Biggest financial trap of 2012: US Treasury debt

US debt is becoming less valuable as Americans grow poorer and poorer

Not much to report on in the markets yesterday. So let’s move on…

What are the big risks in 2012? We can think of several. But the World Economic Forum only sees two worth mentioning — too many deficits and too great a difference between rich and poor. The New York Times reports:

Severe income disparity and chronic fiscal imbalances are the top two risks facing business leaders and policy makers this year and over the next decade, the World Economic Forum said in a report Wednesday. If these problems are not addressed, a result could be a “dystopian future for much of humanity,” according to the report, which was published in preparation for the group’s annual meeting of business leaders, policy makers and academics in Davos, Switzerland, Jan. 25 to 29.

Signs of discontent with growing income gaps and economic problems stemming from the global debt crisis were already on the rise in 2011, as evidenced by the Occupy movement that began on Wall Street and quickly spread to other cities in the United States and around the world. Yet that might be only the beginning.

Of course, there are others with worries of their own. NYT continues:

While scientists can predict the probability — if not the exact timing or scale — of certain natural disasters, the ability to read a crystal ball may be more helpful than complex calculations in determining risks stemming from human events.

Leading many forecasters’ worries is an escalation of tensions between the United States and Iran. In addition to political turmoil, military action between the United States — or Israel — and Iran could cause a sharp increase in oil prices, especially if the Strait of Hormuz were blocked.

Ed Yardeni, an independent economist in New York, lists this as one of his “four horsemen of the apocalypse” for 2012. The others, cited in a note to clients, are: a severe global credit squeeze stemming from the crisis in the euro zone; social upheaval in China and India; and a severe global recession emanating from Europe.

Graham Hutchings, director of analysis at Oxford Analytica, adds to these the uncertainty caused by elections in a number of countries, including France, Russia and the United States, as well as a leadership transition in China.

So you see, dear reader, a lot could go wrong in 2012.

How do you protect yourself?

“Find the investment premise that is false and bet against it,” was George Soros’ formula. And right now, the biggest premise in the financial world is that US dollar-denominated Treasury debt…and to a lesser extent, US stocks…represent the safest investments you can make. This idea is so popular it could take American debt and equities higher in 2012. People flee Europe and the Emerging Markets for the safety of US assets.

But the premise beneath these investments is false. Neither US debt nor US equities are becoming more valuable. They’re losing value. Americans are becoming poorer. They have not had a wage increase since 1974. Only by working more hours per household…and going further into debt…were they able to increase their standards of living. But now, with unemployment over 8% and de-leveraging taking place (admittedly, in fits and starts), they will have to spend less. Sooner or later, investors will have to recognize it.

“They only way for the European [and American] economies to recover is to admit that they are not poor and live within their means,” writes Mahathir Mohamad, former prime minister of Malaysia, in the Financial Times. Then, they must go back to doing real business, ie to produce goods and sell services. Wages, bonuses and other perks have to be lowered to become competitive. …There can be no return to the status quo ante.”

No, dear reader, there’s no going back. And every step you take going forward you risk stepping onto a landmine or into a trap. But one thing is almost a certainty. When we finally reach our destination, US stocks and bonds will be lower.

And more thoughts…

What are we doing in South Africa? Checking on business…

How’s business? Not bad. Johannesburg seems to be booming. The “New South Africa” seems to work…for now.

But if our theory of government is correct, it is probably just a matter of time before the central authorities ruin it. Remember, government is not an enlightened organization designed to promote public welfare. It is barbaric, uncivilized force…military and police power put to the service of the insiders who control it.

Yes, there are constraints on the way the insiders use their power. There are ‘checks and balances,’ built into the constitution, for example. And there are cultural norms and traditional prohibitions.

But eventually, the norms and traditions wear off, like painkillers. And then, the pain of raw government begins again.

*** How do you get to South Africa? Here’s how to simulate the journey in your basement or garage…and save $5,000.

First, stand around for about two hours. Take off your clothes, just as you would as you pass through security. Then, sit down in a fairly comfortable, reclining chair. Turn on a loud furnace or vacuum cleaner. Besides you are two strangers, one on either side. One is immensely fat. The other has a bad cough.

Arrange for someone to serve you a bad meal while you are seated. Have a cheap bottle of wine on hand for refreshment. When you are finished eating, turn out the light. Stay seated for the next 8 hours. It is now about 3 AM. Set your alarm to wake up. Turn the lights on. Stay awake (while the plane is refueling in Dakar) for about an hour. Then, you may put your seat back again. Stay in your seat for another 8 hours.

Voila, you are there.

*** Tomorrow…more ‘crisis in capitalism’ coverage.

Regards,

Bill Bonner
 for The Daily Reckoning