The Most Dangerous ‘Moat’ in 800 years

Why You Might Be Very Concerned About America’s  Economy…

(and What You Can Do to Protect Yourself)

The true story of the most dangerous “moat” threat in 800 years

 Eric Jensen here.

As you know, I did my dissertation on poverty and have become quite interested in the economics of poverty.

I am writing you because I see a threat to your lifestyle and if our roles were reversed, I would like you to tell me about it.

This letter may be a bit uncomfortable to read. If it is, just put it down or delete it. But I will tell you that everything in this is true.

This does not mean there are no alternative narratives about this problem. Yes, there are other, more optimistic scenarios. But I think (and many others much smarter than me) I might (unfortunately) be right about this one.

In the middle ages, the wealthy landowners used both wet and dry moats to protect their family and property. These were costly, ditches around your property, often filled with water. The richer you were, the wider and deeper the moat, the more protection you had. Today, a different kind of moat is developing and it is happening very fast.

This is an “economic moat.”

This new moat is separating the upper class from the rest of society.

In fact, the United States of America has the largest income gap between rich and poor of any developed nation in the world.

What I see is a wide trail of efforts to alter the standard of living in America, using “economic moats.”

In fact, the US trails only Brazil (nearly bankrupt) and Mexico (the land of illegal everything) as the three G20 nations with the widest amount of income inequality.

The moat is getting deeper and wider every day. In short, poverty in the United States is getting worse, not better. In 2015, a majority, 51% of all students in public schools get free and reduced meals. This was unthinkable, only ten years ago. And the middle class is disappearing, too. Gone are the jobs that required hard work and paid a lot (manufacturing, mining, and a whole lot more). For many of those jobs, technology (like robots) has replaced them. For others, it has been legislation (coal mines are bad for our ecology, I’m told).

And here’s why it’s happening…

There has always been corruption in government. It happens in every government, everywhere in the world.  In the United States, the corruption happens is less though favors, “back door payments” or bribes (though that still happens; just ask the ex-CEO of United Airlines who just lost his job).

It happens the most through public policy, which is far more dangerous for the middle and lower class.

Why? The rich make the laws.

Here’s what happened. In 1971, President Richard Nixon decoupled the value of the dollar from the value of gold. We went off the “gold standard.” That meant we did not need to tie any part of our monetary policy to real, “in the vault” (Fort Knox) assets. We could essentially “print money.”

The Federal Reserve (which is not a Federal agency, just a consortium of big banks established in 1912) has a handshake deal with every president to influence US economy. It does this through setting interest rates and adding more liquidity (money) into the system by buying Treasury notes from the government.

Once this “free” money is received, the government uses it to bail out companies or pay bills or (think tens of millions of government employees, huge defense contracts, interest payments on the debt and entitlement programs).

But it is also used to lend out to other banks and corporations at low interest rates.

Since 2010, more than $500 billion worth of new corporate debt was raised (cheap money) just for U.S. onshore oil and gas producers alone. It’s this capital that financed the oil boom – which is responsible for most of the net job creation in the U.S. since 2009.

But these debts cannot be repaid with oil prices at less than $60. Right now, oil prices are near $45 a barrel. And yet, all that debt is coming due between 2016 and 2020. Expect major bank collapses. This cannot end well.

We are told by the administration and the media that, “Things are returning to normal.”

How can things really be “normal” in America, when the so-called “auto-buying boom” of the last five years was financed with dubious subprime loans from cheap debt?

At General Motors, about 90% of GM car buyers finance their purchases. Surprisingly, 83% of their loan book was subprime with some categorized as “deep subprime” meaning very bad credit rating or in bankruptcy. That cannot end well.

By the end of last year, total auto loans outstanding in the U.S. had reached almost $900 billion – up nearly 25% in only two years.

Do you think this does not affect you? The portion of the Illinois Teachers Retirement System funds that was recently found to be invested in credit default swaps, derivatives, and other risky investments was 81.5%. Do you know what your teacher pension is invested in?

The debts in our country are piling up every year. In fact almost every so-called “recovery” has been a result of a debt-pushed market. But the due dates on these debt and credit markets will be coming soon.

There is merging-market corporate debt. There are asset-backed securities – like car loans, student loans, and credit cards. There is U.S. high-yield debt – like small-cap oil and gas bonds that is in trouble.

Do you think I am crazy?

There is a simple indicator for corporate debt. Just check the iShares iBoxx High Yield Corporate Bond Fund (HYG). Go to the site finance.yahoo.com.  Click on the site to see where the share price was 6 months ago.

This result has been forced on us by nearly unlimited credit for our banking system, corporations, lenders and our government, with predictable, disastrous effects.

When you rapidly expand the money supply, it never increases the REAL wages for the middle-class and poor.

Why?

Because any increase to their pay is simply inflated away, by the rising costs of everything they have to buy.

Many are quick to point out how some things are cheaper. Yes, that’s true. But ask yourself, “What does a movie ticket now cost, cable or satellite for a TV, a new car, a pound of meat, health insurance and 500 other expenses?” They are all up (since your last pay raise).

I am sorry if you believe in the government’s cost of living index (CPI). It is not a true measure of the real cost of real life. It has been altered to keep the real inflation hidden and it reduces the government annual cost of living increases to CPI-adjusted wages (like Social Security) for years.

A more accurate measure would the www.chapwoodindex.com. It measures the top 500 most frequently bought, used and relevant lifestyle items. Prices are measured every six months in cities around the country. Inflation is actually running about 7-13% a year.

Who is most adversely impacted by inflation? It is those with low and fixed wages. Those who get an educator’s paycheck or government check every month can see the value eroded, year after year.

This is the “economic moat” I am talking about. You are losing ground when you think you are staying even.

The administration and media tells us that, “things are getting back to normal.”

How can things really be “normal” in America, when average real wages (adjusted for inflation) have declined dramatically, from $57,000 to just under $52,000. The standard of living for the average American household has dropped nearly 10% in the past decade.

How can things really be “normal” in America, when roughly 75% of Americans are living paycheck to paycheck, with essentially zero savings, according to a recent study by Bankrate®. This cannot end well.

How can things really be “normal” in America, when the number of people on food stamps has doubled since Barack Obama took office… and when HALF of all children born today will be on food stamps at some point in their life? This cannot end well.

How can things really be “normal” in America, US Census Bureau says, 49% of Americans are receiving benefits from at least one government program every month? This cannot end well.

How can things really be “normal” in America, when 52% of all American workers make less than $30,000 a year?

How can things really be “normal” in America, when in 2015, we have about 100 million receiving some type of government benefit, but there are only 98 million private company workers? How is that ratio going to end?

How can things really be “normal” in America, when students have borrowed over $1 trillion for college?  Why? Loans were government backed.

The lenders could not lose money. But many of these debts will never be repaid. Why?

The new jobs are not there to support loan repayments.  Most of the increases in jobs of the last five years have been middle and low-income jobs.

Plus, Obama issued new rules that essentially gave many students an option to not repay these debts under certain circumstances. Millions have chosen not to, so who will pay the debt?

Big emerging markets with fragile, corrupt governments (Mexico, Brazil, Turkey, and Greece) have borrowed mind-boggling sums of money denominated largely in U.S. dollars. Those countries are going bankrupt. Their loans will all go bad.

How can things really be “normal” in America, when the big signature healthcare act was written by committee whose chairman says he didn’t understand it, passed by a Congress that exempts themselves from it, signed by a president who smokes, with funding administered by a treasury chief who didn’t pay his taxes, to be overseen by an obese surgeon general and worst of all, it is financed by a country that’s broke?

But it gets worse. How can things really be “normal” in America, when in a new poll, 40 percent of all U.S. doctors plan to bail out of the profession over the next three years?

How can things really be “normal” in America, when Fannie Mae and Freddie Mac the two largest mortgage companies (down 25% in the last 2 months) now tell investors they don’t own any subprime debt? In the great meltdown of 2008, they held hundreds of billions of dollars of worthless mortgages. That will happen again.

How can things really be “normal” in America, when state lotteries are giving winners an IOU instead of money? After years of struggling financially, Susan thought things were looking up when her boyfriend won $250,000 from the Illinois Lottery last month. But because Illinois lawmakers have not passed a budget, she got an IOU from the lottery instead.

States face a cumulative budget gap of $140 billion in the next year – they don’t have the money to guarantee these debts. Meanwhile last year, more than 187 tax-exempt issuers defaulted on $6.4 billion of securities – the most since 1992. These numbers are going to get bigger – a lot bigger. They are forced to balance their budget, so they just cut jobs.

The Federal Deposit Insurance Corp.’s (FDIC) troubled-bank watch list hit its highest level since 1993, though the pace is slowing. The FDIC added 53 banks to the watch list, bringing the total to 829. In 2015, FDIC closed 118 bankrupt banks. And while the FDIC added $5.5 billion to its deposit insurance fund, it still has a $15.2 billion deficit. How is that going to end?

How can things really be “normal” in America, when of the 26 million U.S. small businesses, over 80% have no sales, employees, profits or customers? The U.S. has fallen to 12th worldwide in terms of business startup activities (US Census Bureau, Business Dynamics Statistics). Since 2008, 70,000 more new businesses die than are created every year.

How can things really be “normal” in America, when you hear this, “U.S. financial imbalances are so severe and “irreversible that we must accept that at some future date there will be a run on the dollar Probably the kind of disorderly run that precipitates a global financial crisis?” That quote was by the late Nobel Prize-winning economist Dr. Paul Samuelson – Harvard doctorate, advisor to two U.S. presidents and author of the best-selling economics textbook of all time.

How can things really be “normal” in America, when 36 U.S. cities have filed for bankruptcy?

How can things really be “normal” in America, when together, the two huge mortgage companies (Fannie Mae and Freddie Mac) are sliding towards bankruptcy? These two own about $5 trillion in mortgages, almost half of the entire US housing industry. A collapse of either would send shock waves around the world. To prevent that, the government will do another bailout, using taxpayer money to pay for buying stocks in the companies. It could cost up to $1 trillion in taxpayer money (we don’t have). Today their share prices are under $3.

Where Will The Rescue Money Come From?

Even if all U.S. citizens were taxed 100% of their income… it would still not be enough to balance the Federal budget! We’d still have to borrow money, just to maintain the status quo.

When things fall apart, and the debt comes due. The Federal Reserve will come to the rescue (again) bailing out everyone. More debt will be created. And just like last time, all the corporate debt will become citizen debt. As a nation, we already owe more than we can ever pay back. Ever.

What This Means to You

The investments, retirements and life savings of millions will be at risk. This meltdown will change your business and your work. It will dramatically affect your savings accounts, investments, and retirement. Your normal way of life will end; your job, where you send you kids or grandkids to school, your retirement, how and where you shop… the way you protect your family and home. In short it will be far worse than the 2008 crisis, which was more of a limited and somewhat controlled “meltdown.”

When Will This Happen

“No one can estimate with any accuracy the risk of any crisis (credit, debt or financing) in the federal government, nor when any such crisis might occur.” (Committee on the Fiscal Future of the United States “Choosing the Nation’s Fiscal Future). Also, “There is no identifiable tipping point or debt relative to GDP indicating that a crisis is likely or imminent.” – (Congressional Budget Office).

But the government will not fix it itself. That is guaranteed.

Why?

Everyone who makes policy ensures that the laws do not apply to them. Everyone in Washington is getting rich off the status quo. They would never stop the high-speed gravy train. They will just find ways to shove the debt on to the middle class and poor.

What You Can Do

Take care of cash

A majority consumers say they’ll keep their savings at a local bank but more than half of those who keep their savings in cash plan to hide bills in a secret location at home (53%). (American Express Consumer Report).

These countries are in an increasing crisis: Greece, Spain, Portugal, and Brazil. We were in Greece a few weeks ago. In Greece, account holders still cannot withdraw more than 60 Euros a day, even if you’re a millionaire.

Do not ever, ever think that bank closing and money restrictions cannot happen in the United States. It can. In the last 100 years, the US government has shut down airlines, power, confiscated gold and shut down banks in an emergency.

Keep more money within easy access (out of a bank). How much? Think of a safe number, and then put a zero after it. In an emergency, cash is king.

Buy safe assets

That includes middle-income rental property, silver and gold coins, and farmland (everyone needs to eat).

Get Second and Third Incomes

This may be from book or music royalties, or an in-demand job or consulting role.

What ever you do, do something.  Be prepared. I am doing something and I am hoping you are too.

Be well, my friend.