Simple Bookkeeping:

Bookkeeping is the systematic recording of financial transactions. If you aren’t a bank institution, remember this advice: never lend money to someone else unless you’re morally obliged. In that case before lending, check your creditors creditworthiness and if this isn’t sound don’t lend the money. Someone's creditworthiness is determined by looking at his bookkeeping or more specifically his balance sheet. Add up his assets and subtract his liabilities. To show what shall happen if this isn’t done, please read on: An old joke:

Someone who owes the bank ten thousand dollars loses sleep at night. But when someone owes the bank millions, then the banker loses sleep at night. And that’s the case between the world's largest borrower the U.S. and its Asian enabler.

On the numbers, the US government is the worst credit risk in the world. When checking the creditworthiness of the federal government a very big number with a minus sign in front of it will be the obvious outcome.

While the US balance sheet looks awful, the cash flow is worse. In this current year, the feds will take in about $1.9 trillion in taxes and spend $3.6 trillion. In other words, the feds are living beyond their means like consumers did before. But someone today who would lend to a spendthrift whose outlay exceeds his income by nearly 100% is crazy.

The only way any loan can reasonably be repaid is from the lender’s income. Income must exceed expenses or there will never be money for debt repayment. Lending to a corporation or an individual, the lender expects the borrower to earn his way out of debt. Otherwise, it's a fool's game. The debtor is soon going deeper in the hole, being unable to climb out of it. He borrows from one lender in order to pay off the first lender. In effect, it is a pyramid or ‘Ponzi’ scheme, kept alive on new idiots with fresh money supplies, until the whole craze comes crashing down. As is proven with the Bernie Madoff case.

Conclusion: The state with the biggest economy in the world is going broke. So is the nation's biggest manufacturer GM. Profits are falling.

Lending money to the US government is no sure affair. In fact, under the present circumstances, lending money to the feds is asking for trouble. The US Treasury Bond market is in a bubble. Like all bubbles, these will pop. And as always, when bubbles pop, the lenders are hurt.

The federal government doesn't even pretend that it is going to earn its way out of debt. It presumes that an endless supply of money is always obtainable that can be borrowed and that always-new suckers are on hand to lend. But this is exactly where all Ponzi schemes break up. The fed's pyramid scheme will run out of new money one day in the not too distant future.

Mr. Obama says he plans on cutting the budget deficit in half by the end of his term. Let's see...that's four years out. If he's true to his word, that will mean deficits averaging about $1.5 trillion a year...or about $6 trillion total. Where will that money come from? What kind of suckers has that quantity of cash on hand?

America's savers currently are saving about 4% of GDP, which could rise to 5%. They typically only put less than one percent of their wealth into Treasury paper; but let us imagine that they use every penny to buy it. Over Obama's term that could be as much as $2.4 trillion. The other big buyer is China. If they were somehow able to continue buying at the same rate that they have done for the last 6 months that would add $2.8 trillion more. So even if both should put in the money calculated there would still left $800 billion worth of Treasury Bonds unsold.

More likely, Americans might purchases much less of Treasuries and the Chinese might buy not more than another $1 trillion or so. Nevertheless sooner than much later, buyers of Treasuries are going to begin to notice that there aren't enough buyers around to keep this Ponzi scheme going. The smart ones will head for the exits early, and the slow ones will hold the bag.

Stanford professor John Taylor pondered the same with a rather alarming article in the Financial Times this week, giving some real insights into what a trillion-dollar deficits actually mean. Quoting:

"I believe the risk posed by this debt is systemic and could do more damage to the economy than the recent financial crisis. To understand the size of the risk, take a look at the numbers that Standard and Poor's considers. The deficit in 2019 is expected by the CBO [congressional Budget Office] to be $1,200bn (€859bn, £754bn). Income tax revenues are expected to be about $2,000bn that year, so a permanent 60 per cent across-the-board tax increase would be required to balance the budget. Clearly this will not and should not happen. So how else can debt service payments be brought down as a share of GDP?

"Inflation will do it. But how much? To bring the debt-to-GDP ratio down to the same level as at the end of 2008 would take a doubling of prices. That 100 per cent increase would make nominal GDP twice as high and thus cut the debt-to-GDP ratio in half, back to 41 from 82 per cent. A 100 per cent increase in the price level means about 10 per cent inflation for 10 years. But it would not be that smooth -- probably more like the great inflation of the late 1960s and 1970s with boom followed by bust and recession every three or four years, and a successively higher inflation rate after each recession."
"The good news," Taylor concludes, "is that it is not too late. There is time to wake up, to make a mid-course correction, to get back on track. Many blame the rating agencies for not telling us about systemic risks in the private sector that lead to this crisis. Let us not ignore them when they try to tell us about the risks in the government sector that will lead to the next one."

Taylor is right that the massive tax increases necessary to fund these deficits and programs should not happen. The Obama administration is starting to float trial balloons about a new VAT, or value-added tax.

A large tax increase is not without very serious consequences. It will put a serious crimp in economic growth. It will lock in European growth rates and European-like unemployment rates.

Actually this is not a happy-ending, as some still would hope for. Who is next?

Taylor’s article ‘Exploding debt threatens America’ is on:
http://www.ft.com/cms/s/0/71520770-4a2c-11de-8e7e-00144feabdc0.html?nclick_check=1