So, S & P downgraded the U.S. credit rating, but what in the world does that mean to you? Well, unfortunately, the personal impact will come at you from several different directions, but you’ll be able to see them coming if you understand one fundamental component.
If you recall, in my last article I mentioned financial instruments. A financial instrument is really just a hoity-toity word for an I.O.U.; and are assigned a value based on what asset is backing them. It could be gold, oil, rare art, or even the faith and name of a creditor. Understand that every single piece of our paper U.S. currency is nothing more than a financial instrument; after all, they are labeled as Federal Reserve Notes. Currency was created because it was much more convenient than carrying around gold and silver to make one’s purchases. As such, each piece of currency that’s in circulation is supposed to be backed by an equal amount of gold or silver or other assets like land, grain, or natural gas. But unless you still believe in the Easter Bunny, you know that such is not the case any longer, and has not been the case for decades. S & P just announced to the entire world that these I.O.U.'s are no longer a “stable” asset.
Now consider the fact that you have a whole bunch of these I.O.U’s in circulation domestically, but just how many are out there and what is supposedly backing them is considered the biggest secret of all secrets—protected by the Federal Reserve more so than nuclear launch codes, U.S. Mint templates, or Fort Knox. Such information used to be published regularly via the M3 Report, but ceased to be released by the Federal Reserve years ago. Yes, you’re right to be concerned about that fact.; but now, with the downgrade, we are stuck with the amount of currency in circulation, but we now know that the value of that currency has been seriously downgraded to a “non-investment grade” status which is what is the same rating that has been given “junk bonds” over the last decade! Yup, Washington, Lincoln, Hamilton and Benjamin—you’re now valued equal to many junk bonds in the world. Oh, and by the way, the currency is only the tip of the iceberg. We also have several QUADRILLION dollars worth of financial instruments in play on any given day of year throughout the world.
O.K. So now that I’ve established that foundation, let’s plug it in to what else is going on.
Yesterday S&P also downgraded Fannie Mae and Freddie Mac—those too-big-for-their-britches Federal entities (albeit unconstitutional), which back nearly every mortgage loan on the market today (down to an AA, the same as the U.S.). Unfortunately, We the People are footing the bill for these messes. This means that if our currency can no longer be trusted to back them, and we’re paying less in taxes to back them as a result of a loss of wages (thanks to unemployment) and an overall loss of home equity of 33% nationwide, then these two entities will default! (That’s a heavy hit when you realize that home equity makes up nearly a third of all balance sheet wealth in the U.S. that can be wipe out instantly with any further downgrades!) A default here will surely trigger a domino effect of a complete default of all U.S. obligations.
Unfortunately, you can expect to see these kinds of complications take place over and over again in the next few days and weeks as the S & P makes its rounds through all of the government run entities. You can also see them being brutally accurate in downgrading the cities, counties, and states. When that happens it makes it nigh impossible for these entities to raise money via the sales of bonds; picture a homeless man on the street asking to borrow $5 million. Would you loan him the money? Nope, and neither will the powers that be. With the budget shortfalls that are already happening because of a sharp decline in collected taxes, you can expect some stark cut-backs very soon in your own neighborhood—cut backs that will necessarily impact your life—even your safety.
Next, understand that if our price levels for most essential items get hit with a 99% price jump (which is actually a common side effect of a sovereign credit downgrade) then our purchasing power will likewise drop dramatically. How dramatically? Well, there’s no way to sugar coat it; it is likely to convert a $100,000,000 buying power down to only $20,000 in buying power. Ouch! Is such a price jump trigger likely to happen? Well folks, you’ve been watching the news the last year; of course it’s likely to happen. We’ve been seeing and feeling the effects at the grocery store and gas pumps for some time now, and in some cases significantly more than a 99% increase (produce, grains, fuel, dairy, etc.). In fact, since March of 2009, livestock prices have risen 138%. Since agricultural production is projected to continue to decline 1.7 percent every year through 2020, while the population rate is increasing 2% annually, there’s simply no other realistic expectation for food prices other than UP—and that’s without the consideration of the damage done by fire, weather, and a new breed of fungus killing the crops.
Let’s also consider the present predicament we find ourselves in regarding the debt to GDP ratio. Presently, we are conservatively estimated to be a 90% debt to GDP ratio (amount of money owed vs. the gross amount of money we earn as a nation) with some experts claiming the real number is 360%.! *cough, cough, choke!* No society in history has ever been able to maintain a stable economy for longer than 10 years when their debt to GDP ratio exceeds 55%! State and local governments are at 22% debt to U.S. GDP; and that’s on top of the Federal ratio! During the Great Depression we were at 120%, so can you imagine what will happen if the money we’re supposed to pay our debts with is suddenly reduced in value by 6,000 percent?? Now imagine how you would feel if you’re China or Japan who have heavily invested in the U.S. to the tune of $1.7 trillion and nearly $900 billion respectively? There are knee breakers out in the world that will come after a person for a measly $5K! Imagine what could happen if we provoke the anger of a “bookie” that we owe $1.7 trillion to, and who is also rumored to have the largest army in the world?
Continuing on…Who pays a higher interest rate on a credit card; the guy with the 780 credit score or the guy with the 540 credit score? Obviously the lower one, but in some instances such a risky borrower won’t even be able to qualify for any credit at any price. Now apply this same measuring stick to the ability of the U.S. to borrow and pay their debts, keeping up with their present and projected expenses in light of the credit downgrade. You may not be aware of this, but presently 100% of our federal income tax dollars are only sufficient to pay the INTEREST on our federal debt. That’s right. You’re kidding yourself if you think your tax dollars have been paying for war, highways, or education all these years. So, we clearly do not have much wiggle room in taking a hit in the value of our currency, nor in the amount of taxes raised. Imagine if you were a salesman and you had an annual sales figure you had to meet. What if you were falling significantly behind that number every single month? Well, that’s exactly what’s happening to the U.S. right now, even before the announced credit downgrade. We’re presently missing our MUST HAVE numbers by $125 billion every month. Now, imagine how a credit downgrade will impact our ability to even maintain the status quo, let alone ever have a hope of catching up?!
So, how will this affect your personal monthly budget? Because corporate America has been running their shows in the same manner in which they’ve observed Big Brother’s behavior, they are running up against some serious consequences too. They rely too heavily on Big Brother to bail them out when they have a shortfall. If our Treasury is tapped out because they’ve had to default on loans, are they going to have any money to lend domestically? Nope. So this would necessarily trigger a panicky domino effect. Again, please don’t kill the messenger, but if credit card companies and banks aren’t able to tap into money at rock bottom low interest rates, then they will have to get the money somewhere else. While Congress may have passed a law forbidding credit card companies from arbitrarily increasing interest rates, there are no protections in place relative to monthly minimum payments. Even without this recent development, several credit card companies have jacked up their minimum monthly payments by as much as 400%! Bank of America’s stock plunged 15% over the weekend. Is it just a coincidence that they are one of the largest administers of Fannie Mae and Freddie Mac loans and that they are taking a sizeable beating in courtrooms all over the U.S. as homeowners have begun to fight back against B of A foreclosures? Hmmmm.
Unlike during the Great Depression, the U.S. is intimately entwined in nearly every other sovereign economy in the world AND they have also involved themselves in numerous corporations domestically. If they go down, the ripple effect will be horrendous; and yet there’s no shortage of economy experts who believe that a bankruptcy is a very real possibility for the U.S. As a result of their extensive debt and credit involvement this will no doubt trigger a global depression unlike any other time in history as trillions and trillions of financial instruments, bonds, and U.S. currency plunge in value. Even without default we can expect to see a severe backlash as a result of the $600 trillion to $1.5 quadrillion of derivatives held worldwide. These are very likely to be dumped like painter pants from the 80’s because even the “experts” can’t explain what derivatives actually are and how they generate profits; no one can afford to invest heavily in them in an unstable market. Can you say fire sale? The second largest group of investments out there is our mortgage-backed securities. The hit to Fannie Mae and Freddie Mac just made them about as popular as Typhoid Mary.
Oh, and by the way, please understand that the movement of the DOW today was so blatantly contrived by the Federal Reserve flushing money onto Wall Street in order to continue their ventriloquist act. Dummies aren’t convincing for very long, though. So be wise and don’t fall for the desperate act of deception.
There aren’t many relationships that are more toxic than the ones made with penniless, strung out druggies. They can’t be trusted to be reasonable, honest, or reliable in any way. So, what can you do to protect yourself from this volatile environment? Eliminate all debt while you’ve still got the valued currency to pay it off; and then spend what excess you’ve got while it still has value—but ONLY on items that you are 100% certain will have value no matter what happens. It’s time we stopped treating this like an inventory problem and started addressing it like the balance sheet problem that it is. The only way to avoid getting burned is to preemptively prepare to live with the inevitable desperation that’s sure to come—methodically, strategically, and above all, peacefully.
Read the first part of this article here: The Prelude to a Financial Collapse
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