This document summarizes the dire economic situation facing the United States, including unprecedented levels of national debt, budget deficits, and risk from short-term debt obligations. It outlines how printing money, rising inflation, and foreign holders of US debt reducing their holdings could severely impact the US economy through higher interest rates and a declining dollar. It also discusses risks from interest rate swaps, credit default swaps, life insurers, and overall high private and public debt levels that could lead to a long economic downturn if not addressed.

1. A US-centric economic view of
what’s happening in 22 slides
March 2009

2. US national debt ($11 trillion)
• Annual interest payments $400 billion
• FY2009 US projected budget deficit=
($2 trillion)
• [stimulus waste, bailouts, bank backstops,
Fannie/Freddie]
• FY2010 US deficit = ($1.5 trillion)
• FY2009 US tax receipts $1.5-$2 trillion

3. $2 trillion of debt is short-term
• That’s an interest rate time bomb; for now
we pay 0.7%/yr
• Assume $2 trillion of the $3.5 trillion in
bonds the next few years are short-term
• $2 + $2 = $4 trillion
• If interest rates spike to even 10% due to
inflation risks, that would mean…

4. $400 billion MORE in interest/yr
• With decreased tax revenues, Defense,
Education, Health, Social Security,
Transportation would all have to be cut,
some by as much as 50%

5. March 2009
• Fed announces that they’re going to print
$300 billion and buy US Treasury bonds
• Robbing Peter to pay Paul
• What about the remaining $1.7 trillion in
bonds they’ll have to sell? Who will buy
those?
• What about the $1.5 trillion in FY2010?

6. Foreign Govts hold $3 trillion
• The 2 leading holders of US federal debt are Japan
and China
• But Japan’s exports are down 50% in Feb 2009
• China’s exports were down 25% in Feb 2009
• They no longer have the trade surplus with the US
to put into US gov’t debt, and are plowing their
remaining money back into their own economies

7. Who else?
• Federal employees, state and local
governments and others have around $4
trillion of US govt debt
• But they’re net sellers: State governments
have a $300 billion budget shortfall in the
next 2 years, for example
• Maybe IRAs and 401ks could be taken
over, which was the Argentine solution

8. Trick or Treat
• Printing money was one of the last tricks
that the Fed had left to use, and they used it

9. The Money Supply
• Current US dollars in circulation: $1 trillion
• In circulation in the US: $300 billion
• In circulation outside the US: $700 billion
• One of the main reasons why US dollars are held
outside the US? Oil.
• World oil exports per year: 25 billion barrels
• At $40 a barrel = $1 trillion in transactions per
year

10. April 2, 2009
• The G20 meeting TODAY might be the most
important currency meeting of this whole financial
mess
• New currency possibilities? IMF involvement?
• Russia and China are talking about a global basket
of currencies instead of using the US dollar to
settle trades
• UN Panel also suggested a basket
• Gulf nations (Dubai, Abu Dhabi, Saudi Arabia, et
al) talking about a local currency for oil trades

11. Inflation
• If there’s less of a demand for dollars
overseas, countries dump dollars
• If we print money to monetize our debts
• If the US, UK, Switzerland, Japan, China,
Europe all race to depreciate their
currencies against each other to try to boost
their exports

12. Wages, Stock Market, Real Estate
• Dollar depreciation through various methods
means inflation in some aspects of our economy
• $100 oil, $5 gas, those things will be back
• Wages don’t react as quickly
• People are already in a deflationary mindset, if
their comp doesn’t keep pace, they cut back
• You could see the stock market react favorably to
inflation, real estate react favorably, but the
underlying businesses not doing as well

13. But….
• But…if interest rates have to be jacked up
to react to the inflation, everything comes
tumbling back down again
• But…if real estate dropped considerably,
what is left of foreign capital, if it’s allowed
in the US, might start picking up cheap
commercial and residential property

14. Let’s talk Interest Rate Swaps
• Bank of America, JP Morgan and Citigroup alone
have around $130 trillion of these on their books
• For example, if someone has a variable rate, they
might swap it for a fixed rate, with the bank taking
on the interest rate risk
• If interest rates shoot up like I think they may due
to the profligate spending of the US government,
interest rate swaps blow up
• And even if the US government hasn’t
nationalized the banks by that point, they will
have to clean up the $trillion mess

15. Let’s talk Credit Default Swaps
• The US has 2 choices: continuing to put
money into AIG and other writers of credit
default swaps so they can pay these bets off
at face value, OR
• Start tearing them up and say they’re either
voidable or will be paid off at pennies on
the dollar

16. CDS and Europe
• One problem with pennies on the dollar is that
hundreds of $billions of them are covering
Western European banks, which are…
• Already precarious because of their investments in
Eastern European countries that are going bad
(mortgages in Poland denominated in Euros, for
example)
• CDSs to me are a European issue more than a US
issue, as European banks are way more leveraged
than US banks, in some cases 10 to 1.

17. $8 trillion
• European banks own $8 trillion in US-
denominated assets (govt debt, mortgages,
consumer loans, etc.)
• If they have to start selling, it will further
depreciate the dollar against the Euro
• They’d have to start selling if some of the
CDS are ripped up, because of their crazy
leverage.

18. Life & annuity insurers
• Residential and commercial mortgages: if these
continue to blow up, and further unemployment,
decreased spending, potential increased interest
rates would suggest a further blowing up, life
insurers are especially vulnerable
• Technical indicators: if the current market run
doesn’t reach Dow 11000, some guess it’ll come
back down to hit 5500, with a potential low of
4000. That would hit annuity writers hard.

19. Short-term gain = long-term pain?
• What governments, banks, insurers, hedge funds
are doing now are short-term inflationary and
papering-over things that don’t let the economy
fix itself
• Mark-to-market accounting may be suspended =
short-term gain = puts off until later fixing things
• Non-financials credit debt / GDP = 350%, the
highest it has ever been. In the Depression, it
spiked at 250%.

20. Bank deposits
• FDIC has very little money left, so they
arranged to borrow (in other words, more
printing) $500 billion for potential bank
failures
• Insured US bank deposits represent $4
trillion
• Banks only have $300 billion on hand for
that $4 trillion

21. Japan bankruptcy
• The good news? Japan would probably go
bankrupt before we would, so would serve as a
warning that we’re doing the wrong things.
• Japan’s debt / GDP ratio is 200%
• US’s debt / GDP ratio is 75%
• Japan’s savings rate is now as sickly as the US’s
• Japan has already printed money, it didn’t work,
asset values kept falling through 2003

22. What do we do?
• How this plays out is almost entirely out of
our control ; we’re still very early in this
whole process
• Hope that governments stop wasting money
and time
• Put your head between your knees, grab a
paper bag and hurl
• Got commodities and precious metals?