Dear Money & Crisis Reader,
Our economy is not invincible.
You would think this would be obvious…
Yet the folks on Wall Street are so scared of another financial crisis they refuse to see what’s right in front of their faces.
The stock market has been steady enough for the last two years. But on Feb. 5, we got a not-so-gentle reminder that this period of growth can’t go on forever.
The Dow took a nose dive, dropping 1,175 points in just one day.
It was the single largest drop in trading history…
Yet after a brief moment of panic, the experts went right back to burying their heads in the sand — dismissing the Dow crash as nothing more than a quirk of the market.
But the underlying cause of the Dow’s crash might just be the single greatest threat to the American economy.
Earlier this week, I sat down with Currency Wars author Jim Rickards to discuss the cause of the stock market drawdown… and it doesn’t look good.
You can read what he had to say about the nation’s explosive debt bomb below.
All the best,
Editor, Money & Crisis
P.S. If you like what Jim has to say, click here to grab a FREE copy of his latest book, The Road to Ruin: The Global Elites’ Secret Plan for the Next Financial Crisis.
The Greatest Threat to the U.S Economy
By Jim Rickards
In my view, the U.S. stock market drawdown between Feb. 2 and Feb. 8 is attributable to a sudden realization by the market of how bad the annual deficit is going to be.
The U.S. is currently looking at $1 trillion-plus in deficits — part of which can be attributed to the new tax bill.
The talk coming out of Washington is “Yeah, we’re cutting taxes. But this is going to be stimulative to the economy. So stimulative, in fact, that the additional tax collections from the growth will offset the tax reduction.”
But I don’t think we’re going to be seeing anywhere near the kind of growth that they’re expecting.
It’s one thing to cut taxes in a recession and give the economy a boost. It’s another thing entirely when you’re nine years into an expansion and you’re trying to boost an economy that already has high capacity utilization and low unemployment.
So my expectation is that the tax cuts are just tax cuts. They’re not going to be stimulative, but they will add to the deficit — somewhere in the region of $1.4 trillion.
On top of that, Congress recently removed spending caps that had been in place for about seven years.
As you know, a lot of the budget is on autopilot. But the two areas where they do have control are discretionary domestic spending and defense spending.
The Republicans favor more defense spending and the Democrats favor more discretionary spending. But in 2011, they resolved and passed a budget by putting caps on both.
Well, here we are seven years later and both sides are back to their old tricks.
The two parties wanted to spend more on two different things, and they “compromised” by deciding to spend more on both. And that’s going to add as much as $400 billion of additional deficit.
Now, all of these deficit additions I’m talking about are on top of the baseline deficit of $400 billion a year.
They’re going to add $1.4 trillion over several years — from the tax cuts — and another $400 billion a year — from the removal of these sequester caps.
And then on top of that — the one thing no one is talking about — are our student loans.
Right now student loans are over $1.5 trillion.
All the subprime and similar junk mortgages in 2007 at the beginning of the mortgage crisis added up to just about $1 trillion. And while the subprime mortgages had default rates of 5% or 6%, which is high, these student loan default rates are over 20%.
Until now, most of that is off-budget. The private banks and servicers make the loans and the Treasury guarantees it.
But when those loans default, the bank or the servicer goes back to the Treasury and gets paid. And it’s when the Treasury writes that check that it’s going to hit the budget. And it’s going to hit like a tsunami.
You’re looking at several hundred billion dollars added to the deficit over the next few years.
Putting all that together — the tax cuts without the growth, the sequester caps and the student loan defaults — you’re looking at trillion-dollar deficits as far as the eye can see.
That realization hit the market all at once, and in my view that’s what triggered the stock market slowdown in February.
It was this debt bomb that sank markets, and now the ratings agencies are talking about downgrading the credit of the United States. Things will only get worse from here. The volatility and stock market drawdowns are far from over.
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