When They Break the Bank in the Devil’s Casino

“The prudent see danger and take refuge,
but the simple keep going and suffer for it” (Proverbs 27:12)

As stock markets roar, few seem to realize the financial crisis that began in 2007 is not yet over. The patient was rushed to the emergency room and then put into the intensive care unit. The problem is the doctor has not yet given him a clean bill of health. He is still on life-support. And at some point the power will go off for the hospital because it is no longer able to pay its bills…

Here are the disturbing realities: First, the financial crisis was essentially one of irresponsible lending and borrowing. Second, that problem was never resolved; private debt that will never be repaid simply became public debt that will never be repaid. Third, the scale of this problem is global; the sovereign debt of Greece, Portugal, Spain and Ireland, among others are being viewed skeptically.

The sum of U.S. public debt and unfunded obligations such as Social Security, Medicare and universal health insurance is approximately 105 trillion dollars. The total umber of working Americans is about 162 million. That means the per capita burden for total U.S. debt and unfounded obligations is about $650,000. Each working person would have to pay off about that amount to pay off the debt and meet the obligations. It will never happen, at least in today’s dollars.

Many of those who are considered heavyweights in economics are agreed about this. There are two types here. The first type is the theoretician and the second the savvy investor; I'll give examples of both. Ben Bernanke, the chairman of the Fed recently gave this blunt warning: "It is very, very important for Congress and administration to come to some kind of program, some kind of plan that will credibly show how the United States government is going to bring itself back to a sustainable position." For the uninitiated, a rough translation of the fed speak into plain English would read something like: "Stop it! If the Congress and the administration don't stop feeding this Ponzi scheme by spending like drunken sailors and act to balance the budget, we're all doomed!!!"

Canadian hedge fund manager Eric Sprott also sees the writing on the wall. His record as a prognosticator speaks for itself: his hedge fund has returned 400.8 % over the past ten years versus -2.87% for the S&P 500. At this time he is invested in precious metals and mines and is selling U.S. financial stocks short.

This debt situation means that unless there is a radical and timely change in the policies and practices in government as well as in business, the mother of all financial crises looms ahead. It may not be tomorrow and it may not be next year, but it will surely come. If the U.S. government waits too long to act radically and decisively, it risks passing the tipping point and falling into to the death spiral of loss of confidence and creditors demanding crushingly high interest rates. It remains to be seen whether the present administration and congress will be able to resolve this issue in time. Political leaders get elected by promising not to raise taxes, and by promising benefits, the exact opposite of what is now required. The question is whether our leaders can act before we reach that tipping point.

Disclaimer: This is written an expression of personal opinion and is not offered or intended to be used as investment advice. For investment advice, consult a reputable, qualified adviser.