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Political Science
Written by Martin D. Weiss   

Washington’s Day of Reckoning

by Martin D. Weiss

The crisis has struck the investors world over and is still on. With not many signs of relief in near future, the wise thing to do would be to keep a major chunk of your wealth safe. Probably, the most appropriate saying for today’s times would be--“prepare for the best but be prepared for the worst”

If you read just one of my Money and Markets issues this year, make sure it’s
this one. You will not hear what I am about to say, from our nation’s leaders. Nor will it pour forth from talking heads on Wall Street.

They are still driven by their zeal for bigger campaign contributions or the
lust for fatter year-end bonuses. My sole mission is to help you preserve your wealth and your income — to set you free from escalating worries about how deeply this great crisis could threaten your financial security.

That done, you can actually use this massive global crisis to grow your wealth,
even while millions of other investors could lose nearly everything.

My New Warning

Some will say that the new warning I am about to give you is too outrageous; too
extreme. But, they have said the same about nearly every other warning I have issued
in recent years.

In 2005, with real estate values still soaring by double digits each year,
almost everyone was urging you to buy homes, commercial properties, real estate
stocks and REITs (Real Estate Investment Trusts) mutual funds. But, we warned that the housing bubble was about to burst, and that real estate investors would have their heads handed to them. We begged you to sell and get your wealth to safety.

If you heeded our warning, you did not lose a penny as real estate cratered.
In 2007, almost everyone — including Fed Chief Ben Bernanke — was swearing that
the crisis would be “contained”, only impacting the niche of sub-prime borrowers
and lenders. In contrast, we warned that the bloodletting would spread like wildfire to
America’s largest banks … and we implored you to speed-dial your broker to sell
every bank stock in your portfolio.

If you heeded that warning and sold as we instructed, you did not lose a penny as
they plunged as much as 100% in value. In 2008, most pundits swore on a stack of Bibles that the trillions of dollars Washington was throwing at this crisis would miraculously end it; and Wall Street urged you to buy stocks they claimed were selling at “bargain” prices.

But, month after month, as Washington unveiled one new handout scheme after
another, we told you that they did not have a snowball’s chance of ending the
crisis … and we urged you to sell all stocks in order to preserve your wealth.
If you heeded those warnings, you saved your wealth as the Dow suffered its
worst one-year decline since 1932.

And now, as we put the first month of 2009 behind us, we are nearing
Washington’s great day of reckoning. On the not-too-distant horizon, we can
already begin to see …
* The end of Washington’s futile attempts to stop the explosive collapse of the
US economy and stock market …
* The end of the slow-motion disintegration we have seen in corporate earnings,
stocks and bonds, plus …
* The end of the slow, incremental rise in unemployment.
And, just beyond that horizon, do not be surprised to see …
* A massive collapse in the economy and stock market, triggering a tidal wave
of bankruptcies, despair and even homelessness …
* A massive, global cleansing of the debt that caused this crisis …
* And, provided we avoid some major pitfalls, the first step towards rebuilding
the foundations upon which our economy can grow for generations to come.
Before Washington’s day of reckoning, the American people thought that government
resources were abundant and even unlimited; after the day of reckoning, those
resources suddenly became scarce, often non-existent.
Before the day of reckoning, it was widely believed that the government has the
power to prevent, end, delay or cushion this crisis; after, it is finally
recognised that the government’s actions merely deepen, aggravate and prolong
the crisis.

Before, the government remains committed to doing everything it can to fulfil
the people’s belief; after, it begins to abandon its rescue efforts, allowing
the economy to fall on its own weight.

Suddenly, government omnipotence is replaced by government impotence; generous
largesse is replaced by miserly penny-pinching.

The Reason: Most of Washington's
Big Credit Lines Will Be Severed!
If you or I spend hundreds of thousands more than we earn each year … and then
borrow nearly every penny we need to pay our bills, it is called “insanity”.
When Washington does it, nobody bats an eyelid. Even before this new phase of the crisis burst onto the scene, Washington was living far beyond its means — spending hundreds of billions more than it earned each year; then borrowing hundreds of billions just to pay its bills.

Now, it is much worse. Due to massive federal bailouts, plunging tax revenues,
and surging social costs, the Congressional Budget Office forecasts Uncle Sam
will have to borrow $1.2 trillion in new money to fund its deficit this year,
the worst of all time.
And that is assuming:
1. no major decline in the economy,
2. no $900 billion stimulus package, and
3. no “bad bank” plan or other bank rescues.
The reality is that just ONE of these three new burdens to the federal budget
could double the already-exploding deficit. Washington may have to borrow $2 trillion, even $3 trillion. Right now, Uncle Sam’s sources of funds to finance its folly are already showing signs of drying up; and therein lies the limit to our government's power to finance a recovery.

Why can’t Washington simply print the money it needs to pay all its bills and
finance bailouts to its heart's content?

Because the mere fear of the consequences would turn Washington’s creditors away
and make it even more difficult for it to raise the funds it desperately needs
to
* meet debts coming due,
* cover payroll, and
* keep the government operational.
The key: It is already hard enough to persuade creditors to lend Washington funds
even in the absence of inflation. If they get wind of money printing and foresee
inflationary consequences — on top of the bankruptcy of America’s largest
institutions — it could become virtually impossible for Washington to borrow
all the money it needs.

The U.S. Treasury’s #1 Creditor: “We’ve had it!”
A bond market collapse is already under way.
Global investors are already growing skeptical that too many government
agencies, corporations, states, counties and cities will be unable to make good
on the interest and principal they are promising to pay.

And since December 18, we have already seen a sneak preview of what could lie
ahead: A massive plunge in the price of Treasury bonds. That price decline, however, is just ONE symptom of Washington's coming day of reckoning. Another is the sinking confidence in U.S. investments around the world.

Some prime examples:
* Last Wednesday, at the World Economic Forum in Davos, Switzerland, China's
Premier Wen Jiabao laid the responsibility for this global crisis squarely on
Washington’s doorstep: The financial crisis, he said, is “attributable to
inappropriate macroeconomic policies and their unsustainable model of
development characterised by prolonged low savings and high consumption;
excessive expansion of financial institutions in blind pursuit of profit.”
The implication: A major, across-the-board reassessment in China's investments
in the US.
* Last year, China ended all new investments in a number of US companies.
* Also last year, China dumped $26.1 billion in Fannie Mae and Freddie Mac
bonds — just in the five months ending November.
* Major investors in Japan, Russia, Western Europe, the Middle East, and Latin
America — whether politically aligned with the US or not — are also showing
signs of slowing down, stepping back, or even pulling out of US investments.
Fast forward to Washington’s day of reckoning and you will see how the bailout
game could end:

On that day, Washington will have to either pay rates of interest that wound
paralyse, and virtually kill the economy … or it will have to slash and even
abandon its bailout efforts. Ultimately, it will have no choice but to step aside and let failing companies fail … collapsing industries collapse … and sinking markets sink.

The carnage will be traumatic and terrifying. But, it will also be the beginning
of the end of the crisis. Once trillions in toxic debt are swept away, America
will finally be ready to lay the foundations upon which this economy can grow
for decades to thereafter.
In the meantime, though, if you thought 2008 was a nightmare, brace yourself.
The months ahead are likely to be far more brutal than anything we have seen so
far. Keep up to 90% of your money safe, following the specific instructions I have
laid out here so often.  [short term Treasury Notes]

Plus, if you’ve been worrying about securing a recession-proof, depression-proof
source of income and profit opportunities in this crisis …or if you’ve been hoping for a strategy that gives you the bona-fide power to add thousands of dollars per month to your family's bottom line …We've just posted a full report that introduces you to all that and more.
The deadline is this coming week. So I suggest you act promptly.