The Wages of Obama's Sins

Editor's note: The markets are closed today in observance of Martin Luther King, Jr. Day. As a result, we're taking a break from our usual Digest content. We'll return to our regular publishing schedule tomorrow.

Instead… we're taking the occasion of OBAMA!'s ceremonial second inauguration (he was officially sworn in yesterday) to share some of Porter's recent thoughts on where the president's leadership is taking us…

In the following excerpt from the January issue of his Investment Advisory… Porter describes the inexorable result of our leaders' refusal to take responsibility for their policies or hold their constituents responsible for their own choices.

The Wages of Obama's Sins
By Porter Stansberry

We begin 2013 in awe of what's happened to our country...

Since 2008, when President Obama was elected, the official, net public debt of the U.S. federal government has increased by $5.5 trillion.

That's more than double the size of the total net public debt of the U.S. in 2007, the year before Obama was elected ($5.03 trillion). These additional new debts have swollen the total net debt of the federal government to more than $11 trillion, or roughly 80% of GDP.

These overwhelming public financial obligations are completely unprecedented in the history of our country, outside of the two major global wars we fought in the 20th century.

But even these incredible figures don't tell the real story. Or even half of it.

You see, these are merely the debts that we, federal taxpayers, are actively paying interest on right now. These don't include any of the additional $4.8 trillion in debts held by various government agencies (but which still cost us interest every year). Nor do they include any of Fannie Mae's or Freddie Mac's obligations, two private companies that were taken over by the federal government during 2008 and whose total obligations stand at a little more than $5 trillion.

We've paid nearly $200 billion in interest for these obligations, though they remain completely off the federal balance sheet. Nor do these numbers include any of the trillions of dollars in additional Federal Reserve assets that have been created out of thin air to manipulate the market rate of interest lower during this period of rapidly growing demand for federal debt.

When you add these other, genuine, federal obligations that exist right now, today, you come up with a total debt figure that's much more than $20 trillion. Far more than half of these debts were assumed under President Obama.

We don't know what the full burden of these new and existing debts will be in total, over time. That's because the Fed's power to manipulate interest rates is unlimited. We don't know how much of Fannie's and Freddie's bad debts will eventually be covered by the U.S. Treasury. (We do know they have an unlimited line of credit... so it's a safe bet that we haven't seen the last of these charges.) Finally, we have no idea what the eventual costs of the Federal Reserve's ongoing expansion of the monetary base will be over the long term.

There is one thing that's certain, however: These debts will not be free. They will carry a burden.

I call that burden the "wages of sin" because the effort to cover our country's current expenses with debts that will be borne by generations of Americans is simply evil. There's no other word for the people who have done this to our country. By refusing to take responsibility for their own policies and by refusing to make their constituents responsible for their own poor choices, they've doomed our country to a future that will certainly include a government that's far larger and more expensive.

That means a lower standard of living for all of us.

To give you some idea of the real, underlying costs we face, we can simply apply a real-world interest rate to the total debts we enumerated above. Let's pretend there's a lender large enough to finance our federal burden, someone who is able and willing to extend us credit larger than our entire economy. And let's pretend he's willing to do so for 30 years to make the payments affordable to us.

You can imagine this as a huge mortgage our leaders have put on top of our economy. How much would we have to eventually spend in interest to cover these debts in a legitimate way? When you buy a home, you're given the same information from your lender. It's part of the housing law that governs the mortgage industry – the Fair Lending Act. So using exactly the same guidelines, how much should we expect to spend on interest and principal, for these debts?

If the average real interest rate ends up being 4% annually, we'll spend $34.3 trillion to simply repay what we owe right now. If the rate ends up being 5%, we'll spend $38.6 trillion. If the rate ends up being 6%, we'll spend $43.1 trillion.

Now, of course, our politicians believe that through policy and currency manipulation, they can simply avoid paying any of these costs. They can order the Federal Reserve to prevent interest rates from ever rising to a level that would cost the American people anything. They believe they can manage the economy, so the debts of Fannie and Freddie won't go bad. They believe (without any proof whatsoever) that they can stimulate the economy by even more deficit spending, so that it grows faster, allowing tax revenues to produce a surplus. Repaying these debts, they say, will be easy and painless.

But you know better, my friend. You must know better. The wages of sin must be paid. And they will be paid. Just consider the plans of those who argue otherwise...

Paul Krugman, the publicity-hungry M.I.T. economist, pens a column for the New York Times that's ironically titled The Conscience of a Liberal. He recently suggested a simple and completely pain-free way around the debt ceiling, that flimsy piece of legislation that was supposed to slow the growth of the federal debt.

The problem of our debt is easy to solve, according to Krugman: Just mint a $1 trillion coin (or coins) and deposit it with the Treasury:

Very few people, even our most influential economists, seem to remember that the utility of money and credit are based upon their soundness.

Money allows people to exchange goods and services widely, greatly increasing the specialization of labor and facilitating the economic magic of competitive advantage. Money also plays the critical function of facilitating communications between and among many disparate actors. Price changes guide producers and consumers.

But... when the money can't be trusted... this entire system breaks down. The price signals can't be relied upon. And it becomes harder and harder for people to exchange labor and capital.

Likewise, credit enables an economy to grow by facilitating the growth of savings and capital investment through real interest rates. But very few people are willing to delay consumption and trust their savings in an economy that refuses to pay savers any return above inflation for their savings.

Actions that undermine the legitimacy of our currency or that threaten the stability of our credit will cause enormous problems – real costs – to our economy. Pretending otherwise won't change these facts in the slightest. Minting coins with a real intrinsic value of maybe $3,000 and claiming they're worth $1 trillion is Mugabe finance. Just reading about the possibility of this plan in the pages of the New York Times will damage the stability of our money and credit.

But regardless of whether our creditors read the New York Times, they will soon realize there's no way we can finance, in real dollars, our existing federal debt of $20 trillion. Assuming the real rate of inflation (today) is 4%, we should expect to pay at least 6% annually to finance these debts. That would mean interest payments of more than $500 billion annually.

This is impossible. Ignoring payroll taxes (which finance Social Security and Medicare... at a loss), the federal government takes in roughly $2.4 trillion in income and corporate taxes. Social Security, Medicare, and federal pension spending currently total more than $1.8 trillion, leaving roughly $600 billion for all other forms of government spending (including the military). Even all of the remainder isn't likely to cover the real costs of our debt for long, given the inevitable (and huge) increases to Medicare and Social Security spending.

And so that leaves us, at the start of 2013, wondering how we will pay for the wages of Obama's sins... and the inevitable consequences of refusing to acknowledge these debts or the politics that led to them.

Regards,

Porter Stansberry

Editor's note: Despite the enormous problems created by our ever-increasing debts… these sins will not be OBAMA!'s downfall. In fact, Porter has predicted that the president is amassing such great political power… he will contrive a way to serve a "third term" (despite the Constitutional prohibition).

Porter has identified a phenomenon that he calls the "most important economic event of my life." It has the potential to create vast wealth in America… and the politicians in Washington have the power to dictate who can take advantage of this opportunity and who will be shut out. To learn more about Porter's research into this phenomenon and how he expects it to play out, click here.