The Party's Over

UPDATE 2-25-11 Hot war may only make things worse. Might be best to be in cash says Money News

Here's the bottom line folks. The party is definitely over. I got a financial report today which was positively chilling if you read between the lines. Let me summarize at the big picture level. Government spending is running 23% of GDP. That's Federal Government spending of course. If you kick in the spending by state and local governments the figures get worse. Independent of tax rates the government can't consistently take in more than 20% of GDP. If they try the economic shrinkage kills the expected benefits of the higher tax rates. The current debt limit is $14.3 trillion. BTW just to put that number in perspective the GDP of the entire U.S. was $14.26 trillion in 2009. So the government currently owes the entire income of the country for a year and is generating new spending at 23% of that figure each year of which, catch this, 43% is new debt.

This is not just unsustainable, it's sheer madness. Suppose this were the position of a individual who was making $50K a year. To have a situation like the U.S. currently has he would owe $382K and be spending $87.9K a year, $37.9 K more than he is taking in. To service his debt he has to pay about 2.88% (gets favorable rates) which works out to $11 K per year in current interest so if you stick all this stuff in a spreadsheet you discover that under any reasonable assumptions the system collapses in no more than 20 years on the outside and probably substantially less than that. It's reality time! You can't fix it with taxes and you can't fix it with more debt. It's time to cut spending and entitlements big time. The gravy train is over! As Maggie said: ‎"The trouble with Socialism is that eventually you run out of other people's money." Well the game is over. The question now is whether the players will recognize it and do something sensible or take the whole system down? I'm betting right now that they're idiots and we can watch the panic. Meanwhile you better figure out what you're going to do. I sure hope I'm wrong. (BTW there are some other really bad scenarios such as all the reserve currency float coming home to roost if the rest of the world decides to stop using our currency as their store of value which they might well do if we look like a bad risk. Then move the collapse date up substantially.)

Can anything be done? Probably, but not if no-one will belly up to the bar and recognize the problem is real and urgent. You can't tinker your way out of this most likely. I've over simplified this a lot so maybe I've missed some important fundamental factors. I'm going to try to validate my analysis and keep you posted. Meanwhile, what would you do if most of your money became worthless tomorrow?