Budget Buster: Pentagon Unable to Account for Trillions in Spending

They Don't Even Know How Much US Government Debt "We" Owe

How Much US Government Debt Do We Owe?

The United States military budget accounts for over 40% of the world’s annual military expenditures and, at around $700 billion per year, more than 20% of the federal budget. The Federal government wants to curb that spending as part of deficit reduction.

Last week’s deficit deal calls for up to $350 billion in cuts over the next decade on the departments of Defense, State, Homeland Security and Veterans Affairs, among others. And, if the debt “super-committee” fails to reach a deal on $1.2 trillion in budget cuts, it will automatically trigger an additional $500 billion in cuts over the next decade.

Cutting in a bureaucracy as large and convoluted as the Pentagon is no easy task, but Stephen Glain author of State vs. Defense: The Battle to Define America’s Empire says there are three issues at the heart of their spending problem.

Growing obligations: Much like other public sector groups, the Pentagon has growing liabilities coming from pension and medical insurance plans. It’s “very much a microcosm” of the problems facing the country, says Glain. The Pentagon’s liability for civilian employees is currently $60 billion and the “rate of growth is enormous,” says Glain. The figure was $15 billion a decade ago.

Accounting Problems: You think Enron’s accounting was troubled? The Pentagon has very little accountability when it comes to its books. Since first submitting financial accounts in 1991, the Pentagon “has been unable to account for trillions of dollars, well over almost $10 trillion by my own account,” says Glain. Conspiracy theorists suggest this is CIA money being laundered through the Pentagon, a claim Glain has some sympathy for.

Ending the Wars: Ending operations in Iraq and Afghanistan will instantly save the defense department $180 billion per year. According to Joseph Stiglitz the wars have cost the government $3 trillion and counting.

7 Good Reasons Why The Dollar Will Fall and Gold Rise

It’s time to provide some fundamental reasons as to why the dollar is in trouble long term and why the precious metals sector and the commodities sector stands to benefit from these dollar woes.

  1. The US has a massive current account deficit and it only seems to be getting bigger. Economists may play with the numbers by stating that one month is less than the other and so forth, but the trend is up. It now comes close to 6% of our total economic activity.
  2. The US needs to attract a whopping 1.8 billion dollars a day to compensate for the current account gap. This trend is simply unsustainable.
  3. While Government officials talk big about a strong dollar policy, they actually favour a weak dollar. This serves two purposes, it helps increase exports and it allows the government to pay its debt with lower valued dollars. As long as the Government continues to borrow at these mind boggling rates, it is going to unofficially favour a weak dollar.
  4. By inflating the money supply, the government is imposing a nefarious silent killer tax on the masses. The only way to hedge against this outright theft is to hedge yourself by getting into hard assets (precious metals, lumber, oil, etc).
  5. Our national debt is 12.4 trillion and increasing. However, this does not take into consideration all our unfunded liabilities such as Social Security and Medicare. If these are combined, the debt levels soar to well unimaginable levels.
  6. 44 states are facing budget shortfalls. California is leading the way as it is expected to spend 50% more than it will generate this year. Now that is a really scary thought. Since 2007 US states have collectively spent 300 billion more than they have generated. These deficits mean higher taxes and so far 33 states have raised taxes, but collections have plummeted to their worst levels in 46 years; you cannot squeeze water out of a rock. No jobs means no revenues but states are selling new bonds at record rates to raise funds. It’s a recipe for long term disaster.
  7. Eventually the Fed is going to have to raise rates to continue attracting the huge amounts of money it needs to function. Overseas investors are going to start demanding higher rates. Higher rates will kill this fragile economy. Precious metals thrive in a high interest rate environment. From a long term perspective the bull market in precious metals has only just begun.
About the author: Sol Palha

A Big Crisis is Coming with America’s Weak Dollar Policy

The Dollar Index hit yet another 14-month low early Monday after a Chinese central bank official urged the PRC to diversify its reserves into more euro and yen. A stronger-than-expected GDP report in South Korea also put pressure on the greenback as traders expect other central banks to follow Australia’s lead and raise rates while the Fed stands pat.”The dollar is a significant concern,” says Leo Tilman, president of L.M. Tilman & Co. and author of Financial Darwinism.” You can envision all sorts of crises scenarios where rest of the world stops buying U.S. assets because of the dollar [and] you have higher interest rates and all sorts of recessionary pressures.”With the U.S. Treasury set to auction a record $123 billion of notes this week and the Fed’s $300 billion Treasury purchase program set to expire, those risks should not be taken lightly. Of course, such concerns have been circulating for a while and have not come to fruition, to date.It’s “very difficult to say” when foreigners stop talking about diversifying away from the dollar and take more concerted action, Tilman admits. But “it’s hard to imagine a lot of foreign buyers are going to tolerate further declines in the dollar. “Tilman, whose firm advises institutions on strategic risk management, says the day of reckoning is likely to come within the next year.”A lot depends on how sustainable the recovery in the U.S. is: If the Fed has an ability to start hiking IR, that will mitigate some of the pressures on the dollar,” he says. “But if we see rest of the world starts hiking rates and the Fed lagging behind because the U.S. economy is so fragile, that will be the breaking point. We’re taking the second or third quarter of next year.”

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The Economy Is Dying – It Will Be a Bloodbath; Says, Christopher Whalen

Stocks rallied to start the week thanks to a better-than-expected ISM services sector report and a Goldman Sachs upgrade of big banks, including Wells Fargo, Comerica and Capital One.But all is not right in either the economy or the banking sector, according to Christopher Whalen, managing director at Institutional Risk Analytics. In fact, Whalen says most observers are drawing the wrong economic conclusions from the stock market’s robust rally.”Why is liquidity going into the financial sector? It’s because the real economy is dying [and] everyone is fleeing into the stocks and bonds because they’re liquid at the moment,” Whalen says. “That’s not a good sign.”The banking sector’s assets shrunk by about $300 billion per quarter in the first half of 2009, a sign of banks hoarding cash in anticipation of additional future losses, according to Whalen. “The real economy is shrinking because of a lack of credit.”The shrinkage will continue into 2010, Whalen predicts, suggesting the banking sector hasn’t yet seen the peak in loan losses. Institutional Risk Analytics forecasts the FDIC will ultimately need $300 billion to $400 billion to recoup losses to its bank insurance fund. (In other words, the $45 billion the FDIC sought to raise last week by asking banks to prepay fees is just a drop in the bucket.)”Investors should think about this because the fourth quarter in the banking industry is going to be a bloodbath,” says Whalen, who believes smaller and regional banks like Hudson City Bancorp may come into favor vs. larger peers, which have dramatically outperformed since the March lows.”When you see the markets rallying when the real economy is shrinking that tells you this [recovery] is not going to be very enduring,” Whalen says.In this regard, Whalen finds himself in philosophical agreement with Nouriel Roubini, George Soros and Meredith Whitney, among other “prophets of the apocalypse” who’ve once again been raising red flags in recent days.

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How Long Can We Print Money And Increase Our Debt

Stocks and commodities are on the rise today as the dollar falls. It’s nothing new or surprising.What is newsworthy is a report from the British newspaper The Independent claiming the dollar’s days might be numbered in the oil trading pits.The story says “secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.” The details on how and what would replace the dollar, according to the report, are still in the works.Sources aren’t named and Saudi officials, among others, are quickly denied the veracity of the report. However, it appears some investors are buying the story based on today’s move in gold prices.As Henry and Aaron discuss in this clip, questioning the U.S. dollar as the global reserve currency makes sense. How long can we print money and increase our debt before other global markets take action? And, how will the Fed manage its exit strategy without causing hyper-inflation?

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Jim Rogers says “The Dollar is Doomed”

Jim Rogers says “The Dollar is Doomed”

Jim Rogers – Buy Commodities, Short the Dollar and Long Bond

by John Kimelman
Monday, April 20, 2009
provided by

The legendary investor is sticking for now with the two Cs: China and commodities.

Well, bank executives and investors can breathe a sigh of relief: Jim Rogers has covered the short positions on financial stocks he put in place ahead of last year’s massive meltdown.

But just because this influential investor isn’t betting that big banks will fall much further doesn’t mean he’s confident they will stage a lasting rally either. He feels similarly about U.S. stocks in general.

“I am skeptical about the rally, and the world economy for the next year or two or three,” he says. “But if stocks go down, I can make money with commodities.”

Rogers, now 66, gained fame as George Soros’ hedge-fund partner in the 1970s and 1980s. After retiring from professional money manager in his late 30s, the Alabama native tooled around Europe, Asia, Africa, and Latin America visiting emerging markets, one by one. His resulting book, Investment Biker, helped to popularize emerging market investing at the outset of a bull market for the sector.

He also helped to popularize commodity investing, which for decades was the province of niche investors. In the 1990s, he developed commodity indexes based on futures contracts that in recent years have been turned into exchange-traded funds available to all investors. His 2004 book, Hot Commodities, came ahead of a surge prices for energy, metals, and agriculture.

Since its inception in July 1998, the Rogers International Commodities Index has gained 158%, while the S&P 500 has fallen 23%. And that gain for the commodities index comes despite the fact that it’s lost more than half of its value since last July. At these levels, Rogers has been a buyer.

These days, Rogers, now 66, is sticking close to home in Singapore with his wife, Paige Parker, and two small daughters. He’s about to release his latest book, A Gift to My Children: A Father’s Lessons for Life and Investing (Random House), in which he encourages other people’s children to travel widely and learn Mandarin so they can reap the rewards of China’s economic boom.

Recently, Rogers talked to Barrons.com by phone from his Singapore home.

Q: When you last did a lengthy interview with Barron’s magazine a year ago (see “Light Years Ahead of the Crowd,” April 14, 2008) you were lightening up on emerging markets investments. Well, you called that one right. But now that many of those markets have fallen from their highs of recent years, are you more optimistic?

A: No. I’ve sold all emerging markets stock except the ones in China. I bought more Chinese shares in October and November during the panic, but I have not bought China or any other stock markets including the U.S. since then. I’m not buying anything in China right now because the Chinese market ran up maybe 50% since last November. It’s been the strongest market in the world in the past six months and I don’t like jumping into something that has been that run up. Still, I’m not thinking of selling these stocks either. I think if it goes down I’ll buy more. I think you will find that it’s the single strongest market in the world since last fall.

Q: In your latest book, you talk of China as the great investment opportunity of the 21st century, just as the U.S. was in the 20th century. What percentage of a typical American investor’s portfolio should be in China?

A: If they can’t even find China on a map, I don’t think they should have anything in China. They should know something about China before they invest there. If they have the same convictions that I do then they should probably have a lot. If you asked me that question in 1909 about the U.S. stock market, I would have said to put 100% of your money in the U.S.

Q: Might it make sense to have a greater weighting in a diversified mix of Chinese stocks than in U.S. stocks?

A: Well yes. Just as in 1909, if you were German or Chinese, you should have had the largest percentage of your money in the United States. The idea of investing is to make money, not to have some sort of political agenda.

Q: That being said, you currently think Chinese stocks are bid-up now, so you’re not buying at these levels. So what have you been buying lately?

A: I have been buying commodities through the Rogers commodity indexes I developed because my lawyer won’t let me buy individual commodities. I recently bought the all four Rogers indexes — the ElementsRogers International Commodities Index (ticker: RJI) as well as the three specialty indexes, the International Metals (RJZ), the International Energy (RJN), and the International Agriculture (RJA.) That’s how I invest in commodities and that’s what I bought last week. I have been buying these shares since last fall and up to last week.

Q: Though you got out of emerging markets last year before they fell hard, you seemed be caught by surprise by the fall-off in commodity prices last year. Is that right?

A: Yes, I was surprised. I did not expect commodities to go down that much and in retrospect it was a period of forced liquidation for many (professional) investors. You know AIG went bankrupt, which was huge in commodities. Lehman Brothers was big in commodities.

But at least I was shorting the investment banks at the time and other financials such as Citigroup and Fannie Mae. So I was hedged by being long commodities and short the other things such as financials and as you know most of them were down from 80% to 100%, so I more than made up on my shorts than I lost on my longs. So thank God for (the stock decline in) Citigroup and thank God (for the decline) in Fannie Mae.

Q: Now despite the recent stock-market rally that started in March, many U.S. stocks are trading well off their 2007 highs. How come you see no value to this market?

A: I am not buying U.S. companies mainly because I think we may have seen a bottom but I don’t think we have seen the bottom. I am skeptical about the rally, the world economy for the next year or two or three. But if stocks go down, I can make money with commodities. In the 1970s, commodities went through the roof even though stocks were a disaster. In the 1930s, commodities rallied first and went up the most long before stocks pulled it together.

Q: Can you summarize the reasons for your bullishness about commodities?

A: It depends on the supply and demand. And we have had a dearth of supply. Nobody has invested in productive capacity for 25 or 30 years now. The inventories of food are the lowest they have been in 50 years and you have a shortage of farmers even right now because most farmers are old men because it has been such a horrible business for 30 years. And as for metals, nobody can get a loan to open a mine as you know. Who is going to give you money to open a zinc mine? It takes at least 10 years to open a mine so it’s going to be 15 or 20 years before we see new mines come on. Nobody has been opening mines for 30 years and they are not going to. And in the meantime reserves are declining. As for oil, the International Energy Agency came out recently with a study showing that oil reserves worldwide were declining at the rate of 6% or 7% a year.

That does not mean that if suddenly the U.S. goes bankrupt that everything won’t collapse in price. But I would rather be in commodities because it’s the only thing I know where the fundamentals are improving. They are not improving for Citibank or General Motors but the supply situation in commodities is such that when demand comes back, then commodities are going to be the best place to be in my view.

Q: What do you think of bonds?

A: I am anticipating shorting bonds — the U.S. long bond. It’s about the only real bubble around that I can see right now — other than the U.S. dollar. I am not shorting bonds at this moment because I’ve shorted plenty of bubbles in my day, and I have learned that you better wait because they go up higher than any rational person can anticipate. But my plan is to short the long bond in the U.S. sometime in the foreseeable future.

Q: I’ve read that you think the penchant of the last two presidential administrations for bailing out failing U.S. companies is a big mistake and will contribute to prolonging this recession. You argue that it’s best to let these companies all go bankrupt. How bad can the economy get?

A: Yes, politicians are making mistakes. In Japan, the problem has lasted for 19 years. I hope that it doesn’t last 19 years in the U.S. The approach that works is to let them (U.S. banks and automakers) collapse and clean out the system. The idea that phony accounting is the solution (through changes in mark-to-market rules) is ludicrous. And the idea that a debt problem and an excessive spending problem can be cured with more debt and more spending is ludicrous.

It’s laughable on its face, but politicians think they’ve got to do something. Unfortunately, they are doing the wrong things and they are going to make it worse.

Q: Thanks for your time.