Personal Finance Blog by Debit versus Credit

The End of the World As We Know It: National Bankruptcy!

September 19, 2008 | Filed in: Debt, Miscellaneous | 6 comments

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If you had to take a close look at the U.S. markets and the financial system and give an estimate on the absolute worst-case scenario for our economy, what would you predict?

Martin Hennecke, senior manager of private clients at Tyche, has done just that and he has publicly declared that he believes that the U.S. government will be forced to declare bankcruptcy due to all of the private-sector bailouts that they have been sponsoring.  I saw this article over at CNBC and thought that it was interesting and something that I would like to cover.

I’ll quote the highlights of the article here, but you should definitely read it and see what Mr. Hennecke has to say on the matter.  There is also a video attached where they interview him, which is a pretty decent way to blow eight minutes.  I’d like to point out that although Mr. Hennecke doesn’t say so (he may not even believe so) what he’s proposing is more or less a worst-case-scenario.  More on that later.  I’ll begin with his first major (and the biggest) point.

“We expect a depression in the United States. We expect a depression, very possibly, also in Europe,” Hennecke said on “Worldwide Exchange.”

We may not even be officially in a recession (at least by the dictionary definition) but Mr. Hennecke believes that the U.S. and Europe are going to face an actual depression.  He believes that the United States Government will have to accounce a National Bankruptcy as they will not be able to afford the bailouts that they have promised.  For those unaware the government is planning a new bailout, this time to bailout literally every institution having issues with solvency due to mortgage-backed securities.  They plan to purchase these securities for pennies on the dollar, thereby ending any crises related to solvency.  It’s important to note, however, that this article was posted on the 11th of September.  Which means that the last bailout that had been made at the time of publishing was the Fannie and the Freddie bailout.  Since then we’ve invested $85 billion in AIG to bail them out as well.

When the government can no longer pass the United States’ “immense debt” on to taxpayers, it will turn to the holders of U.S. dollars, leading to the eventual downfall of the currency, Hennecke said.

It’d be stupid to pretend that the U.S. is not facing huge debt levels.  In fact we’re close to $10 trillion at this point.  You can see for yourself at the U.S. National Debt Clock.  Things aren’t looking well at all when it comes to the health of our U.S. government.  The problem with this extreme level of debt, and the reasoning behind Hennecke’s predicted depression, is that the U.S. will be forced to print billions of dollars of cash in order to cover the debt and the interest.  He believes that this will lead to HUGE inflation levels which of course will have devastating effects on the American people.

I don’t necessarily think that we’ll ever get to this extreme of a crisis here in the U.S., but it’s worth thinking about.  Just in case something like this ever did happen it wouldn’t be a bad idea to have some money invested in something that wouldn’t be devastated by hyperinflation and depression in the U.S.  If you follow what Mr. Hennecke is doing then you would want to invest in Asian countries, especially China.  He also recommends investing in Gold, as it is a natural hedge against inflation.

Tags: Bailout Nation, Depression, housing bust, Inflation, National Bankruptcy, National Debt, recession