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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Thanks Kellene, for another great lesson. It is obvious to me that God has prepared you to be a voice of reason and wisdom in these unstable times. I, for one, am grateful that I found your blog several months ago and have accomplished quite a bit in supplying our extended pantry.
It's time for all of us readers to go back and reread your Ten Steps and make a plan. The riots in London are likely to occur here as services are diminished. I read an interview by a British broadcaster that the looters were responding they were targeting the business owners "to show the rich people we can do whatever we want". As Obama blames the problem on the rich not paying "their fair share", and the conservatives for not raising taxes, his rhetoric will resonate and inflame the demographic that feels entitled.
We must all become more self-reliant and be able to hunker down at home with plenty of water, food, etc., should temporary violence occur in our neighborhoods. Then, acquire the goods and learn the skills we need to provide for our families over the longer term.
These are frightening times but God has instructed us to prepare so that we can enter into His rest and not live in fear. Kellene, you have helped me avoid several purchasing errors over the past few months. Thank you for the vendor recommendations and priority guidance. I know you've stayed up late finishing this for us. You're a great blessing.
By the way, I noticed you didn't use the words "food storage"--GOOD GIRL! *grin and high five*
Thank you Kellene for the explanation (both parts)... even a non-business minded person like myself can understand. Thanks again.
Thank you for this well thought out and timely article. We need to be aware and at peace as we prepare.
Wow...so well written Kellene. Thank you!
What are some examples of items are 100% certain to have value?
Anything that's covered in the 10 Principles of Preparedness
I went back to reread the 10 Principles and I can't find the tenth one on communication - and that is one I need some prompts for.
Kellene, it appears that you're losing posts again. I read this article around 12:45 am CST and commented. Thanks for another great article.
nope, it wasn't lost. It was just in the moderation que for some reason and I'm just now getting around to approving them. :-)
Thanks for making this all so clear..I'm glad I have read your blog faithfully and have undertaken in my preparedness efforts..my husband reluctantly took a loan on his 401K last year after much convincing..and now that its paid back,he just put in for another..and so did all the others at work..who hadn't already...you have helped a lot of people who don't know they have been helped by you..little by little I think people are seeing the clowns in Washington and wall street for what they are...clowns Bless you and keep the real news coming.
So, is there any light at the end of the tunnel? I mean, is there ANYTHING the government can do about it or as we just waiting for the you-know-what to hit the fan?
They could put the brakes on their spending in a strict manner and abolish the Federal Reserve--that would definitely turn things around, but that will never happen. The druggie is not only addicted, but also feels entitled--very much like the Pharaoh in the Old Testament. He could have avoided every single one of the plagues sent to him, but he just couldn't resist the life of living off of the House of Israel.
The "government" are simply people who have access to information that you and I do not. They will cover the truth and keep us in the dark in order to buy time for themselves to personally prepare.
If we are in the last days before Christ comes, it is not going to get better. If this is part of a cycle, we must prepare so that we can ride it out. Either way, we are to provide for our families, fear not, and follow Him.
Great Article. I enjoy reading your blog, since you agree with me most of the time. I don't think that things are going to get better, at all, for a long time. Everyone had better finalize their preparations quickly, not in panic, but with peace and focus. Hopefully, everyone is mostly there, already. I think you have hit the nail on the head, with your assessment of the financial situation. I have been watching and expecting this for the past 5 years, and it seems like it has been happening in slow motion. Things are only going to get worse as time goes by. Not to discourage anyone, but it is only the beginning of the diffuculties that we will face in the near future. The important part of overcoming adversity, in my opinion, is to look to the 'source' of happiness and comfort to keep us from being overwhelmed by the negitive. As you are always counseling, stay positive, keep moving in the right direction, and focus on the important things.
Where can I find vendor recommendations and priority guidance??
Sad but true article - thank you for your help understanding a confusing topic. You try and watch the news and make sense of things, but every channell you try says something different if not contrary!
Do a search on this blog for "10 principles of preparedness" and read what each one is. Then you'll have your priorities in order of importance.
I hear what you are saying. My question is what will be the effect (in real terms) of the fed printing enough money all at once to completly pay off the debt, and doing it before anyone knows the money is worthless?
We're already living through a much worse scenario that printing that much. That's why the downgrade occurred in part but with only a part of the scene playing out. That's primarily why things will get tougher soon.
Thank you Kellene for your understanding and abilities to assist us in our understanding of this mess. We all will continue to do our due diligence in preparing for our sustainment on all levels.
Great article! I really do have a sense of peace now. Thanks again.
There is peace in being debt free!
I wish others would open their eyes to what is going on in the world.
They think it is just a game and all will be ok.
Kellene - thanks so much for all you do and have done! As I struggle with finances in ruin due to someone else's choices and manage a busy, filled life as a single mom with lots of kids, I have to be honest and say that when I see what is happening around us, it's easy for an uneasy anxiety to settle in. When that begins to happen in my heart, I know that with a first focus on spiritual preparedness, I can also come here, get the low-down, and see that while I can't do everything, or even everything I'd like to do, I can know that I'm on the right track and at least doing what I can - there is peace in that, too! Oh yeah, though I've canned all my life, and have even canned meat for a few, I canned bacon for the first time yesterday - totally cool! I was a little skeptical, I must say, but it was easy and smelled great! My kids exact words were "Mom, that rocks!" We did our first butter bottling in my dear friend's sun oven(on my list for next in food preparation), and it was also wonderful - just the sunny yellow in those little jars was enough to bring a smile, even when we have it - I can only imagine how great those little "jars of sunshine" will be when it's not so easy to get! Thanks again!
Keep your head up Holly and your heart full. I personally think the Lord has a special way of watching over single mom's having been raised by one with my other siblings. :-)
You rock Kellene! Great article. : )
My opinion is not pay off debt if you can afford to hold. Hyperinflation is likely and will wipe out your debts. Just don't over-leverage! Great article otherwise.
Oh my holy cow! That is the worst advice to follow, absolutely worst. Please understand I'm not picking on you personally; I'm glad you've taken the time to read this article; but I assure you that when "moneybags" lose money due to a hyperinflation or like incident, they NEVER take the debts off of the books, instead they get incredibly desperate and take extreme measures to get as much back as possible. You do realize that there are over a dozen states which actually ALLOW for debtors prison sentences on unpaid debts, don't you? Are you really willing to risk your own safety and comfort and that of any person who follows that advice based on information that goes against historical precedent, logic, and moral laws? Make no mistake about it, debt is a slave owner no matter how useless the dollar becomes.
There are stories (not authenticated by me) of farmers paying off their mortgages with the proceeds from selling a few dozen eggs during the Weimar hyperinflation. I think some did manage it. Many did not.
Planning such a move though, besides being immoral, could easily backfire. Some brief thoughts as to why:
Those were relatively honest times, and inflation was widely documented. Today the USA government lies about the true rate of inflation and the media supports the lies. This allows paying decreasing real wages and pensions while pretending to adjust for inflation. Compared to then, we haven't seen much yet, inflationwise! If inflation gets roaring, how can anyone know their income will keep pace?
We are entering a cycle much like the Great Depression. The Fed cartel is trying to inflate out of this bind, which can lead to hyperinflation, but the economy wants to deflate. It is still possible for massive bank failures to bring a deflationary crash first. IF this happens, wages drop, access to funds in "saved" banks is likely limited, unemployment skyrockets, the Fed would continue to inflate, but mainly the connected would get the new cash first to buy assets cheap. By the time new money reached those still employed, few would be in a position to pay off old debt. When bankers see an inflationary wave coming (and they see [or create] such things first) they will forclose where they can (and maybe even where they have no right) preferring to hold property rather than debt.
Since the dollar is a "reserve currency" and other nations have substantial holdings, those nations will react in their self interest. This could mean net dollar rescue, or dumping depending on when and how this hand is played. They could continue inflating their curriencies to keep pace, or together, could introduce a new "world" currency with an exchange favorable to the debt holders rather than the debtors.
For those who choose to play the debt game anyway. Be carefull. It's like betting in a crooked casino where the house changes the rules without notice!
I hope that everyone will get what is owed them in terms of getting money back on their investments/loans, etc. That said, reading the previous comment brings to mind a question I have had for a long time, which is: if there were a financial problem on the level of what happened in Germany, where, I've heard to the effect, "it took a wheelbarrow of money to buy a loaf of bread", what does that do to debts that were written up previously? If it took $1,000 to buy a loaf of bread, would that same $1,000 dollars take $1,000 dollars off someone's car loan? Doesn't seem fair to the one who loaned the money in better times, but it would be a contractual agreement written up previously, so would the person who made the loan be able to change the terms because of the change in the financial situation?
Your article states that "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."
Where do you get this figure? My understanding (from other media sources) is that the U.S. government takes in approximately 900 billion a year from all revenue sources ($0.00 from GE) and pays out around 200 billion in interest.
Could you provide your sources to back up your statement...please.
I'm a big fan of folks doing their own research on matters as important as this. So I'm just going to provide you with one instance in which this fact is documented. Ronald Reagan commissioned a report in the 1980's known as The Grace Commission. The following is some of the contents of that report:
"Resistance to additional income taxes would be even more widespread if people were aware that:
One-third of all their taxes is consumed by waste and inefficiency in the Federal Government as we identified in our survey.
Another one-third of all their taxes escapes collection from others as the underground economy blossoms in direct proportion to tax increases and places even more pressure on law abiding taxpayers, promoting still more underground economy -- a vicious cycle that must be broken.
With two-thirds of everyone's personal income taxes wasted or not collected, 100 percent of what is collected is absorbed solely by interest on the Federal debt and by Federal Government contributions to transfer payments. In other words, all individual income tax revenues are gone before one nickel is spent on the services which taxpayers expect from their Government."
In fact, in January of 1984, President Reagan was vehemently cautioned in the following words: "If fundamental changes are not made in Federal spending, as compared with the fiscal 1983 deficit of $195 billion, a deficit of over ten times that amount, $2 trillion, is projected for the year 2000, only 17 years from now. In that year, the Federal debt would be $13.0 trillion ($160,000 per current taxpayer) and the interest alone on the debt would be $1.5 trillion per year ($18,500 per year per current taxpayer)."
As you can see, they were right on the nose with their caution. And you may want to keep in mind the percentage of unemployment that we now have which was NOT a part of their projections, which would have lowered their "per current taxpayer" ratio.
"The Creature from Jekyll Island" by G. Edward Griffin is another resource I would recommend in researching this topic as it quotes from several different government and non-government sources on this fact.
The entire economy is one humgous debt ponzi scheme. To grow the economy you have to grow debt. Money has to keep moving and the amount of money has to also expand to create the illusion of growth. History tells us any country who has tried to follow the present economic phlisophy has decended into hyperinflation.. We started down that road when we left the gold standard. FYI We as a nation no longer produce anythng - except debt - both private and public. The masters of this magic have been able to keep this illusion going for a lot longer than I ever thought they could. But its certainly getting a lot tougher for them. Please research why Rome fell. The government kept things going with bread and circus for quite a while. BTW Romes big export was [drum roll please] taxes and debt. and government. Rome never produced squat. Those who dont learn from history are doomed to repeat it. The modern banking system is nothing more than a huge ponzi scam, backed by the government - AKA the taxpayers.
Ive found having a plan and preparig produce peace of mind, not panic!