The Crash of the US Empire

by ChartCruzer@Yahoo.com (with assistance from the Gang of 5)

1/26/2011

The process of large governments and their economies becoming big, complex, and debt loaded has
been going on for centuries. Very seldom has a government lasted more than 200 years or a fiat
currency (like the dollar) lasted more than 30 years. This cycle of construction and destruction is
unrelated to political affiliation or style of government. Per examples of the past few hundred years,
the play unfolding before us now contains approximately six acts.

Act 1) The government with the aid of the banks increases the creation of fiat money (in the form of
bank loans) to fuel economic growth, enrich the bankers, and delight the populous. Unfortunately,
history has proven that, as the total debt load for an economy increases the fundamental ability for the
economy to grow diminishes. As a result the economy stagnates.

Act 2) Government deficits accelerate as more corporations/consumers become reliant on tax cuts,
bailouts, and social programs to prosper. The economy is now addicted to debt and real economic
growth starts to decline along with tax revenues. Also, new debt is being issued/used for purposes
other than long term capital investment which decreases the utility of the new debt to generate long
term economic growth. A debt bubble is now growing fast. The separation of wealth in the country
increases creating socioeconomic stress.

Act 3) To cover its deficit spending, the government sells increasing amounts of debt to global creditors
stressing their ability to consume the debt at low interest rates. The government often forces it's
countries banks to buy it's debt to relieve the interest rate pressure. Privately held debt laden assets
(like real estate and equipment) deflate in value as people/companies begin defaulting under oppressive
debt loads.

Act 4) The government via it's central bank creates currency out of thin air (money printing) and buys
some of it's own debt (because no one else will at low interest rates). Today, called 'Quantitative
Easing'. This devalues the currency in the eyes of global investors and keeps the debt bubble from
busting.

Act 5) As the total debt load becomes ominous, investors around the world start selling the countries
currency and debt instruments for fear of loosing their investment principle. This inflates prices for
imported goods (which further drags down the economy and tax revenues) and increases interest rates
on government debt (which results in interest payments consuming larger amounts of tax revenues).

Act 6) Global creditors/investors suddenly become fearful such that interest rates on debt increase
geometrically and the value of the currency drops precipitously in a short period of time (months). The
government runs out of money to operate and becomes insolvent. This results in hyperinflation, debt
default, civil unrest, political upheaval, economic depression, and sometimes war. Inflation renders
long term debts and investments denominated in the countries currency valueless. The debt bubble is
eliminated and a new monetary/financial system is born.

The acts in this play are filled with fits and starts as the incumbent power structure tries to hide the
unfolding play by distorting economic/financial/accounting information. In recent world history, only
one country partially escaped 'Act 6' consequences of a debt bubble like the US carries today (thanks
to the industrial revolution and the vast expansion of its territories via overt military aggression).
http://www.iie.com/publications/papers/niarchos-ferguson-2010.pdf

http://www.zerohedge.com/article/guest-post-why-world-financially-doomed-four-charts

The Play and the United States:

A) THE DEBT BUBBLE: The primary underlying effect depressing the US economy is the large total
debt load carried by consumers, corporations, and the government. Long term real economic growth
can not occur until the total debt load abates. This is the largest debt bubble in 200 years of US
history (larger than the great depression). The debt bubble has started to burst in the housing market
and numerous failed and expensive government programs have tried to stop it.

http://www.zerohedge.com/article/its-gundlach-jeffrey-gundlach-and-his-latest-contrarian-thoughts
http://www.marketoracle.co.uk/images/2009/Mar/Total_Credit_Market_Debt_vs__GDP.png
http://seekingalpha.com/article/195012-debt-the-chart-of-the-century
http://www.calculatedriskblog.com/2010/08/mba-q2-2010-1442-of-mortgage-loans.html

B) GOVERNMENT DEBT: Yearly, US government deficits are increasing rapidly while tax receipts
are stagnant or falling. Also, yearly deficit projections for future social programs are proving to be
understated (example Social Security is now $30B in-the-red, 6+ years ahead of schedule).

Today's total US federal debt of $14T is understated as the government and it's central bank (the Fed)
has seized several corporations like Fannie Mae with who carry over $5T in debt (currently not
included on the US balance sheet). Additionally, the government carries forward looking deficits to
support social programs (like social security and medicare) which adds approximately $50T to the
total debt (in specific, the government holds $4T in IOUs for the ponzi scheme called social security).

Falling tax revenues have also resulted in large budget shortfalls for state and local governments
(approx $300B) which will result in massive budget cuts in 2010 and 2011.

Pressure is being held in the US debt bubble via government deficit spending in hopes of holding up
the economy, stimulating substantial economic growth, and (in the long term) outgrowing the deficit.
The total US debt load itself will prevent this economic outcome and the total US federal debt will only
be paid off if the dollar is devalued or the debt substantially restructured/reduced.

http://en.wikipedia.org/wiki/File:USDebt.png
http://www.federalbudget.com/
http://blog.heritage.org/2009/03/24/bush-deficit-vs-obama-deficit-in-pictures/
http://www.dailyfinance.com/story/recession-second-april-budget-deficit-27-years/19478312/
http://www.ritholtz.com/blog/2010/03/updated-federal-withholding-tax-revenue/
http://www.zerohedge.com/article/state-tax-revenues-plummet-87-billion-biggest-year-over-year-
decline-history-record-state-ta

C) ECONOMY AND GOVERNMENT DEBT: Currently, over 10% of all yearly US economic activity
is a result of state/federal deficit spending - which is holding together the debt bubble. The US
economy will significantly shrink if deficit spending is removed and bankrupt social programs (like
social security and medicare) are scaled back. It will be impossible for the US to 'wash-away' this
yearly deficit thru economic growth as the current total debt bubble is a drag on future economic
expansion. The US economy is sitting on a debt bubble time bomb. As US politicians seek re-
election every few years they continue to pump up the bubble in hopes of holding up the economy and
winning re-election.

http://www.zerohedge.com/article/cbos-revised-budget-sees-2011-deficit-rising-500-billion-15-trillion-
4-trillion-deficit-thro
http://www.usdebtclock.org/
http://zfacts.com/p/318.html
http://www.youtube.com/watch?v=eb1n1X0Oqdw
this will take some time to load.
http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2010/5/28_Felix_Zulauf.html

D) DEBT and MONEY PRINTING: The US has had two and a half rounds of formal 'Quantitative
Easing' (money printing) as the US Federal Reserve (FED). Money printing effectively continues in
more subtle ways that the general public is not aware of with liquidity swaps and the relaxation of
accounting rules. The Fed balance sheets continues to grow and additional rounds of money printing
are being engineered as the economy stagnates or shrinks in real terms. The irony is that the liquidity
generated by the Fed and given to large banks is proving to have little effect improving the economy
(bank lending has not rebounded). Similarly the international community is now actively seeking
alternatives to the dollar.

http://www.zerohedge.com/article/why-qe2-qe-lite-may-mean-fed-will-purchase-almost-3-trillion-
treasurys-and-set-stage-monetar
http://www.zerohedge.com/article/fomc-announcement-250-300-billion-thru-june
http://www.telegraph.co.uk/finance/economics/7937724/US-Federal-Reserve-starts-QE-lite-to-placate-
markets.html
http://seekingalpha.com/article/207628-marc-faber-when-is-the-next-aig-to-fall?source=email
http://www.zerohedge.com/article/fed-balance-sheet-hits-record-22-trillion-assets-71-billion-increase-
mbs
http://www.zerohedge.com/article/shift-fed-policy-coming
http://www.alternet.org/module/printversion/148481

E) US INTEREST RATES and DEBT: The US Treasury has moved over half of the total US
government debt to short term debt instruments that must be frequently 'rolled-over' and refunded. The
US government now carries the most short term debt in the world. Specifically, the US must roll over
$4T in debt in the next 2 years in addition to funding $3+T in new deficits in the same period. In total,
the US government must sell $7+T in debt in the next 2 Years. In other words, the US will soon be
selling new federal debt equal to the size of the economy of the 5th largest country on earth.

With world record amounts of short term debt and interest rates at historic low levels, the US is in a
pickle. If interest rates on US debt rise to the historic average (5%), interest payments on US debt will
quickly increase to over 40% of taxes driving the US government to insolvency in the eye's of global
creditors. Additionally, even at these historic low interest rates, government interest payments are
scheduled to rise to 30% of tax revenues by 2014 to cover new deficits (remember this is understated
by the government). Thus, the US government is now highly sensitive to keeping US interest rates at
historic low levels and must force interest rates to stay near zero via any tactic possible. As such, the
US is expected to engage in additional money printing (i.e., Quantitative Easing) which devalues the
currency and encourages Act 6 consequences.
http://www.zerohedge.com/article/three-horrifying-facts-about-us-debt-%E2%80%9Csituation
%E2%80%9D\

http://blogs.telegraph.co.uk/finance/edmundconway/100005702/us-faces-one-of-biggest-budget-
crunches-in-western-world-imf/
http://cib.natixis.com/flushdoc.aspx?id=42799
http://www.moneycafe.com/library/primeratehistory.htm
http://preview.bloomberg.com/news/2010-06-18/greenspan-says-u-s-nearing-limits-on-borrowing-
capacity-restraint-needed.html

F) DUMPING OF US DEBT: China (one of the largest US creditors) has been divesting of US debt
after accumulating for years.

http://www.zerohedge.com/article/tic-data-confirms-china-bond-sell-continues-foreigners-dump-
corporate-bonds-and-stocks
http://www.leap2020.eu/GEAB-N-42-is-available!-Second-half-of-2010-Sudden-intensification-of-the-
global-systemic-crisis-Strengthening-of-five_a4294.html
http://www.zerohedge.com/article/chinese-treasury-dump-brings-its-total-holdings-one-year-low-uk-
continues-exponential-accumu

G) DOLLAR REPLACED AS WORLD CURRENCY: Banks are working on replacing the dollar as
the worlds reserve currency thus, undermining its long term value and stability. China, Russia, and
Brazil now exchange currencies without the US dollar as an intermediary.

http://www.ft.com/cms/s/0/182a2b70-b130-11df-b899-00144feabdc0.html

H) THE FIRST SIGN OF DEBT BUBBLE TROUBLE - HOUSING: Housing is in melting down (was
the largest sector of the US economy) as debt laden consumers default. In late 2010 and 2011 another
bubble in residential real estate has started to burst with recasts on mid-high end loans. The retirement
of the baby boomers and the huge shadow inventory of housing being held by the banks will also be a
long time drag on prices and building.

http://www.dawnsellssandiego.com/blog/wp-content/uploads/2008/12/adjustable-rate-mortgage-reset-
schedule.JPG
http://www.calculatedriskblog.com/2010/05/mba-mortgage-purchase-applications-at.html
http://www.calculatedriskblog.com/2010/05/real-case-shiller-national-house-prices.html
http://www.calculatedriskblog.com/2010/05/new-home-prices-median-lowest-since.html
http://www.zerohedge.com/article/147-million-19-us-mortgages-have-770-billion-underwater-equity-
24-trillion-total-debt-impair
http://www.calculatedriskblog.com/2010/08/nahb-builder-confidence-falls-in-august.html

I) THE SECOND SIGN OF BUBBLE TROUBLE - COMMERCIAL REAL ESTATE: Commercial

real estate is also melting down (a key impact on local/regional banks) as debt laden companies default.

http://www.zerohedge.com/article/record-commercial-real-estate-deterioration-june-cmbs-investors-
hope-50-recoveries
http://www.calculatedriskblog.com/2010/08/aia-architecture-billings-index-shows.html
http://www.calculatedriskblog.com/2010/08/costar-commercial-real-estate-prices.html

J) THE THIRD SIGN OF BUBBLE TROUBLE – BANK FAILURES: The number of banks in
trouble is increasing - despite FDIC closures. Note: FDIC fund is now broke and will force the US
Gov to incur even more debt to bail out failing banks.

http://www.calculatedriskblog.com/2010/09/unofficial-problem-bank-list-increases.html
http://www.istockanalyst.com/article/viewarticle/articleid/3888946

http://seekingalpha.com/article/210594-nothing-fine-about-our-banks

K) SUPPRESSING THE EFFECT OF THE DEBT BUBBLE – MARKET MANIPULATION: It is

widely suspected that the FED and Government (in cooperation with the big banks) are manipulating
virtually all investment markets with a variety of tactics. This manipulation keeps the debt bubble from
busting and will use increasingly creative tactics.

http://www.zerohedge.com/article/developing-implications-loan-accounting-law-mark-market-mark-
model-or-mark-market-crash
http://www.minyanville.com/businessmarkets/articles/taxpayer-government-debt-enron-m3-
money/4/16/2010/id/27821?page=full
http://www.zerohedge.com/article/institutions-now-actively-selling-hft-permabid

L) HIDING THE BUBBLE EFFECT - DISTORTED ECONOMIC/FINANCIAL DATA: Inflation,

total debt load, unemployment, economic growth, etc as reported by the government are widely known
to be distorted to hide the effect of the debt bubble. This is key to keeping the current US
power/financial structure in tact. Numerous private sources have emerged to provide unbiased data.

http://www.zerohedge.com/article/guest-post-inflation-so-much-worse-were-told
http://www.financeandeconomics.org/Articles%20archive/2011.01.12%20USDGP.htm
http://www.chrismartenson.com/crashcourse/chapter-16-fuzzy-numbers
http://www.shadowstats.com/
http://www.nowandfutures.com/key_stats.html
http://www.zerohedge.com/article/debunking-myth-us-retail-sales-improvement

M) JOBS – A KEY SYMBOL OF ECONOMIC CONTRACTION: Total US employment as a percent

of the total population has been falling as the credit bubble has grown over the past 15 years. Real
unemployment/underemployment is now approximately 17% (with ~400K continuing to be laid off
each week). After years of economic stimulus and deficit spending the economy is not creating enough
jobs (150K/mo) to employ new adults entering the work force (much less put the unemployed back to
work).

http://www.calculatedriskblog.com/2010/05/employment-population-ratio-part-time.html
http://www.zerohedge.com/article/290k-payrollsadded-unemployment-goes-back-99-
underemployment-171
http://cfecon.blogspot.com/2010/05/u6-unemployment-crosses-17-unemployed.html

N) INFLATION – A COMPLEX PICTURE IN THE BUBBLE: Debt laden assets (like real estate) are
experiencing deflation as they are debased through default. Non debt laden assets (like food) are
experiencing serious new inflation. Real bottom line consumer inflation is now running at 5-10%/yr
(which results in real negative yields on most interest/dividend bearing investments). Hyperinflation is
a completely different animal and will only occur when the dollar starts to crash (Act 6). Note: During
the past 20 years ( the bulk of the construction of the credit bubble) inflation has slowly and
systematically consumed the prosperity of the middle class in the US and the value of the dollar has
fallen (see shocking video below). When the credit bubble starts to deflate in earnest this consumption
will accelerate as prices for imports (which the US depends on) rise.

http://www.youtube.com/watch?v=akVL7QY0S8A
http://www.shadowstats.com/alternate_data/inflation-charts

O) PERSONAL INCOMES: After falling off a cliff in 2008 personal incomes are flat after subtracting
government hand-outs like unemployment and food stamps (ie, transfer of payments). If transfer of
payments are included total personal income is now higher than the peak of the bubble in 2007.
Government deficit spending is clearly holding up the economy. Also, pension funds across the US
are underfunded by $2-3T (another form of debt) which, when adjusted for, will lower the income of
retirees.

http://calculatedriskimages.blogspot.com/2010/05/personal-income-less-transfer-payments.html
http://calculatedriskimages.blogspot.com/2010/05/personal-consumption-expenditures-april.html

P) PERSONAL SAVINGS: Saving by the US population are near record lows. The US has one of the
lowest personal savings rates of developed countries. When the debt bubble starts to unwind in earnest
this will exacerbate the suffering of the people and related sociopolitical consequences. It is unlikely
(given US consumer behavior) that the saving rate will increase to historic levels (8-10%). If it did, a
new economic down-turn will occur as 70% of US GDP is consumer spending.

http://calculatedriskimages.blogspot.com/2010/05/personal-saving-rate-april-2010.html
http://www.wikinvest.com/wiki/National_Savings_Rate

Q) SEPERATION OF WEALTH: One indicator that an economy has reached its peak is the separation
of wealth (aka wealth dispersion) across US working classes along with a disparate percentage of
corporate profits being generated by the banking sector. Recently, these measures of the US economy
have reached levels present in the 1920s (before the crash).

http://www.zerohedge.com/article/guest-post-age-mammon
http://www.zerohedge.com/article/path-socialist-prosperity-charting-distribution-income-within-
countries

R) GLOBAL POLITICAL TENSION AND WAR: The US is now responsible for approx. 50% of all
the military spending on planet earth and holds military superiority over other global powers . US
military spending is 5X larger than the 2nd country (China) and 10X larger than the 3rd country
(Russia). This out-of-proportion military spending represents a large percentage of the current US
government debt load outside of social programs. While audacious, as the US faces a monetary/debt
crisis (Act 6) it is thus, possible that a significant new war will occur. A large conflict will keep
investors seeking safe haven in the US Treasuries at low interest rates which is key to holding the gas
in the US debt bubble. While speculative, it seems logical that a new conflict would disrupt the flow
of oil driving the US to create a new energy infrastructure. This would fuel some economic growth
and fulfill campaign promises made by the current power structure in Washington. Given, the growing
tension around the Iranian nuclear program and the new presence of US carrier groups in the region,,,,
a target seems to have been identified.

http://www.washingtonsblog.com/2010/07/irony-our-huge-military-is-what-made-us.html
http://www.washingtonsblog.com/2010/01/military-industrial-compex-is-ruining.html

Timing the Melt Down

The most difficult task in the years ahead is preservation of wealth. The production of
interest/dividend income from assets while preserving wealth will be even more difficult as the dollar
declines and inflation heats up. It is difficult to forecast when Act 6 of the play will occur as it is
ultimately triggered by a collapse in global investor confidence in the dollar. This lack in confidence
can be stimulated by a substantive new US economic decline, increasing interest rates on US debt
instruments, and/or signals of out-of-control government deficit spending. All of these factors must be
watched closely however, ultimately, the value of the dollar as well as interest rates on longer term US
treasuries will be the clear signal of the start of Act 6. Ancillary signals leading up to the start of Act 6
include:
• The dollar being replaced as the worlds reserve currency.
• Additional rounds of money printing (QE) by the government.
• Defaults and debt restructuring by other smaller countries.
• Key: Interest payments on the national debt foretasted to exceed 40% of tax revenues in the
coming fiscal year.

http://fora.tv/2010/07/28/Niall_Ferguson_Empires_on_the_Edge_of_Chaos#fullprogram

http://www.washingtonsblog.com/2009/04/was-sdr-just-chosen-as-new-world.html
http://www.washingtonsblog.com/2009/03/head-of-chinas-central-bank-proposes.html

Watch for the dollar to decline AND break below historic support levels as a quantitative trigger. Also,
as a result commodity prices (which are denominated in dollars) will rapidly increase.

Per the link below, one plausible scenario for triggering the melt down is a significant sell off in US
treasuries.

http://www.zerohedge.com/article/guest-post-how-hyperinflation-will-happen
http://www.zerohedge.com/article/guest-post-hyperinflation-part-ii-what-it-will-look

Investing for the Melt Down

- Corp Bonds: With interest rates at historic low levels, a rise of a few percentage points (to normal
levels) would destroy the value of bonds. However, US interest rates should stay low until the debt
load starts to rapidly unwind in Act 6. Bonds will need to be quickly liquidated just before Act 6 of
the play starts. Inflation adjusted bonds (TIPS) may offer minimal protection (although the
government substantially understates real inflation). Interest and dividend bearing instruments not
denominated in dollars from financially stable developing nations (with low debt loads and high public
savings rates) will offer some safety and possibly real returns across the scope of the world bond
markets.

- CDs/Treasuries: Relatively stable in the short term (3-6 months) however, currently producing
negative returns when adjusted for REAL consumer inflation. Avoid.

- US Real Estate: Avoid until a clear bottom in the market is signaled (several quarters of stability in
price along with a crash in foreclosure/delinquency rates must first occur) as the debt bubble must fully
out-gas. US population demographics (the bubble of baby boomers) as well as the next wave of
mortagage defaults makes residential real estate a poor bet in the coming decade.

- Gold/Silver: Super bull market in progress. From the perspective of a buy and hold strategy this will
be the most stable investment class in coming years for several reasons: First, the fiat currencies for
several major developed nations are coming under pressure from debt bubbles (scaring global investors
into safe haven investments). Second, world gold production is declining which adds to the
attractiveness of this investment class ('peak gold'). As fiat currencies (like the dollar/Euro)
destabilize in Act 6, gold/silver based investment could radically increase in price. Ultimately a mix of
mining stocks, gold funds, silver funds, and physical metal is desired. It should be noted that buried
in the new health care legislation is the ability to tax physical precious metal holdings (as such the
attractiveness of this class of class investment is diminished).

http://www.zerohedge.com/article/10-gold-charts-commercial-investment-firms-dont-want-their-
clients-see
http://www.zerohedge.com/article/matterhorn-asset-management-there-will-be-no-double-dip-it-will-
be-lot-worse

- Stocks: Today's equities markets are nothing more than a rigged casino. The manipulation of liquidity
and interest rates by central banks will make equities unstable and their price direction often counter
intuitive. Also, with the bulk of activity in the markets is now controlled by high frequency trading
platforms at the large banks/Fed, overt daily manipulation is the norm (see first reference below).
Wild market swings (volatility) and events like the 'flash-crash' will be common moving forward. As
the debt bubble pressure grows, market manipulation tactics will become more extreme. Trading the
equities markets should only be done with extreme caution and with mechanical trading systems that
respond to erratic changes in market behavior. History has shown that when the US debt bubble starts
to bleed off in earnest (Act 6), US equities will crash to very very low levels and then resume a huge
bull market. Timing this behavior with leveraged short and long positions respectively will provide an
opportunity not seen in generations.

- Commodities: As the US and developed nations face new economic headwinds, commodity prices
may decline for short periods. However, when the dollar starts a new significant decline (Act 6) a
buying opportunity will emerge for increasingly scarce/vital commodities (like oil and food)
particularly in the context of the expanding global population/economy (fortunately a variety of new
ETFs provide the opportunity to invest long/short in these classes of commodities). This is a investing
play that must be timed properly but, a valuable consideration in a portfolio that will protect against
inflation and eventually hyperinflation. Political tension and war have proven to accelerate commodity
prices which could provide added value to this asset class in coming years. Profiting in the
commodities markets will require the skills of nimble 'swing' trading until Act 6 (and the dollars
decline) has clearly started. Thanks to new ETFs, commodities are now a more stable vehicle for
investment relative to stocks in corporations.

http://evilspeculator.com/?p=17119
http://www.minyanville.com/businessmarkets/articles/short-stocks-economy-stock-market-
fed/5/26/2010/id/28486?page=full

Final Note

“It was the best of times, it was the worst of times”, rings true in the current climate for investments
and business. Perhaps relative to the past two generations of history in the US,,,, it is simply “radically
changing times”. Unfortunately, the changes taking place are accelerating socioeconomic class
separation.

http://www.zerohedge.com/article/path-socialist-prosperity-charting-distribution-income-within-
countries

Watch the following video clips in the link below to gain a new appreciation for the potential road
ahead.

http://www.chrismartenson.com/crashcourse

Other Interesting Videos Related to this Situation.

Fractional Reserve Banking:

Money As Debt:
http://www.youtube.com/watch?v=vVkFb26u9g8&feature=fvw
http://www.youtube.com/watch?v=sanOXoWl0kc&feature=related
http://www.youtube.com/watch?v=kTv1fo6sKmo&feature=related
http://www.youtube.com/watch?v=3qicabStQkc&feature=related
http://www.youtube.com/watch?v=7kpSbkaD4tM&feature=related

Money As Debt II:

http://www.youtube.com/watch?v=_doYllBk5No&feature=related
http://www.youtube.com/watch?v=pp7tiySCyb4&feature=related
http://www.youtube.com/watch?v=lG7Jjb0cw9o&feature=related
http://www.youtube.com/watch?v=0-O_yGEI_0U&feature=related
http://www.youtube.com/watch?v=6MwHgpFSQMo&feature=related
http://www.youtube.com/watch?v=vH1M1QaM6SY&feature=related
http://www.youtube.com/watch?v=4GH4OElpZtM&feature=related
http://www.youtube.com/watch?v=iqeTComdm5A&feature=related