Tim Geithner Spills the Beans, U.S. Debt Crisis Looms

As the European sovereign debt crisis quickly spreads to Spain (again), with the Spanish 10-year bond yield once again soaring past 6 percent (on its way to the magic red-alert yield of 7.5 percent), the half-life between sovereign debt bailouts appears to be diminishing.  Predictions of a four-year time window to prepare for the mother of all currency crises could turn out to be overly optimistic, with the latest rumblings that suggest the math won’t work a lot sooner than originally estimated by some economist and analysts focused on the problem.

So says U.S. Treasury Secretary Timothy Geithner, if lightening has indeed struck again.  Sign-up for my 100% FREE Alerts

From the weekend program, Meet the Press:

DAVID GREGORY: If we don’t deal with these debt problems we are going to be Greece in two years”

GEITHNER: “No risk of that.”

A year earlier, when Geithner was asked about scuttlebutt brewing of an impending downgrade of U.S. debt, he assured the world that there is “no risk of that” either.  Weeks later, rating agency Standard & Poor’s rocked the financial markets with an announcement of a debt downgrade of the world’s remaining superpower.

Geithner, once afforded the traditional benefit of a reasonable measure of public trust, lost all credibility on the day of the S&P announcement, as a case made that the highest-ranking Treasury ‘official’ wasn’t privy to an impending historic milestone of such gravity was never attempted by anyone in the Obama administration.

Could Geithner have slipped up again?  Does he know the dollar’s days number less than two years’ worth?

Though a stretch, as it may appear, Geithner’s otherwise carefully measured responses during his tenure as Treasury Secretary have at times been marked by fits of overplayed knee-jerk protests—’me thinks’.  As in the case of S&P, it’s become clear that Geithner may exhibit a ‘tell’ under certain moments of duress.

If U.S. debt and current account deficits weren’t so bizarrely high, coupled with a likelihood of GDP contraction in the U.S. next year coming more into focus; and a growing repulsion by overseas creditors to accumulate more debt, investors could reasonably accept Geithner’s word on the subject of solvency.

But one economist, in particular, is quite sure that 2014 will be the end of the line of 40-years-plus of deficit spending without tears.

“We’re at a scary point in time” in U.S. fiscal history, economist John Williams of ShadowStats.com told Financial Sense Newshour in March.  “Our [U.S.] circumstances are a lot worse than the European situation, in aggregate.  The European situation will work its way out one way or another, and the markets will focus back on the U.S.  I cannot see anyone wanting to buy U.S. Treasuries.”

Williams went on to say that as soon as there is any relief in the crisis in Europe, the bond vigilantes will begin to take notice of the overwhelming fiscal problems confronting the U.S. and its Greece-like characteristics.  For now, he said, the dollar is less ugly than the euro, but that won’t last very much longer.

“The U.S. is the elephant in the bathtub here . . . the European crisis is more like the little yellow rubber duck floating in the tub,” Williams added.  “There will come a time when the markets will begin focusing back on the dollar.”

And that time could be a lot sooner than many in Washington care to admit, according to Williams.  “I expect it to all come to a head in 2014.”  There will be hyperinflation, he said.  It’s only a matter of time and not much can be done about it other than drastic cuts to entitlements and accept a deflationary collapse.  And Williams isn’t giving that scenario much chance.  Sign-up for my 100% FREE Alerts

QE3 “Coming back on in Spades,” says Jim Sinclair

Bullion expert Jim Sinclair has no doubt that Bernanke and Fed will come in with QE3.  Languishing stocks, downgrading GDP projections, and record wide credit spreads in Europe evolved from investor expectations that the ECB and the Fed are done printing money, said Sinclair.

The former adviser to the billionaire Hunt brothers of Texas said the Fed has no choice but to embark on QE3, or whatever it will be called when an announcement is finally made.  In the meantime, investors taking the Fed at its word could find themselves in a whipsaw trade.

“You’ve got to continue what you’ve been doing,” warned Sinclair.  “The slightest indication that you wouldn’t continue has brought this crisis on.  But you see QE is the kind of thing that puts some sort of balm on the sore of fear.  Whether they call it QE or not, it’s coming back on in spades.”

As the Fed’s so-called QE2 comes to an end on June 30, investors have voted no confidence in Bernanke’s plan to end the easy money policies instituted in April 2009.  After peaking at a high of 12,876 on May 2, the Dow shed nearly 1,000 points in anticipation of a shut down of cash flowing through its 18-primary dealer network.

Beyond the monetary realities confronting the Fed, Sinclair is betting that the presidential election cycle adds to his conviction of a Fed reflation announcement this summer.  The bond king, Bill Gross of PIMCO, agrees, and suggested on his Twitter account that Bernanke is likely to plant a hint of a QE3 plan in August during the Fed’s annual symposium in Jackson Hole, Wyoming.

“Next Jackson Hole in August will likely hint at QE3/interest rate caps,” Gross tweeted.

The timing of an announcement (or hint) in August would line up nicely to a September kickoff to the 2012 presidential race.  And after a CNN poll released Jun. 8, indicating that the electorate is losing confidence in the Obama recovery, a nervous White House will sure be pressuring the Fed to do something to keep the house of cards up a little longer.

From CNN:

“CNN Poll: Obama approval rating drops as fears of depression rise”

“President Barack Obama’s overall approval rating has dropped below 50% as a growing number of Americans worry that the U.S. is likely to slip into another Great Depression within the next 12 months,” according to CNN.

Confidence in the nation’s leaders to solve the financial crisis is paramount to the Fed’s goal of debasing the U.S. dollar in an orderly manner.  Without the confidence that the Fed will continue supporting asset prices (stocks), the economy and the dollar move into what George Soros calls the “Act II” of the global financial crisis.  No official (either governmental or quasi-governmental) wants to end up at the helm when the system collapses.

“If people lose confidence, it isn’t the country that suffers, it’s the currency of the country that suffers,” Sinclair explains.  “This whole thing is put together with mirrors, smoke and spit.  You can’t afford to have any kind of financial crisis or all of the old wounds will open up and hemorrhage because of the investment that’s already been made, you’re stuck in a bad investment, the dollar.  All currencies are going into oblivion and that’s why they (investors) are buying gold.”

With the crisis in Europe and the looming problems in the United States coming to a head all over again, Sinclair told Eric King of King World News earlier in the week, “You’re out of your mind if you sell gold assets now.”

Lehman-like Meltdown Looms Large

Greece may be a small European nation with small financial problems when compared to a backdrop of a quadrillion dollars of accumulated global debt (according to the Bank of International Settlements), but Greece has also become the litmus test for the resolve of political leaders to fix the problem with the euro and its dependent counter-parties worldwide.

As the pressure from the IMF on the Greek president intensifies while the crowds on the streets of Athens grow in size and violence, traders have been monitoring sovereign debt interest rates for signs of contagion amid the crisis in Greece.

Signs have appeared in the European bond market, whereas the yields on Greek, Irish and Portuguese 10-year sovereign debt have all surpassed the 10% print, with all three moving higher every week to levels which are now higher than the lofty rates of March 2010 when the Greek crisis emerged in earnest.

What everyone seems to fear is another Lehman-like meltdown.  And for good reasons, too.  But this time crisis could be much worse.  A major financial institution failing is one thing.  It’s together another story if the ones doing the bailing out need bailing out.  And as the crisis deepens, the loan amounts grow while the number of pockets left to guarantee the additional debt grows smaller and smaller.

Germany and France are financial backbones of the EU, and both countries’ politicians feel pressure from those determined to keep the euro together as well as from constituents who want nothing to do with bailing out “lazy” Greeks.

Asked if the markets need to fear a Greek debt default, Belgian finance minister Didier Reynders told Belgium’s RTL Radio, “We can indeed fear it because that’s what we experienced in 2008.”

“Remember — the collapse of an American bank, Lehman Brothers, Reynders continued.  “Everyone said ‘OK, a bank’s gone under.’ But that triggered a collapse in confidence right through the financial sector and banks could no longer borrow money amongst themselves. And we saw what that meant.”

Reynders warned of a repeat of another contagion if Greece, the EU, and the IMF cannot come to a deal on tranche number two of the original Greek debt restructuring agreement reached last year—which Greece had failed to achieve key financial metrics stipulated within the initial terms for a second tranche.

“If we turn our backs on Greece, it won’t be able to repay its debts to banks and therefore savers in our country (and savers, globally),” he said.  “The domino effect will begin and there will be consequences in Ireland, in Portugal and perhaps even here (in Belgium).

A collapse of Greece and the contagion that is sure to follow could happen “tomorrow,” bullion expert Jim Sinclair told Eric King of King World News.

“It’s just that bad . . . this thing can blow at any time,” Sinclair continued.  “Wiemar Republic had no more problems than we have right now.”

The saga in Europe continues next week as German Chancellor Angela Merkel and French President Nicolas Sarkozy meet today before they head off to an EU summit scheduled for next week.  Merkel wants one-third of the bailout package to come from banks, while Sarkozy’s French banks seeks a resolution as well after downgrades of French banks were issued by credit rating agencies this week.

Marc Faber: Get your Assets out of the U.S.

In article just published by the Insider Monkey, Marc Faber emphasized that investors should hold investments outside the jurisdiction of the United States, focusing his ire upon the U.S. President as a contributing reason for his advice.

The outspoken Swiss-born editor and publisher of the Gloom Boom Doom report told the Insider Monkey during the Ira Sohn Conference that he believes U.S. President Barrack Obama “is by far the worst president in the U.S. has had,” and is “vote-buying through handing out money and through increased transfer payments.”

Faber also blames President Obama for escalating conflicts beyond the burdensome Bush-era wars in Iraq and Afghanistan to now include Lybia, which only further blows out the already horrendous federal budget deficit.

Tallied on a cash accounting basis, the U.S. budget deficit looks as bad as any of the European PIIGS, but the U.S., unlike the UK, has no meaningful plans to stop the U.S. budget hemorrhaging.  But, the fiscal picture is a lot worse than the projected $1.6 trillion deficit slated for fiscal 2012.  If expenses were reported using the GAAP accrual standard that corporations must report to Wall Street, the U.S. budget deficit would show an excess of $4 trillion per year, according to economist John Williams at Shadowstats.com.

Four trillion dollars. That calculates to nearly 28% of GDP, more than twice federal tax receipts, and nearly as large as the entire Chinese economy!

Even with that bleak fiscal situation facing America, Faber doesn’t expect any changes coming in the form of fiscal responsibility—in whichever form it may take—anytime soon because of domestic U.S. politics.  In fact, in previous interviews he has stated that the U.S. government will most likely find ways of confiscating wealth through legislation over time from the so-called rich (middle class) to cut the deficit.  But those drastic Leninist-like solution that Faber suggests may not come until after Obama is re-elected to a second term.

“I think it is quite likely that he [Obama] will be reelected,” said Faber.  “But that is the problem of the U.S. In maximum 2-4 years, he will be gone, but the big people who vote in the U.S. will still be there. And I think that in today’s presentations many observers have expressed a view that it’s very difficult to cut entitlements. In other words, social security, Medicare, and Medicaid because nobody wants to do that.”

As a result of budgetary impasses, the same old kicking the can down the road legislative maneuvers will lead to a dollar devaluation—the easy way out taken by governments throughout thousands of years of economic history—until, of course, a modern day bond market crisis ensues in U.S. Treasuries—which is a long-held prediction of Faber’s.

“Nobody wants to accept that [budget cuts] because everybody lives from that,” said Faber, “so essentially the fiscal deficit will stay very large, and it will mean that over time the U.S. dollar will lose its purchasing power, more money will have to be printed, more quantity of easy measures will have to take place, and so forth.”

In the present global economic and financial environment, Faber likes equities and real estate in promising countries as well as precious metals.

“My advice would be to diversify heavily and have money in other jurisdictions than the United States, in other assets than U.S. assets,” Faber warned. “In say Asia, Asian equities, Asian real estate. And I would have some money in custody outside the USA, in Australia or in Singapore or in Hong Kong or in Switzerland and not have all my assets here in the United States.”

Peter Schiff: We are on the Precipice

In his typical candid style, Peter Schiff said he believes the U.S. is again on the brink of another banking collapse—this time the crisis will be worse than the scary swan dive of 2009.

“The stimulus is wearing off and the much anticipated hangover is starting to set in.  The economy is now in worse shape because the government stimulated it,” Schiff told King World New’s Eric King.  “The stimulus merely interfered with the corrective process.  So instead of resolving some of our economic imbalances, the government has made them worse.  Now we are on the precipice of a bigger economic decline than the one the stimulus interrupted back in 2009.”

The irascible president of Europacific Capital, Schiff (known for his no-nonsense responses to interviewer questions), is well-liked by investors who cherish forthrightness amid the legion of perma bulls paraded on financial television programs throughout both bull and bear markets.  The stock bulls of 2000 and 2008 as well as the housing bulls of 2006 still regularly appear on those financial programs.

Schiff has stated many times that he wonders why those who have gotten it consistently wrong are still asked to appear on television in front of a mass audience, while on the other hand, he, who’s gotten it right, is periodically browbeaten for their “fear mongering.”

Schiff, like many independent investors, doesn’t trust the Federal Reserve and the Treasury to come clean on articulating the core problematic issues surrounding the reasons for the precipitous decline of the U.S. dollar against nearly all Forex currencies, commodities and precious metals. Schiff has not only offered blunt assessments when asked about the dollar, he’s been spot on the mark with his predictions, too, which in turn has steadily increased the size of his flock of Schiff disciples.

Those fortunate enough to have followed Schiff’s commentary prior to the collapse of Bear Strearns, Lehman (LEHMQ), AIG (AIG), Fannie and Freddie (FNMA, FMMC)—or have read his book, Crash Proof: How to Profit From the Coming Economic Collapse, weren’t taken by surprise by the dramatic swings and crashes that followed the Bear Stearns fiasco.

So what’s Schiff saying about the U.S. dollar at this juncture?

He told Eric King, Monday, “It’s going lower, last Friday the U.S. dollar closed at a new low against the Swiss Franc.  You need a $1.18 to buy a single Swiss Franc.  I think you are going to see much more of the safe haven money going into other currencies or precious metals and the dollar is going to lose that bid, especially if the Fed launches QE3.”

Schiff continued, “… If you look at the economic relapse that’s going on right now, look at Friday’s abysmal job numbers, look at the housing numbers, understand that all of this is taking place with record monetary and fiscal stimulus.  What happens if we remove those supports?”

Schiff told KWN he believes the Fed’s actions to bailout the banking system throughout the years 2009 and 2010 have made the initial problem of highly leveraged banks vulnerable to a downturn in the economy more acute, so the next crisis will result in a bigger problem for the Fed and less options to cope with bank and broker/dealer insolvencies.

“I think it’s a certainty,” said Schiff in his response to KWN’s question on the chances of another banking system meltdown.  “The financial crisis in our future is bigger than the financial crisis in our past.  We are more vulnerable as a nation, we are more heavily leveraged now than we have been at any other time.  We are more vulnerable to an increase in interest rates or a run on the dollar and either of things or both of things could happen soon.”

Just as Schiff predicted before the crisis began in 2008 that the Fed would fight a U.S. economic collapse with massive money printing, Fed chairman Ben Bernanke will print again if the U.S. economy cannot grow on its own, Schiff warned.

“It [the Fed’s balance sheet] just hit a record size on Friday.  It’s $2.77 trillion, almost $2.8 trillion,” he said.  “We’re approaching a $3 trillion balance sheet, but the thing is in order for the Fed to keep this phony economy on life support that balance sheet has to continue to grow.”

He continued, “Once that happens we can build a lasting and sustainable period of prosperity.  The one we have now is doomed, it’s an abomination, it can’t survive.  It depends on ever and ever greater injections of credit so that we can keep on borrowing to consume and import.  If we try to do that indefinitely we will destroy the economy completely because we will destroy the currency completely.”

Schiff predicted gold’s ascent well before the debt crisis became apparent to everyone in 2008, and he again expects more bullish moves in the monetary metals in the months and years to come as the beginning of “Act II” of the global crisis—as George Soros described the volatile financial markets in March 2010 (during the Greece sovereign debt crisis)—plays itself out around the globe.

“The more mistakes the Fed makes, the more stimulus the government pours into the economy, the brighter gold and silver are going to shine.  Since I am optimistic that the government will keep doing the wrong thing, I’m optimistic that gold and silver prices will keep rising.”

Jim Rogers says to Expect Currency Crises

Jim Rogers, Quantum Fund founder and former partner with George Soros, told Russia Today he forecasts turmoil in the currency market within two years.

“Well, I would expect to see more crises in the currency market, maybe as soon as this fall, or certainly by the fall 2012-13,” Rogers said.  “And you’re going to see serious turmoil in the currency market, which is going to force the world and force America to do something about it.”

The legendary 68-year-old commodities trader doesn’t foresee a smooth end to the U.S. dollar as the premiere reserve currency, noting in previous interviews that Congress’ inaction to cut spending or raise taxes to stem the tide of $1.6 trillion annual budget deficits is evidence of the policy of kicking the fiscal can down the road.

“But that’s the way it’s going to wind up,” Rogers said of the disastrous course charted for the U.S. dollar, “because nobody is taking any serious action except talking about it.”

When asked why he thinks no meaningful action has been taken to reign in federal spending, especially this fiscal year, Rogers began to lay blame on the American press as a contributing factor.

“I am stunned by how little there seems to be in the American press about it,” Rogers opined.  “The American press seems to be more worried about wish TV star is divorcing which TV star more than anything else.”

Moving onto one of the root causes of runaway federal spending, the Pentagon, the American turned Singaporean resident faults U.S. wars in three foreign countries—presumably to mean the wars in Iraq, Afghanistan and Libya—as an example of America’s lack of resolve on the fiscal front.

“We have wars going on in three different countries right now. We’d like to have wars in four or five more if we could figure out a way to do it,” Rogers said.  “We’ve got troops stationed in 120 countries around the world that aren’t doing anything except making enemies for us and costing us a staggering amount of money.  This is all going to come to an end.”

Monetary history is replete with counts of superpowers falling from power through a steady debauching of their nations’ currencies, with France’s franc and Great Britain’s sterling during the 18th and 19th centuries, respectively, as the most recent past examples of what happens to countries that engage in overreaching foreign entanglements.

“Unfortunately, no country that’s gotten itself into this kind of situation gets out of the problem without a crisis or a semi-crisis.  We’re rapidly, more and more rapidly approaching a crisis that’s going to be bad for all of us,” he said.

“2008 was bad,” Rogers concluded.  “But wait until the next time around, it’s going to be even worse.”