Your money, your life...and what's coming your way through 2012

Brilliant know-nothing that I am, I'd always assumed that Jimmah Carter's Community Reinvestment Act (CRA) which passed in 1977 was somehow behind the horrific economic collapse of 2008 that, conveniently, pushed a Marxist into the White House for the first time in U.S. history.

Here's why you should believe it, too:

If you carefully run through these posts and the accompanying comments, I think you'll see that every argument raised by the "Defend CRA at all costs" crowd has been refuted.

Here's How The Community Reinvestment Act Led To The Housing Bubble's Lax Lending

UPDATE: Contrary to the Obama narrative, however, it is not free-market capitalism at the root of the current mortgage industry crisis, but rather the very socialism Obama hawks. The historical record makes this fact unmistakably clear.

But it ain't over yet folks, it's gonna be a bumpy ride:

Mark Mobius, executive chairman of Templeton Asset Management’s emerging markets group, said another financial crisis is inevitable because the causes of the previous one haven’t been resolved...

Stansberry Research, as usual, goes much deeper. Here are some brief excerpts:

The Beginning of the Panic

On June 30, the Federal Reserve has pledged to cease buying U.S. Treasury bonds. This is the second time since the financial crisis it has intervened in the Treasury market in a major way. The program of buying new Treasury issues has been dubbed "quantitative easing II" (QE2).

We'd wager not one in 1,000 Americans has any idea (or at least any real understanding) of what has been going on in the market for U.S. Treasury bonds since the financial crisis. For the last nine months, the Fed has been printing up new dollars and buying huge amounts of newly issued debt from the U.S. Treasury – $600 billion of bonds. And these purchases followed a $1.75 trillion program of quantitative easing that ran from March 2009 to March 2010.

It is no exaggeration to say that a printing press has kept our economy going for the last two years. But what will happen when the printing stops?

We Can't Borrow Forever...and We Can't Stop

President Obama's economic mandarins now forecast the fiscal year 2011 deficit will come in at $1.6 trillion.

To put this figure in perspective for you, when Ronald Reagan took office, the entire national debt totaled less than $1 trillion. Even as late as 2002, the national debt was only $6 trillion. Obama's administration will almost surely borrow more than $6 trillion in only his first term. In four years, Obama will double our entire national debt from its pre-financial crisis levels.

This has never happened in peacetime.

A Hard Reality

Rather than face these unpleasant facts and consider where they are leading us, most people continue to think, "It can't happen here, this is America."

Meanwhile, our country has been depending on a printing press to make our economic system work. When is the last time that happened in America? (Hint: the Civil War.)

How many other things most people didn't think would ever happen in America have happened recently? What about the collapse of our investment banks, the bankruptcy of General Motors, the liquidation of Fannie Mae and Freddie Mac, the failure of AIG, hundreds of banks being seized, millions of homes in foreclosure, real unemployment rates close to 20%. We could go on.

As we frequently point out to our critics, the question isn't when this crisis will begin – it started in 2008. The question is, when will it end and how bad will it get before it does?

Two Secrets About U.S. Finances You Won't Read Anywhere Else

Most people misunderstand two things about the U.S. financial situation...

First, the U.S. government's official debt burden might not yet have reached the "red line" of imminent default. But our entire economy's enormous debt burden makes it nearly certain we will default on our federal debt and many of our private debts, too.

The U.S. is the world's largest debtor. As a whole, Americans owe a total of nearly $56 trillion dollars (almost 400% of GDP). That's federal, state, municipal, corporate, and private (mortgages and student loans) debts. The debt service on our total obligation is $3.6 trillion a year. It's hard to put that number into context because it's so large. Think about it this way – It's roughly the same amount of money as the federal government's entire budget.

To the extent our debts fueled past consumption (homes, cars, credit cards, health care, etc.), they are unlikely to spur future economic growth. That's not to mention a considerable portion of these payments belongs to foreign investors, folks who are typically more interested in building their next factory in Bangladesh than in Bangor.

When you combine this "debt tax" – aka interest – with the size of our actual tax burden (about $4.4 trillion when you combine federal taxes with state and local taxes), you can see pretty clearly why our economy is struggling.

We're spending half our annual GDP on taxes and interest.

Imagine if you had to spend half of your family's income on taxes and interest. How would you rate your credit risk? What's the likelihood of default in that scenario?

More important, given our current federal deficits and the looming entitlement crisis we face (total unfunded future liabilities in excess of $100 trillion)... How is it possible to expect Americans will be able to afford to pay more taxes? What would happen to our budget if interest rates rise because of inflation, which seems inevitable?

We don't think many Americans – even sophisticated investors – have considered these numbers. Our foreign creditors will realize they have no chance of being repaid in sound money. Americans simply cannot afford debt service, never mind principal repayment. There are signs they already recognize this...

The Dynamics of a Bond Market Collapse

By the end of 2012, our national debt will likely exceed $17 trillion. Let's assume our average interest increases to 4.4% – half the rate we believe investors will eventually demand. That works out to an annual interest expense of almost $750 billion. That's more than we spend on defense or Social Security. Interest expenses would leave the government spending almost 25¢ of every dollar on interest payments.

Does that sound wise or reasonable to you? Given these expenses, some of our creditors would become reluctant to "roll" our debt into the future by offering new loans. This could cause a serious problem for the U.S. Treasury. This is how the dollar dies.

Gambling on Short-Term Financing

Portugal's government recently suffered a debt default. The country required a bailout by the European Central Bank (ECB) because it had too much short-term debt coming due and not enough lenders were willing to extend these loans at affordable rates. Lots of economists criticized Portugal's borrowing strategy because much of its debts were short-term.

Apparently, these folks haven't bothered looking at the U.S. Treasury's debt maturity curve. We have. The numbers are so shocking, we expect most of our subscribers simply won't believe us. You can read all of the numbers for yourself, if you'd like. Bureau of the Public Debt includes all the numbers in its Financial Audit (which you can read on its website.

Feel free to read all 35 pages... Or focus on just this piece of data. It's all you really need to know: 61% of all the marketable Treasury debt held by the public will mature within four years. Thus, over the next four years, the U.S. Treasury must either repay or refinance more than $1 trillion in existing debt each year – not to mention additional deficit spending of at least $1.5 trillion. For us to avoid a default, the U.S. Treasury may have to borrow or refinance as much as $10 trillion in the next four years.

That would double the amount of U.S. Treasury bonds currently trading in the world's markets.

Think about that for a minute. Then, consider the decades-low yields in the Treasury market today, which would surely rise to accommodate this enormous increase in supply.

Now, try to arrive at any sort of scenario that ends well for today's U.S. Treasury bond market investors. We can't...

Keep in mind that these brief excerpts have a much broader context in the newsletter, and many more details, but I think they will give you an idea of what is coming.

Be prepared.

UPDATE: Some important references

www.fms.treas.gov/annualreport/index.html

www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/tables.pdf

www.whitehouse.gov/omb/budget/Historicals/