Monday, May 16, 2011

Debt Ceiling Breached - Result? Seize Pension Funds

We stated all the way back  in our 2010 predictions -
Banks will start to claim ownership of 401k and pension funds (private and public) and begin "looting" them. (Read as taking your cash and continue to "invest" as they double-double down) and the government moves to “protect” them by seizing them. I would assume they would be placed in a new 'secure conservatorship'.
The news has come out that the United States has breached its debt ceiling -
The U.S. government is expected to hit the $14.294 trillion debt ceiling Monday, setting in motion an uncertain, 11-week political scramble to avoid a default.
Of course, what is the natural response? -
The Treasury Department plans to announce Monday it will stop issuing and reinvesting government securities in certain government pension plans, part of a series of steps designed to delay a default until Aug. 2.
The Real Effect
What do I think will happen? Simple. I believe this is a test run designed to frighten people. They will seize "limited" funds claiming they have the legal right to do so. (Whether they do or do not.) They will drag out the 11 week Congressional process to "avoid default" all the while pretending that we are in trouble that we are not actually in. (If we do not pay our bills, then we will default. However, we could balance the budget now and not default. Borrowing more money from a Chinese populace that isn't willing to lend more just exacerbates the situation and kicks the can down the road. Throwing more logs on the fire will succeed, in burning more logs.)

Next, they will institute temporary measures and will scream of a "Crisis being averted!" and all will hail the leaders as being courageous and great political statesmen. This will avoid further issues for another time period (6 months?), but once again will only kick the can down the road. Meanwhile, this will create the public perception that if the government is allowed to seize private property, they can Fix the problem! (This technique will then be seized upon and copied ad infinitum around the country on lower levels.)

But, quietly in the background, investment firms will begin to downgrade the US debt, resulting in a climbing interest rate and depreciating dollar. That will be where the real pain lies. The result will be a panic flight out of the dollar and into other asset classes.

When austerity reality comes blaring through sometime in late 2011 to mid-2012, the perception of the public will continue to be that the government just needs more tools to fix the problem, if only those blasted patriots would give them to them. This will cause resentment to build on the part of some sheep orientated public towards some of those that perceive the correct problem. This resentment will be seized upon and used to conduct personal attacks on those who wish to actually solve the problem resulting in a despotic slide into semi-overt tyranny in the name of liberty and prosperity.

But wait! What was that, Rahm is the mayor of Chicago now???

Update: Just to rub salt in that wound -
In 2008 we hit a big brick wall where the inflation naturally gave was to deflation to unwind extreme debt positions held by institutions. (The 2008 crisis) The government's response to this wall, was to substitute a larger and larger can with a boulder. (Increased government debt)

To explain further, the government is going to have to service this new debt (boulder) with new debt at either a higher amount of debt borrowed or higher rate . Yet, the market is saturated with debt both private and public viciously competing for whatever available liquidity is left. (The wall) In order to succeed in averting further crisis, the boulder needs to be kicked through the wall.

Is this possible? As long as there are gullible willing senior citizens clients to buy ever more debt, the boulder can be exchanged for a bigger one and successfully kicked through the wall.

At some point though, demand for U.S. debt will cease to an extent (2011?) and the bills will come due. At this point the government is going to have to figure out a new trick to take care of the debt fiasco. If that trick is money printing, (hyper-inflation) lookout as everything you think you own will suddenly belong to some man down the road named Chen.

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