DownsizeDC.org
June 12, 2009
Digging Really Deep Holes
By Jim Babka

Quote of the Day: "One time in the House of Representatives [a colleague] told me a story about a proposition that a teacher put to a boy. He said, ‘Johnny, a cat fell in a well 100 feet deep. Suppose that cat climbed up 1 foot and then fell back 2 feet. How long would it take the cat to get out of the well?' Johnny worked assiduously with his slate and slate pencil for quite a while, and then when the teacher came down and said, ‘How are you getting along?' Johnny said, ‘Teacher, if you give me another slate and a couple of slate pencils, I am pretty sure that in the next 30 minutes I can land that cat in hell.' [So] if some people get any cheer out of a $328 billion debt ceiling, I do not find much to cheer about concerning it." -- Senator Everett Dirksen, Congressional Record, June 16, 1965

Subject: How deep is the hole the politicians are digging for us?

The financial newsletter The Privateer reports...

"Warnings have been issued from the Treasury that the Congressionally mandated debt ceiling of $12.1 TRILLION will most likely be breached in the second half of this year."

This pit of borrowing doesn’t even account for the deepening currency well we reported in last Friday's Dispatch.  

The politicians are borrowing and the FED is printing at staggering rates. As their shovels continue to ominously clang and clash, the news gets worse. Again, from The Privateer...

"The Federal Deposit Insurance Corporation (FDIC) list of troubled American banks has risen in the past three months from 1,568 banks with about $2.3 TRILLION in assets to US 1,816 banks with some $4.4 TRILLION in assets. Just who guarantees the FDIC? The US Treasury of course."

To be more specific, you the taxpayer will dig out all of those banks.

And if past history is a guide, that FDIC list is conservative to a fault. The real number of "troubled" banks is almost certainly higher. It seems the FDIC, like most government regulatory agencies, is usually the last to know there's a problem.

That's not all. Relying on data from the US Federal Reserve and Congressional Budget Office (CBO), The Privateer reports... 

There's a hodge-podge of guarantees totaling $12.9 TRILLION, with...
 
* $8.2 TRILLION from the Fed
* $2.7 TRILLION from the US Treasury
* $2.0 TRILLION from the FDIC

On top of that, the US government has... 

* Made asset purchases of $2.3 TRILLION
* Guaranteed $7.3 TRILLION worth of Fannie Mae, Freddie Mac, and Ginnie Mae debts
* Made other guarantees of $6.6 TRILLION to the US banking system.

"The sum total of all this 'Stimulus' is $29.1 TRILLION!" concludes The Privateer.

It would be fair to point out that not all that money has actually been spent yet. Things would have to go wrong in order to trigger those guarantees.

So we must turn to history to see if we’re doomed to the ditch. Were the bailouts an effective strategy or a sink-hole?

Consider the example of Citibank. When former Treasury Secretary Hank Paulson first extended support to Citi, his team believed it was strong. Paulson believed the funds would be focused at stabilization of the markets and the economy. Yet TheStreet.com was already giving them a C-. Once again, government was the last to know, because Citibank almost went out of business and required a second bailout just weeks later.

That track record is no cause for hope about these guarantees.

And another crater might await the banks. Weiss Research reports that U.S. banks have a total of $200.4 TRILLION in derivatives, and that those derivatives may well do more severe damage to bank balance sheets. 

"According to the OCC's Q4 2008 report, America's top five commercial banks control 96 percent of the industry's total derivatives, while the top 25 control 99.78 percent. In other words, for every $100 dollar of derivatives, the big banks have $99.78 ... while the rest of the nation's 7,000-plus banking institutions control a meager 22 cents! This is a massively dangerous concentration of risk."

Derivatives caused record losses for banks in the fourth quarter of 2008. Are there more serious losses to come?

And we're left to wonder, should that time come, where will the government get the money to cover these "too big to fail losses?"

Yet, those aren’t the only pitfalls. The projected budget deficit this year is $1.8 trillion. Just a year ago, many of us were screaming about a projected $490 billion deficit. Oh, for the good ole days!

But that projected deficit will certainly deepen, even though the White House budget allegedly reduces the deficit over the next few years. Why? 

Unemployment! The Libertarian Party reported this week that a Jan. 10 White House report selling the stimulus package promised unemployment under be kept under eight percent. Instead, according to the Bureau of Labor Statistics, it grew to 9.4 percent, placing unemployment at a 26-year-high, with 14.5 million workers now jobless.

Uncle Sam is "bursting at the seams," but he's probably going on a diet. Higher unemployment means lower than expected tax revenues. That means the deficit will be more cavernous than projected -- maybe in excess of $2 TRILLION. 

In review, numbers to be concerned about are,

* $12 TRILLION, the National Debt number that's rapidly approaching
* $29.1 TRILLION in bailout/stimulus guarantees
* 1,816 "troubled" banks with about $4.4 TRILLION in assets
* $200.4 TRILLION in U.S. bank-held derivatives that can create tens of billions of dollars of losses, and perhaps bank failures
* $2 TRILLION, the likely federal budget deficit

Indeed, the hole the politicians are digging is unfathomable. But that's not all the numbers we have to WORRY about.

According to the Social Security Administration, the federal government's unfunded liabilities equals $101 TRILLION -- that's a liability of $834,000 for every full-time working American. These long-term debts are primarily due to Social Security, Medicare, and Medicaid.

Even here, the news threatens to get considerably worse... 

* Social Security, a Ponzi scheme that makes Bernie Madoff look like a piker, has, until now, taken in more money than it puts out. It was projected that starting in 2017, it would run a deficit. But due to high unemployment rates, it will likely turn its first loss in 2010.

* As we've reported in these Dispatches, the President seems determined to bring health care under total government control, including dramatically expanding Medicare.

What does all this mean to you?

Sooner or later, the politicians will either...

 a) Default on commitments, perhaps with a variety of tinkering reforms like rationing, means-testing, tax increases, etc. or, 
 b) Inflate the currency so much that you'll see massive price increases for virtually everything. Imagine, for example, $8 per gallon gas.

Let's put a stop to this digging. Instead, we can do four very important things...

1) TAKE ACTION. We've updated our Unfunded Liabilities campaign to reflect the Social Security number. Send a message objecting to the very deep hole the politicians are digging. Demand that they "Downsize DC!"

2) Forward this message to others and ask them to join you in sending a message to Congress.

3) The politicians may be digging us a deep hole, but you can "Digg" this Dispatch if you're registered with Digg.com, so that more people see it, and join the Downsize DC Army. Just go to the blog version of this Dispatch and click on the Digg icon to get started.

4) The down economy has affected DownsizeDC.org as well. Pledge attrition levels have been unusually high. To continue growing, your DownsizeDC.org needs new pledgers. Would you consider joining as a monthly pledger, or perhaps increasing your existing pledge? As regular readers know, we acknowlege pledgers by name here on the Downsizer-Dispatch regularly.  

Thank you for being a part of the growing Downsize DC Army,

Jim Babka
President
DownsizeDC.org, Inc. 

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