October 15, 2012,
[Editor’s note: Today’s letter is an excerpt from the edition of Sovereign Confidential that will be published this afternoon.]
Let’s step away from the noise for a moment and look at the big picture. This isn’t about doom and gloom, or fear, but objective facts.
Undoubtedly, the Western hierarchy dominated by the United States is in a completely unsustainable situation. Across the West, national governments have obligations they simply cannot meet—both to their citizens and their creditors.
In the UK, national government borrowing is already 22% higher than at this same point last year, a record year for borrowing. Meanwhile, the UK’s budget deficit for August hit a record high.
In France, the new government of Francois Hollande passed a ‘historic’ and ‘austere’ budget that is still posting a deficit of 3% of GDP. That’s including a 75% tax on incomes exceeding one million euros.
In Japan, the government is mulling legislation that will fund 40% of the budget with ‘deficit-financing’ bonds.
In the United States, the government recently hit $16 trillion in debt about six weeks ago, after reaching the $15 trillion mark last November. It took 200 years to accumulate the first trillion in debt and 286 days to accumulate the most recent trillion.
Each of these countries has a debt level that exceeds 90% of GDP– the historic point of no return. More importantly, each of these countries also has to borrow money simply to pay interest on money they’ve already borrowed.
This is important because it makes the problems multiple. At the beginning of the 1780s, the French monarchy was spending around 30% of tax revenue to service its debt. Eight years later when the revolution began, they were spending 62%.
The next 26-years in France were filled with internal civil war, external war with Austria and Prussia, hyperinflation, crime, social unrest, and Robespierre’s genocidal dictatorship.
In the 19th century, the Ottoman Empire faced an even steeper financial decline. In just 11-years, the Ottoman central government went from spending 17% of its tax revenue on interest payments to spending over 52% of its tax revenue on interest payments. Then came default, in just eleven years.
In the US, debt service is also rising. According to the Government Accountability Office’s figures, the US government was spending 9% of revenue to service the debt in 2002. Throughout most of the last decade, in fact, the US government spent roughly 9% of its tax revenue on debt service.
But in 2009, the figure hit 9.75%, then 10.5% in 2010, then 11.5% in 2011. For the fiscal year that just closed on September 30, the Bureau of Public Debt reported cumulative interest expense of $375.8 billion on income of $2.45 trillion. This is a rate of 15.3%. See the trend?
But it’s not just debt burdens that are problematic. ‘Rich’ countries in the West are also rapidly debasing their currencies, spawning tomes of regulatory impediments, restricting the freedoms of their citizens, aggressively expanding the powers of the state, and engaging in absurd military folly from Libya to the South China Sea.
Once again, this is not the first time history has seen such conditions. In our own lifetimes, we’ve seen the collapse of the Soviet Empire, the tragi-comical hyperinflation in Zimbabwe, and the unraveling of Argentina’s millennial crisis. Plus we can study what happened when empires from the past collapsed.
The conditions are nearly identical. Is our civilization so different that we are immune to the consequences?
Probably not. And the cycle that has befallen so many great powers before us– decline, collapse, turmoil, and reset– will likely happen in our time too.
But it’s not the end of the world. Not by a long shot. It’s a complete reshuffling of the deck. A brand new game with brand new rules. And the old way of doing things (like printing money backed by nothing) will be resigned to history’s waste bin.
One of the things that we see frequently in history is that this transition occurs gradually, then very rapidly.
Think about the Soviet Union, which you may recall. One day, they were the greatest threat to the planet. The next day, the wall came down. It happened so quickly. It’s like what Hemingway said about bankruptcy– it happens slowly at first, then all at once.
Unfortunately we don’t know where we are along this path. And we won’t know until we’re over the cliff on the way down. Everything will feel normal until then.
Argentina’s millennial crisis is a great example of this. Argentines woke up in December 2001 and everything still felt normal. Within a few weeks, they had defaulted on their debt, the currency collapsed, and people were out in the streets doing battle with the police.
But since we don’t know precisely when things may happen, it’s a sharp idea to take responsible action that makes sense no matter what, even if all of the world’s problems are miraculously solved. Things like:
– Owning gold and silver (and storing it abroad)
– Acquiring agricultural property overseas.
– Holding savings in a strong, stable foreign bank
– Looking at healthy economies for top quality investment and business opportunities
– Improving tax efficiency and asset protection with proper foreign structures
– Developing relationships with like-minded people
– Learning valuable skills
– Traveling a bit and exploring potential relocation options
– Increasing your digital privacy
– Considering dual residency and nationality options
All of these steps make sense no matter what happens. Yet, should the thesis hold, and we indeed find ourselves on the precipice, then you and your family will be in the best possible position. And that too is a fact.