannot prop-up both Spain and Italy.

3. The EFSF bailout fund doesn’t have the funds to prop-up Spain and Italy.

4. Spain and Italy want the ESM (the other bailout fund in which they fund 30%) to buy their bank’s bonds…so that Spanish and Italian banks can continue to buy Spanish and Italian sovereign debt. Put another way, bankrupt countries want to fund their insolvent banks so those banks can buy the countries’ debts. Wow – Europe has become a not-so-funny Abbott & Costello sketch.

5. As for the U.S., the markets are exploding higher on a stronger than expected jobs
report: 100,000 new jobs were expected and instead we got 163,000. However, most of these “jobs” were created through accounting gimmicks such as seasonal adjustments and birth-death models. Many people forget that going into the 2008 Crash, we had several rallies, some as great as 17%! But these rallies, like the one we’re currently experiencing, were based on hopes and dreams, not real solutions to the underlying problems of the financial system.

6. John Mauldin says (and I agree) that the U.S. is going to have to cut something close to $800 or $900 billion from our annual government spending to maintain mid-term economic solvency. It’s a huge number. It can’t be done all in one year. It has to be done over five or six years. We have to have some growth as well. Say you start talking $150 billion a year in cuts. These cuts effectively reduce GDP by 1%. It’ll have an effect for about a year – and then we’re going to do it again. So what we’ve done is we’ve locked in slow growth. We’ve locked in a muddled-through economy, and that’s without a recession. If we have a recession, it makes the situation worse. We will have a recession during that period. You don’t go for 10 years without a recession.

If we don’t make these cuts, we get to the place where Greece was or Spain is or Italy is; the markets will begin to force us to do it. Spain would be in a catastrophic situation if it was not for the fact that the ECB put one-point-something trillion euros together. Without Europe, the ECB or somebody putting another trillion euros together, Spain will in fact have their own moment where they can no longer borrow money at rational numbers. The interest rates go hyperbolic on them, which quickly leads to default.

Once again, the only sustainable solution to Europe’s and the U.S.’ economic problem is to create more value than what we collectively consume. This needs to happen on an individual basis. We can’t rely on the government or any institution to do this for us.

Rather than hope for the best, I want to own companies that produce things that people need (not want) to buy. To that end, MidasFund will soon start acquiring castoffs. At this point, I hope Economic Armageddon Day doesn’t decide to appear by the end of the year or early next. That would effectively freeze the system for a year or two.

For reasons I can’t really understand, we’ve chosen to play political games in the U.S. rather than engage real solutions. At what point did denial become America’s new passtime, any way? As a result, at best, we’ll tread economic water this decade. At worst, you’ll be reading more about Economic Armageddon Day.

 

 

Prepare for End Times?  Alternative Best Case, Per Slee:  Economy Treads Water for the Decade.

See also:

New American
Tuesday, 21 August 2012 10:10
Top Investor Warns of “Financial Armageddon” as Soros Dumps Bank Stocks, Buys Gold

Wall Street Journal
August 14, 2012, 9:00 p.m. ET
Managers Unload Big Banks
Quarterly Filing Shows Soros Eliminated Positions in J.P. Morgan, Goldman