Bloomberg:

The odds on the dollar, Treasury bonds and the U.S. government’s AAA grade all heading for the dumpster are shortening.

While currency forecasting is a mug’s game and bond yields can’t quite decide whether to dive toward deflation or surge in anticipation of inflation, every time I think about that credit rating, I hear what Agent Smith in the “Matrix” movies called “the sound of inevitability.”

Several policy missteps suggest that investors should stop trusting — and lending to — the U.S. government. These include the state’s pressure on Bank of America Corp. to buy Merrill Lynch & Co.; the priority given to Chrysler LLC’s unions over the automaker’s secured creditors; and the freedom that some banks will regain to supersize executive bonuses by giving back part of the government money bolstering their balance sheets.

Currency markets have been in a weird state of what looks almost like equilibrium for the past couple of months. What’s really going on is something akin to an evenly matched tug of war that fails to move the ribbon tied around the center of the rope, giving the impression of harmony while powerful forces do silent battle until someone slips.

(snip)


David Walker, a former U.S. comptroller general, wrote in the Financial Times on May 12 that the U.S.’s top credit rating looks incompatible with “an accumulated negative net worth” of more than $11 trillion and “additional off-balance-sheet obligations” of $45 trillion. “One could even argue that our government does not deserve a triple A credit rating based on our current financial condition, structural fiscal imbalances and political stalemate,” he wrote.

My comment: Long time readers and friends of the blog know that I am very opinionated regarding my views on government, politicians (both parties included), and my advocacy for freedom and individual liberty. I would hasten to add that I am rarely invited back to to peoples backyard barbecues and gatherings after the conversation moves from the weather to politics. Having said that I will reiterate my view that it is imperative that the average person diversify their assets out of the US dollar as much as practical. I know there are probably people across the entire economic spectrum that read this blog and each persons circumstance and risk tolerance are different but I think it is becoming obvious to almost everyone where the current policies are going to lad. Price inflation, lower standards of living, and possibly even a complete change in the social and political status quo. That is the history of the world when government resorts to inflationary policies as a solution to economic problems. I do not predict a sudden crash but more a steady IV drip of bad news and lower economic outcomes as time goes by. I have no doubt this will be punctuated with occasional crisis as things become unbalanced in this sector or that sector. I also expect more and more calls by the people for government to do more and more.

In order for government to do more it needs resources. As government produces nothing it must either steal these resources through taxes, borrow more, or sell more debt. All of these choices lead to bad outcomes. That is my view on the cap and tax scheme for example, it has nothing to do with stopping climate change it has more to do with stealing $600 billion a year from the economy so that a national healthcare system can be funded. If that is not enough money why doesn’t the government invent a pension scare and claim that evil Wall Street and workers have demonstrated that they are unable to mange funds such that a suitable retirement can be provided so government should step in seize the assets and mange them for you. Can’t happen you say, anything is possible as this is what just happened last year in Argentina. The government seized pension assets to pay foreign debt and gave the people long term government bonds. At this point anything can and will happen if someone can think of it.

With communication so cheap and user friendly and airline travel fairly cheap there is no reason, if you have the means, to not set yourself up an out in some other country. If nothing else one can put themselves on a program of religiously buying gold or silver coins and squirreling them away as a hedge against the inflationary and confiscatory tax policies that are in effect and will gain momentum as the burden and promises of government grow beyond the ability of these same governments to pay for them.

Please do not fall into the trap of thinking this is America those things do not happen here. That is at this point just stupid. In addition I know there are quite a few people that seem to think that this can be changed if we just hand out fliers and convince our neighbors to see what we can see. This is also naive, as most people do not pay taxes and therefore government is literally free for them. There is no major constituency for smaller government. Yes I know I support Ron Paul and other small government candidates but I am not optimistic that they will actually have any influence. Human nature is what it is and was demonstrated in California this week when people voted down the proposed tax increase but when polled still want no cuts in services. People like their free stuff that’s how it is.

John Polomny
The Real Deal