Curried Wealth Building
Finding an Edge

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March 1, 2009
Issue 35  -  Let the Spending Begin

   I have to say that I didn't honestly have a lot of hope that President Obama would be different.  It just seems that to rise to the level he has so quickly, he had to be just like the others.  I just thought he would be another liberal politician that thinks you can tax and spend your way to prosperity.  I have, regrettably, been right.

   The stimulus bill is just a compilation of pay-offs and ear marks to appease every liberal interest group that supported Obama. This spending of money we don't have is only going to lead to more inflation. This will lead to higher prices eventually. The idea that we are going to just jump out of this recession with more of the same type of spending is just plain nuts. All of these financial guys in the government are classically trained in Keynesian economics. This says that spending more will stimulate the economy which leads to growth and more jobs. This then leads to more tax revenue for the government. This works...for a while. Then it stops working. The whole problem is that the extra funds are borrowed. Eventually you borrow too much and the fun ends.

   Proponents of Reagan say he created millions of jobs and tax revenue increased big time. Opponents say look at the deficit he caused as the national debt ballooned. Who's right? I have to say the liberals are right, but not for the reasons they claim.  The liberals, who are now going to make George Bush look like a spending piker, have no place criticizing anyone's debt build up. The conservatives are wrong because they just ignore the increased debt. Of course if I borrow a bunch of money and spend it there will be activity. What I spend it on does make a difference though, and if I'm stimulating "spending" like everyone seems to think we need, that really is only a short term benefit and I'm left with the bill. All debt is not equal. Let me explain.

   A majority of financial books will classify debt as good or bad. Good debt is borrowed and spent on something that can generate profit to pay off the debt. A factory is the perfect example. Bad debt is just spent on big screen televisions and new cars. This debt is just another yoke over the neck of the borrower. With nothing of value to produce profit to pay back the debt it is just added to his already high debt level. Government spending is ALWAYS bad debt. There is never a pay back or profit in government.

   Our government is spending money hand over fist with NO chance of a pay back. This can go on for only so long and then the piper must be paid. This time is fast approaching for the United States. With deficits projected to be $2 trillion dollars for the next couple years, we are going to have to start paying more for our debt. This is starting to show up in credit default insurance.

   Credit default insurance is basically what it sounds like. You get a bond from some entity and they agree to pay you a fixed interest for some defined time period. You give them a thousand dollars and they pay you 5% interest for 10 years. After 10 years, you get your 1000 dollars back. This works great unless the bond issuer defaults. That means they go bankrupt and say they are going to stop paying the interest. In the worst case, you don't even get all (or any) of your money back. Borrowers buy credit default insurance to insure that they get their money back. When you buy it, the price is quoted in basis points. It may be only 30 basis points in which case your interest return will drop to 4.70% in the example. The borrower is willing to forgo the extra interest for the peace of mind that they will at least get their principle back.

Now read this from GATA:

"Cost of insuring U.S. 5 yr. Treasury bond is now 1%

If an institution buys a 5-yr Treasury and then wants to turn around buy credit default protection on its purchase, it now must pay 1%. The yield on a 5 yr. T-bond is 1.92%. It now costs more than 50% of your rate of return on a T-bond to insure that you get your money back. This is an absolute disaster for our Government. The cost of credit default insurance is a real world, market assessment of the risk of default of the U.S. Govt, as opposed to the fantasy/fraudulent ratings issued by Moodys and S&P. As per this article, the default risk of the U.S. Govt is now considered to be higher than that of Japan, Germany and France. I would also argue that, given the risks being priced into our credit markets, including the Govt bond market, that the level of the Dow/S&P 500 is still way too high."

All you can say is wow. To buy insurance, that the PREMIER country in the world will not default on its debt now costs over half of the promised interest. If this doesn't convince you that our great country is in trouble then you are terminally Pollyannish. This is going to unravel very quickly when it happens.

Our plan to spend to prosperity with borrowed money will only make things worse and more prolonged. Instead of borrowing and spending more, we need to pay down our debts and save more. Of course this will lead to a contracting economy and a healing of America's balance sheet, but this is required to fix the problem. This will eventually happen. Either by our decision or our creditors. They will eventually not lend us money and then the party is over. Interest rates rise and our standard of living drops. This must happen and it will.

Remember, we have 6% of the world's population and consume 25% of the world's resources. How long do you think that can continue? I must admit I don't know. What I do know, is that it WILL end. When it does, we, the American people, will suffer.

 The American people will experience all types of chaos as the world goes into a depression. If you think that is a very far fetched scenario read what one of the richest guys of the world has to say:


" Soros sees no bottom for world financial "collapse"

Sat Feb 21, 2009 4:19pm EST

NEW YORK (Reuters) - Renowned investor George Soros said on Friday the world financial system has effectively disintegrated, adding that there is yet no prospect of a near-term resolution to the crisis.

Soros said the turbulence is actually more severe than during the Great Depression, comparing the current situation to the demise of the Soviet Unionl production around the world was declining even more rapidly than in the United States, which is itself under severe strain.


He said the bankruptcy of Lehman Brothers in September marked a turning point in the functioning of the market system.

"We witnessed the collapse of the financial system," Soros said at a Columbia University dinner. "It was placed on life support, and it's still on life support. There's no sign that we are anywhere near a bottom."

His comments echoed those made earlier at the same conference by Paul Volcker, a former Federal Reserve chairman who is now a top adviser to President Barack Obama.

Volcker said industrial growth will decline severely, maybe even more than in the Great Depression, when things went down quite so fast, quite so uniformly around the world," Volcker said.

(Reporting by Pedro Nicolaci da Costa and Juan Lagorio; Editing by Gary Hill)"


We are "nowhere near a bottom". This is what I have been warning of for some time now. Now is not the time to be risking your retirement funds on the general stock market. It might go up and when I think that it will, I will tell you, but for now it is just too risky.

 All the while, our fearless leaders are out trying to save the world by buying everything in sight. More money to Citibank and then more to AIG. Our "investments" in these bankrupt companies is a complete disaster. Now the government is going to "stress test" the system to see how the banks will do. Why in the world are we buying stock in a company BEFORE a stress test? Wonder if it fails, what is bound to be a rather tame test? This is nuts.  Stress it first and then figure out if it's worth ANYTHING.

 The day has come when the government is not capable of helping. The free market and wringing out the excesses is the only solution. Pain, time and tough sledding are what's required. Two trillion dollar spending sprees are not. Now is the time to make some moves. Get out of the stock market except for gold and silver issues. Change your bank to a small local one that is not bankrupt. I am in the process of leaving Bank of America. Get some cash in a place you can get to it and have some food storage in the house.  This is not the time to be cavalier.  If you need help, let me know.