Peak Debt

From our friends at the Wall Street Journal Sunday night, “In 2011, Social Security, Medicare and other entitlement programs will consume 60% of all federal spending, not counting interest on the debt, or $2T.” I just wish that they had noted that in 2010, all tax receipts were $2T. This seems to be a notable juxtaposition.

Now every financial writer worth their salt has noted that as the economy improves, tax revenues will increase. Let’s stipulate, for the moment, that there is an economic improvement in place (stimulus and QE driven or not). Shouldn’t we add that as the economy improves, interest rates will necessarily increase lest we stoke the already red hot fires of inflation?

And if, right now, our tax revenues equal only our entitlement spending, what happens to the discretionary spending and interest costs? Our current interest expense is about $400B and that is at historically low interest rate levels. Add to that our Treasury’s proclivity toward short-term note bias and you have an extraordinarily vulnerable capital structure.

We must issue trillions more in debt each year even if we make the “hard choices” regarding spending cuts. If current interest costs are $400B and our national debt is $14.2T, our average cost of debt is about 3%. Should that 3% increase by only 3%, which would bring it in line with historical averages, our interest expense would increase to $800B per year, not counting the increased interest on the increased debt. That amount will add 6% of the estimated $1.5T in deficits for 2011 or about $90B… in one year!

This is the horror of compounding. As our national debt increases by $2T or so each year, our interest expense increases by about $120B (using the 6% average cost of debt). This $120B is added to our annual deficit and to our total debt. Each year, we will pay more interest on more debt, regardless of what we do to reduce the deficit. This is the reason we should be very concerned about “Peak Debt“. We must be concerned when the world financial community declares that we have reached Peak Debt. This game is so far out of hand, it has become a game of perception.

And let’s note here that we must be concerned with worldwide Peak Debt, not just our sovereign America Peak Debt. But, for the moment, the American example will suffice.

Peak Debt is very much like Peak Oil. It is the point at which the system instantly becomes unstable. With Peak Oil, when we reach a point where maximum capacity is exceeded by maximum consumption, wars will be fought for that one incremental gallon. This is not hyperbole. This is precisely accurate. We await only the official declaration that there is a systematic supply shortage and then the game is on.

Peak Debt is no different except that we can manufacture currency and debt in relatively unlimited amounts and with very little fuss if the world financial community is willing to suspend disbelief and accept the fact that paper and digital currency, in unlimited amounts, retain their marginal values.

I contend that anything that can and is created in unlimited amounts cannot possibly retain value. If that were true, then just print trillion dollar notes, give one to every man, woman and child on the planet and make us all infinitely wealthy.

Peak Debt comes into play only if sanity surfaces somewhere in the world financial community. Some will say that this sanity should never be allowed to see the light of day and that we need only print our way out of this debt purgatory. If we never ask how much money has been created, and by that I mean all forms of currency and debt, paper or digital, and implied sovereign guarantees, we will never have the numerator for the currency to asset formula that sets the true value of all currencies. As currency supply increases and assets remain relatively constant, the currencies are debased and inflation is created concurrently.

Now one might think that if no one truly knows how much currency exists, nearly 7B people on this planet will continue to live in a delusional bliss thinking their currency has and retains value. If that only were true. But that currency does get into circulation and prices are bid up and real inflation does occur. Additionally, many worldly financial types smarter than I know not only this formula but also both the numerator and denominator. They have already placed their bets and they await the Peak Debt proclamation. At such time, our financial system will necessarily fail and there must be a system that is ready to be immediately implemented when the 7B people say “Save us!”

A new financial order is waiting in the wings with just such a system. This system must include a world central bank and a new currency. Trillions will be made and lost instantly as “old” currencies are exchanged for the “new” currency. Oil, gold and all commodities will be priced in this new currency. The most massive redistribution of wealth in all of history will occur when these new conversion ratios are foisted upon us. Debts will be repudiated, the financial markets will be reset and the only winners will be bankers, their preferred clients and those countries judged to in need of the redistributed wealth. Being a nuclear power will be an important “ante”.

Surprisingly, much, if not all, of this system is already in place. The International Monetary Fund (“IMF”), the International Bank of Settlements (“IBS”) and very pro one world financial system legislation (already passed by all meaningful countries) is here now. Oh, there may be bits and pieces still to go but the real trip wire will be a major world event such as a sovereign default or a string of defaults.

This default scenario is entirely dependent upon the proclamation of Peak Debt. I have no crystal ball but I know that our time to plan and act is here, the assets are in place and the financial freedom of our world is in play. Default is the trigger and a one-world financial order is the end game.

The rest is up to us to put our financial houses in order. Each of you, hopefully, has reached this point in your life with a certain amount of financial freedom. What choices we make today and the days in the near future will determine our ability to cope with the changes we will face. We may never have a better day than today to make the changes necessary. Certainly not all is doom and gloom and many of us may prosper for months or more to come, with some divine intervention. But for those who neglect to plan or fail to recognize the warning signs or fail to see tops coming, there will be fiscal challenges beyond our imaginations.

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