The Greatest Economic Disaster in Recorded History

Posted: Apr 08, 2009 12:01 AM
The Greatest Economic Disaster in Recorded History

It's going to be a real disaster...

The current administration's economic strategy will create an unmitigated disaster – not only our country's worst financial calamity, but the greatest economic disaster in recorded history.

I first warned my readers about what was happening last December, in a letter titled The End of America:

The coming great inflation will destroy America's economic leadership. It will lead – eventually – to the return of settling international obligations in gold instead of paper dollars. And this will happen much faster than anyone expects.

By the time Obama leaves office, you will not be able to exchange dollars for any sound currency in the world without permission from the U.S. government. The price of gold will be well over $2,500 per ounce. Most importantly, commodities will no longer be priced in dollars either, but instead in the currencies of the leading producer. Americans haven't experienced anything like this since the Great Depression.

Since I wrote that first warning, I have become much more concerned and much more afraid. What the president has done is actually worse – much worse – than even the dire scenario I had envisioned. Not only is the administration planning on enormous deficit spending this year, but the current plan calls for increasing deficit spending for the next decade – spending that will more than double our entire national debt during his presidency.

At the same time, Obama plans to extend federal control over vast and critical sections of our economy, promulgating new and extensive rules and taxes over both the power industry and the health care business. These are probably the two most important engines of our economic growth. Producing huge amounts of inflation while severely restricting the most productive sectors of our economy is a recipe for catastrophe.

The Congressional Budget Office produced the following graphic, which compares the deficits of the 1980s and 1990s to Obama's current and future budgets. Assuming he remains in power over the next eight years and assuming these deficits aren't actually much larger (which almost always happens), the Congressional Budget office estimates the president's budget will add more than $10 trillion to the total federal debt by 2019 – approximately as much total debt as was outstanding at the beginning of 2007.

Obama plans to borrow more money over the next eight years than all of the other presidents – combined.

It's very hard to put this in perspective. The numbers have become so large they're almost meaningless. "Twenty trillion" has 13 zeros: $20,000,000,000,000. Nobody can think about a number that large. But consider this... In 1980, the entire federal debt totaled $930 million. Assuming we're paying 5% on our debt in 2019, we will spend more money on interest than our entire national debt of 1980.

Keep in mind these figures don't include any of the off-budget items, like the obligations of Fannie Mae and Freddie Mac – both of which are insolvent. That's roughly $2 trillion. They don't include any of the unfunded future liabilities of the U.S. government – the estimated $40 trillion net present value of the entitlement programs. And perhaps most importantly, they don't cover any of the pension guarantees the U.S. government supports via the Pension Benefit Guarantee Corp. (PBGC) – one of the dozens of fraudulent insurance schemes that keep the fiction of the government's accounting alive.

PBGC – like the FDIC – is quick to tell anyone who looks at its website that it doesn't take any taxpayer money. And right now, it doesn't. But when General Motors goes bankrupt, how will PBGC finance the huge deficits of the car company's pension program, which amounts to more than $50 billion? What about when local governments start going broke because they can't afford to pay the pension guarantees they made to their cops and firefighters, who retire with full pay in their mid-40s? Right now, PBGC's total assets are something around $60 billion – and some of that was invested in the stock market.

It's impossible to know the government's real liabilities right now, thanks to all of the off-balance sheet items and quasi-governmental insurance groups. But you can make a rough estimate...

Let's say $20 trillion for the on-balance sheet spending. Another roughly $50 trillion is coming for unfunded entitlement programs, and probably another $10 trillion for all of the various guarantees to PBGC, FDIC, and Fannie/Freddie. That gets us to something around $80 trillion by 2019 – and my estimate is likely too conservative by a large percentage because it assumes tax revenues can grow substantially.

There are roughly 100 million families in America. How many families do you know can afford to add another $80,000 in debt to their balance sheets? That's how much money we'll owe, per family, by 2019 – and that's just for the federal government's debt. That doesn't include state or local governments, and it doesn't include any personal or corporate debt.

This is going to be a huge problem because no one will want to pay the money back – ever. And it can't be financed forever. The poor will blame the rich. The rich will leave and take their wealth offshore. And absolute chaos will follow. The dollar will be completely destroyed.

It's critical for you to take precautions now, while you still can. And tomorrow, I'll explain what every individual investor can do to protect his wealth and his family.

Good investing,

Porter Stansberry

P.S. I realize it's paradoxical. But the coming crisis will make lots of people rich. It's not hard to generate a paper fortune in a huge inflation…

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