IS THE U.S. GOING BANKRUPT ? / SEEKING ALPHA ( HIGHLY RECOMMENDED READING )

Weekly Recap: Is the U.S. Going Bankrupt?

by: Graham Summers

November 13, 2009

Despite several attempts, the S&P 500 failed to close above the all-important 1,100 level. It has since fallen back to the 1,090 pivot. This does not bode well for stocks and suggests that the bounce started seven trading days ago is likely over.

We are witnessing a flight to safety occurring in the major indexes as evinced by the Dow outperforming the Russell 2000, the S&P 100 outperforming the S&P 500, the Nasdaq 100 outperforming the general Nasdaq, etc. In simple terms, money is shifting away from smaller more “risky” tranches into the larger, bluechip companies.

















Similarly, the US Dollar looks to have put in a double bottom. This is extremely stock and commodity negative (it could also hammer gold). If we see the Dollar rally above its recent high of 76.4 then we may very well see a test of the 50-day moving average (blue line). Any break above this level should trigger a full-scale collapse in stocks and commodities (oil appears to already be discounting this in some ways).


















Spending Up, Sales Down. The US is Bankrupt

As I’ve stated in previous essays, the US is effectively bankrupt. Spending is soaring at the very same time revenues (tax receipts) are in a free-fall. I’ll outline some simple math proving it.

Consider that the US economy is officially listed as being valued at $14 trillion. However, we know that this recession has dented it by at least 10%, so that puts the real US economy somewhere in the ballpark of $11 trillion.

Now, total public and private debt outstanding currently stands at $57 trillion. We’ve also got another $70 trillion in unfunded liabilities standing in the wings as a result of Social Security and Medicare. However, for simplicity’s sake, we’ll ignore this $70 trillion and focus on the debt we have to service right now.

With interest rates standing at 0.25%, the annual interest payments for our debt are around $142 billion which is roughly 1% of GDP.






So, what happens if interest rates go to 1%?







With interest rates at 1%, US debt payments jump to $570 billion, an amount equal to 5% of US GDP. At 2% interest we’re up to $1.4 trillion (10% of GDP), and so on and so forth.

And that does not count return of principal, those are merely the interest payments.

Now, the US, like most governments, funds payments via taxes. There’s one small problem there though -- tax receipts are plummeting (as unemployment soars) at the exact same time that the government is engaged in profligate spending. In October, the Government spent $312 billion and took in $135 billion in taxes, creating a $176 billion deficit.

This is the single worst reading for the month of October in history.

In simple terms, the US is effectively bankrupt and getting more bankrupt by the day. There is no way we can service our debts at current levels, and the levels are only getting worse. How this will end (default, inflation, etc) I cannot tell you, but it will end badly. I would look into buying gold bullion on any significant pullbacks in the precious metal.

Speaking of which…

Gold Due for a Correction

As I stated in Wednesday’s essay, I believe Gold has come too far too fast.In particular,there has been several non-confirmations to gold´s rise : the precious metals, Gold´s miners, etc.


















As you can see, Gold is extremely extended above its 50- and 200-day moving averages. If the Dollar is indeed putting in a double bottom, we should see a serious correction here back down to $1,050 or even $1,000 per ounce. At that point I would definitely consider increasing exposure to the precious metal.

The world’s banks are all engaging in the same mindless stimulus and money printing. This is extremely Gold positive. And we are nowhere near the real mania stage for the precious metal. During the last Gold bull market (the ‘70s), the final leg of the bull market saw a 750% rise in the price of Gold. At that point we’re talking about Gold in the $5,000 per ounce range.

Bear in mind, I’m not talking about Gold’s near-term performance future. The final bull leg in the ‘70s took four years to complete. If this current bull market continues to repeat the trends we saw in the ‘70s (as it has almost to perfection) then there’s considerable time before Gold peaks.