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February 27, 2010
Issue 85  -  National Bankruptcy?
As hard as it is to believe, and as I've written before, the United States is bankrupt.  The evidence just keeps getting stronger and stronger regardless of any "recovery" news you might hear.  This headline really caught my attention from ZeroHedge:

California One Step Closer To Insolvency After State Cancels $2 Billion General Obligation Bond Sale

Submitted by Tyler Durden on 02/24/2010 20:59 -0500

Five days ago a great white hope appeared for the great bankrupt Golden State (Baa1/A-), in the form of $2 billion in GO bonds, which were supposed to be promptly syndicated via underwriters JPMorgan and Morgan Stanley. This would have been the first bond sale for California since November: a critical milestone as the state creeps ever closer to a full-on default. Unfortunately, the creeping just turned into a casual jog after Jane Wells (@janewells) just tweeted that California has cancelled its bond sale "after legislature fails to approve cash management flexibility bill [the] Treasurer said he needed to attract investors."And seriously, did California think it would succeed where so many other high yield issuers have recently failed?
A little explanation is necessary here, as people don't typically follow the state bond market.  My life is boring, so I do it for you.  When the United States needs more funds they can do 1 of 3 things:  tax more, borrow more or print (monetize debt) more.  States, however, only have two of these options and they typically have a balanced budget law.  States can't print money and raising taxes is always unpopular, so they must borrow it.  They do this by issuing bonds.  A bond is an instrument where the buyer pays the issuer a lump sum in exchange for a stream of interest payments.  When the bond matures you typically get your original investment back. 
So how are these sold?  With an auction.  The potential buyers only make one bid however, kind of a blind auction and there is usually a minimum interest rate required.  There is also a set amount of debt to issue.  (The above story shows that California had $2 billion to sell.)  After the bids are all received the winners are announced.  If there are more bids than bonds available, it is said to be an "oversubscribed" auction.  This would mean all bonds were bought.  That is good.  If the auction is undersubscribed, than less than the total amount off bonds were sold.  This can be bad or horrible.  If the bids don't meet the minimum interest rate required (think of it like a "reserve" bid amount on ebay) there is a failed auction, and no bonds are sold.  This is really bad as the state receives no money and it's reputation is damaged.
What happened here, is that the auction was canceled.  Why would they do that?  Well the state can "gauge" the market by making inquiries at bond brokers.  These are similar to stock brokers only with bonds.  They can check the pulse of potential buyers and report back to the seller.  This information allows them to determine a reserve interest rate.  Obviously here, the interest to sell $2 billion was much higher than CA wanted to pay.  If investors perceive you as risky, they demand more interest.  If they perceive you as REAL risky, they demand a real high interest.  CA decided to postpone the sale.
Let me ask you this, would you lend money to someone who was bankrupt?  Didn't think so.  That's what's happening in CA and many other states.  They are insolvent. They're not the only ones:

Parade Of The Insolvent State Governments

By fgrace on February 18th, 2009

California state lawmakers wound up on center stage (above, the state capitol in Sacramento), but deficit dramas are now unfolding in all but eleven states.

California Gov. Arnold Schwarzenegger, often called The Governator in a good-natured reference to his acting credentials, is looking a lot more like The Terminator to the as many as 20,000 state workers whose jobs may go up in smoke due to budget cuts reflecting California's share of the pain of the national economic crisis. But with the state swimming in nearly $42 billion in red ink, that label may not be fair. It's clear that something's got to give – the ongoing debate being exactly what should be cut, and whose taxes should or should not go up.

While California's dilemma is dramatic, it is not as unique as one would hope. CNN lays out the grim statistics in an interactive map showing state government deficits ranging from the millions and hundreds of millions to double digit billions – with only 11 states in the black, amid concerns running the gamut from unemployment benefits and health care costs to meeting payrolls. State workers in Colorado are facing the prospect of unpaid time off, proposed budget cuts in Washington state have sparked protests, the airwaves in New York are full of ads denouncing proposed changes in health care spending, and the governor of Kansas – which had briefly suspended tax refunds – has resolved a standoff by signing a bill to balance the budget.

 This is really unbelievable.  All but eleven of the 50 states are technically insolvent.  Think about that.  We are in BIG trouble.  The insolvency is shown in the following chart which is adjusted for inflation.  This should make it look better.  Does this look better to you:
Not to me.  I see a debt that is approaching over 400% of GDP.  This means if every single dollar of commerce was used to pay off the debt, and nothing else, it would still take over 4 years.  Obviously, you can only use a fraction of your income for debt so it would take much, much longer to pay this off.  In fact, probably hundreds of years.  This all assumes that fiscal sanity is restored first, an unlikely occurrence.  Therefore the bankruptcy will occur, it's just a matter of when.
If you're paying attention you can the see the signs.  Here's a fairly obvious one.  If things are getting better, why are banks becoming worse off? 
 Regulators report 27 percent jump in problem banks
On Tuesday February 23, 2010, 10:05 am EST
WASHINGTON (Reuters) - The number of "problem" U.S. banks jumped 27 percent during the fourth quarter of 2009 to 702, the highest level since 1993 and a sign the industry's recovery is still shaky, regulators reported on Tuesday.
The Federal Deposit Insurance Corp said the industry overall eked out a profit of $914 million for the quarter, benefiting from a healing economy, but said the improvement was concentrated in the largest banks.
FDIC Chairman Sheila Bair said the profit was a huge improvement over the $37.8 billion loss the industry reported in the fourth quarter of 2008. "It's not that this was a strong quarter. It's simply that everything was so bad a year ago," Bair said in a statement.
Smaller institutions are still struggling with deteriorating loan portfolios, especially with loans tied to commercial real estate. The FDIC set aside an additional $17.8 billion during the fourth quarter for expected bank failures.
Regulators have closed 20 U.S. banks so far this year and 185 since January 2008, as banks continue to struggle with loan portfolios stocked with souring loans.
(Reporting by Karey Wutkowski; Editing by Tim Dobbyn)
So the troubled banks is getting bigger and bigger, but the press and the president say things are improving?  Listen to the facts, not the bluster.  There are things happening that point to very dark times ahead.  Here's another:
Date: Sunday, 7-Feb-2010 11:06:05 From Godlike Productions
"I'm freaking. I can't remember this many heads resigning unexpectedly in such a short period.
Most notably are telecoms, banks and energy companies. People who would have insider knowledge if something huge were about to happen.
Please add any more you can find here. I stopped at 50 just to get it posted, but there are more, including lots of board members and other executives.
1. Sun Microsystems
2. Royal Bank of Scotland
3. Bank Leumi of Israel
4. Lenovo
5. Wellpoint (on March 1)
6. Ingersoll-Rand
7. Gasco
8. Syntel
9. Motion Picture Television Fund
10. GrainCorp
11. Connaught Plc
12. Netplay TV
13. AgResearch
14. Zain Telecom
15. Ethan Allen Institute
16. Fahrney-Keedy Home & Village
17. Nordzucker
18. France Telecom
19. TransWorld Entertainment
20. Parlux
21. Medical Developments International Ltd
22. PBR (on March 1)
23. Aeropostale
24. Cook Islands Tourism
25. Uranium International Corp
26. San Francisco AIDS Foundation
27. Borders Books
28. YTB International
29. Western Australia Business News
30. Bergen Group Rosenberg
31. Phumelela
32. Bartow Regional Medical Center
33. NV Energy (CFO)
34. Shanda Interactive
35. NB Power
36. Empire Aero
37. Argentina Central Bank
38. Hong Kong Exchanges & Clearing (CFO)
39. Arbitron
40. Lihir Gold Ltd
41. Meredith Corp
42. Red Bull
43. Golden Harp
44. Endo Pharma
45. Nuplex
47. Mirada (chairman)
48. Remedial Offshore
49. Abercrombie & Fitch Co
50. Commerce Resources (CFO)
These insiders are bailing for a reason, and I don't think it's because the good times are about start rolling again.  So a debt weight is draped around the necks of the United States citizenry and politicians are scrambling to find an answer.  What to do, what to do?  How can all that debt be brought under control?  Hmmmmmm.......  Maybe this chart has the clue we need:
That's some chart.  Going from 0% inflation to 16,000,000% inflation in two years!  That's how fast it can take hold.  It's almost like a switch is flipped.  I believe this is our ultimate fate.  We will probably not reach inflation levels that high, but after it hits 50 or 60%, it really doesn't matter, your life savings are gone.  That is why I have gold and silver.  That is why you should too.   
Oh, and the corruption and deception from our government continues unabated:  (from seekingalpha)
Remember the market's "cheering" of the "-0.1%" CPI-U reading (core) yesterday?
There's a problem - it was wrong.
Look at the highlighted numbers.  Let's multiply them up.
(5.966 x 0) + (.769 x -2.1) + (25.206 x -0.1) + (.347 x 0.4) / 32.288 = -0.12%, or -0.1%.
But it was reported as -0.5% in the line directly above (inverted tone.)
I didn't re-run the weightings for the entire series but a quick "eyeball" of the table shows that this should result in a CORE reading of 0.1% (positive), not the negative number reported.
Will the BLS admit to this error?  Who the hell knows, but if you have a calculator, you can verify that yet another game to "boost" the market was run, with desire effect - a roughly 1/2% spike in the S&P 500 futures right on the BOGUS data release.
Since this table is undoubtedly computed (indeed, if I was to dump the raw data into EXCEL I could have a spreadsheet do this literally in a fraction of a second) it calls into question whether this was an accident or an intentional distortion of the data at the BLS.
It also leads to a few other questions, none of which are very comfortable to consider, but all of which, unfortunately and in light of this report, we must.
For example, is the BLS simply publishing whatever the government wants it to, and then making up the numbers inside the report to hit that target?  Even a simple high-school cheat knows that you must "fix" the constituent numbers that go into a cheated result in order to not get (easily) caught; in a world where people don't add things with calculators but instead have computers sum up columns and do the math it is essentially impossible that this sort of "mistake" is an error. 
Rather, it is virtually certain that this "reported" value was in fact intentionally false, and the persons doing so were too clumsy to "fix" the evidence behind it so that it would "add up."
We now officially live in a world where intentionally-incorrect data is published by our government for the specific intention of misleading the markets.
PS: This will, of course, be used to screw Social Security recipients out of their lawfully-mandated cost-of-living increases.  Count on that.  Oh, and don't ask about the money you already got screwed out of from other similar "errors" that neither I or anyone else caught because they weren't so clumsy as to fail to cover it up.
This is just becoming all too common.  Calculator broken at the BLS?  Fact checker sick?  No, just corruption to the nth degree.  This has to stop.  Too bad things will have to get way worse before they are fixed.  And we will all suffer the consequences. 
Our government is so used to fudging and outright lying about our current situation that it's just the normal way of doing things.  I happen to think math is the most important skill you learn in school.  It's used in many, many ways that make life easier.  It is also a key element in developing technologies and inventions.  Without a firm grasp of math, young adults are at a severe disadvantage.  Without a solid mathematics base, it is much easier to be misled by these types of numbers. 
How does the United States do in Math?  While keeping in mind that we "won" the olympics medal contest, have a look at this chart: 

Mean Performance on Mathematics Scale

  Range of ranks1
Country Upper
Hong Kong (China) 1 3
Finland 1 4
South Korea 1 5
Netherlands 2 7
Liechtenstein 2 9
Japan 3 10
Canada 5 9
Belgium 5 10
Macao (China) 6 12
Switzerland 6 12
Australia 9 12
New Zealand 9 13
Czech Republic 12 17
Iceland 13 16
Denmark 13 17
France 14 18
Sweden 15 19
Austria 16 20
Germany 17 21
Ireland 17 21
Slovak Republic 19 24
Norway 21 24
Luxembourg 22 24
Poland 22 26
Hungary 22 27
Spain 25 28
Latvia 25 28
United States 25 28
Russian Federation 29 31
Portugal 29 31
Italy 29 31
Greece 32 33
Serbia 32 34
Turkey 33 36
Uruguay 34 36
Thailand 34 36
Mexico 37 37
Indonesia 38 40
Tunisia 38 40
Brazil 38 40
1. Because data are based on samples, it is not possible to report exact rank order positions for countries. However, it is possible to report the range of rank order positions within which the country mean lies with 95% likelihood.
2. Rank based on top two levels of proficiency (out of six) on mean scale of mathematical performance.
3. Rank based on lowest two levels of proficiency (out of six) on mean scale of mathematical performance.
So we are tied for 25th place in the world in math proficiency, but we won the olympics.  Which is more important?  I believe this is done on purpose.  If we had a high math skill set, we couldn't be misled so easily by politicians and their economic "numbers"  It is going to take major changes in this country to get back to where we need to be.  If you have a kid in school now, contrast the following video with what they are doing for math homework. 
Pretty amazing stuff.  In case you didn't catch it, the boy at the end of the video solved the following problem with an "imaginary" abacus in about 4 seconds:
x   34,255
Have a great week!  (In case you were wondering the answer to the problem is 86,814,536,055)