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Drowning In Debts And Deficits

As long as government continues to hog most of the available credit, it's going to be increasingly difficult--and sometimes nearly impossible--for most businesses and consumers to get their share of much needed funds.
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Reading lots of statistics is usually a bore, often a sleep producer. Not the numbers that follow which relate chiefly to debts and deficits. Financially speaking, not only are they not boring, but in their own way they're as frightening as flesh-eating Hannibal Lechter in The Silence of the Lambs because these figures signal even greater economic hardship, which means more chaos on the jobs front, less money in your wallet, higher interest rates, a potential bloodbath in bonds, and an abrupt end at some point to the current stock market rally.

First, though, about a year ago, a couple of well known and supposedly savvy financial guys, Federal Reserve skipper Ben Bernanke and JPMorgan Chase chief, gave us the good news, or at least, so we thought: The credit crunch, they declared, is over. That declaration, as we all know, has proved to be about as credible as John Edwards.

What makes it all so relevant now is that the amount of available credit--the backbone or backbreaker of economic expansion--is still a gory story, although some economic trackers, obvious long-time residents of Disneyland, are saying the just opposite, that the credit squeeze is practically history.

Granted, if you're Warren Buffet, Bill Gates, Roger Federer, Carl Icahn or Tiger Woods, that's probably true. But not for the rest of us, even including some big earners.

A case in point is the losing effort of a New York hedge fund trader, who recently learned the hard way that his seven-figure annual income wouldn't allow him get a mortgage on a multi-million-dollar home he had hoped to buy in the Hamptons. The banks, he found out last month, are not your buddies. About two months ago, he told me, he asked a Citibank banker, a close personal friend, to use his influence to help him get a mortgage. With his income and his willingness to put down a hefty amount of the purchase price, say about 20%, he figured it was a sure thing. It wasn't. His friend suggested he try Chase. He did and he's still looking.

An incisive and worrisome perspective on it all is offered by veteran Florida investment adviser Martin Weiss. About nine months ago, we were sharing some sushi at a New York restaurant and he suggested at the time that the credit crisis, contrary to what the experts were saying, would get progressively worse, reflecting burgeoning debt and a swelling deficit.

He reaffirmed that concern the other day in a commentary he fired off to clients in which he warned them that the credit crunch--or the great credit squeeze, as he calls it--will produce "a violent double-dip recession" beginning later this year. Much of it, he points out, relates to the budget deficit, currently standing at $1.42 trillion.

Actually, five years ago, if you stopped the man in the street and asked him, what do you think of our federal budget deficit, your response might well have been: If it's not too expensive, I might buy one. No more such quips. Now, by and large, there's widespread recognition that our deficit woes can materially impact economic growth, as well as lead to higher interest rates and higher taxes.

In his commentary, Weiss, the head of Weiss Research in Jupiter, Fla., challenges the view of some market observers that the sovereign debt crisis is mostly behind us, that America's federal deficit is turning into a non-issue and it's back to business as usual. In particular, he took note of last month's deficit of $221 billion, the most the U.S. has ever experienced in a month in its history.

Ever since America's Declaration of Independence, he wrote, deficit spending, a recurring theme in Washington, invariably returns with a vengeance, especially during wartime. But Weiss notes it took a long 169 years and seven major wars--from 1776 to 1945--to rack up a cumulative deficit that matches the gaping budget hole of just 28 short days in February.

To finance these humongous deficits, observes Weiss, the government has embarked on the obvious: unprecedented borrowing, as seen in a record one-week issuance, ending February 26, of $236 billion worth of assorted Treasury securities. That means, notes Weiss, that Uncle Sam, around the clock, borrowed new money--and replaced old debt at the rate of $390,212 per second, $23.4 million per minute and $1.4 billion an hour.

The key here, Weiss warns, it's a pace of debt issuance that simply cannot be sustained without disastrous consequences because it's crowding out the private sector,. As long as government is continuing to hog most of the available credit, it's going to be increasingly difficult--and sometimes nearly impossible--for most businesses and consumers to get their share of much needed funds.

The Federal Reserve's flow of funds fourth-quarter report, released last week, tells the story. Government borrowing was massive as the Treasury jumped into the credit markets and grabbed up new funds at an annual pace of $954.7 billion, while most business borrowers were shoved out of the credit market and were forced to cut down their existing debts--either voluntarily or not--at the breakneck annual pace of nearly $2 billion.

Meanwhile, at the same time, millions of consumers were virtually ostracized from the credit market. They were forced to cut back, according to the report, their existing mortgages at the annual rate of $365.1 billion and consumer credit at the rate of $143.5 billion. That's a total annualized cutback of $510.4 billion.

You can't underestimate the potential impact of this phenomenon on the economy and your investments, asserts Weiss, because what we have here is massive pressure on consumers and businesses to actually pay down their outstanding debts, as well as widespread defaults and foreclosures, forcing lenders to write off huge amounts of their debt.

It's bad enough, observes Weiss, when you see credit flowing to consumers at a slower pace, but what's happening now is far, far worse: Credit is actually being sucked out of the consumer and corporate sectors at a torrid pace, meaning huge amounts of credit are being denied or even taken away from those who could fuel a recovery.

Against this background, the debt picture continues to grow darker, what with the U.S. national debt now standing at a record $12.647. trillion. Also at a record are total debt per citizen of $180,630 and total debt per family of $691,142.

Meanwhile, here's some more disturbing statistics. According to the Employee Benefit Research Institute's 2010 retirement confidence survey, 43% of all American workers have less than $10,000 in retirement savings. What's more, 27% have less than $1,000..

The obvious question: Will they be drowned by debts and deficits, which, based on what's happening, seemingly have nowhere to go but up? It could be a real life version of Jaws. For sure, a lifeguard is badly needed.

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