By Jeff Nielson of Bullion Bulls Canada
I checked in recently on my favorite source for U.S. debt information, the
Grandfather Economic Report
, published by U.S. economist Michael Hodges. I immediately headed for the section --
America's Total Debt Report
-- where I've gotten my information on total public and private U.S. debt.
At the end of 2008, U.S. total public/private debts stood at $57 trillion, not including the federal government's $70 trillion in "unfunded liabilities.". Thus, I was very curious to discover what that total had risen to by the end of 2009. I was utterly flabbergasted to discover the same total for 2009. Let me elaborate.
With U.S. federal debt at more than $12 trillion, and total public/private debt at $57 trillion, this implies that the rest of the U.S. economy has been taking on nearly $5 of debt for every $1 dollar of debt taken on by the federal government. This ratio has eased somewhat in recent years -- not because the rest of the U.S. economy has been borrowing less, but because the federal government has been borrowing much more.
Even with this reduced ratio, with the U.S. federal government taking on $1.8 trillion of new debt in 2009, I fully expected the new total to soar well above $60 trillion. Keep in mind what the 2009 total directly implies: In order for the total to stay at $57 trillion this means that for the rest of the U.S. economy, rather than any new debt being incurred, $1.8 trillion of debt had been extinguished.
In other words, we know that U.S. state and local governments were taking on huge amounts of debt in 2009. We know that while Wall Street has slashed lending that there is still a considerable amount of "residual" lending taking place. What this means is that for total debt to have stayed the same a mountain of debt would have had to be extinguished to negate all this other debt: $1.8 trillion of federal debt, hundreds of billions in state/local debt, and at least tens of billions in new private sector debt. That mountain would have totaled well over $2 trillion.
There are only two possible ways to retire debt: to extinguish it through repayment, or to destroy it through default. Given that U.S. default and delinquency rates for all categories of debt are at or near all-time record level, we know that very little U.S. debt is being extinguished through repayment, thus somewhere around $2 trillion of debt was destroyed through default in 2009.
This begs the question: Where are all the U.S. writedowns or write-offs? While a big chunk of defaulting U.S. debt is held by the U.S. government (and we know all their records are totally fraudulent), most of that defaulting debt would have had to be held by the private sector. For convenience, let's round it off to the very conservative number of $1 trillion: $1 trillion of private sector defaulting debt in 2009, leveraged by U.S. banks somewhere between 10:1 and 30:1. In other words, that $1 trillion of defaulting private sector debt would have produced somewhere between $10 trillion and $30 trillion of writedowns for U.S. banks, in 2009 alone, as those debts blew up.
Getting aggregate information on U.S. bank losses is difficult, especially in this new era of mark-to-fantasy U.S. accounting. A 2009 International Monetary Fund report forecasts total global losses on U.S. debt from the start of the crisis until the end of 2010 at $2.7 trillion. Even if we assume that only 25% of that total would be borne by foreign banks, this still means that the IMF is estimating that total U.S. bank losses would only amount to $2 trillion for 2008-2010 combined. This implies no more than $1 trillion of bank losses or writedowns in 2009, and I strongly suspect that the Wall Street fraud-factories didn't report nearly that amount.
In other words, U.S. banks during 2009 reported less than 10% and likely only about 2% or 3% of their actual losses and writedowns for 2009. In some respects, this is not a surprise. We know that with the U.S.'s mark-to-fantasy accounting that U.S. banks are hiding trillions of dollars in losses, which they have yet to recognize.
However, Hodges data directly implies something much more fraudulent than that. Even the new, bogus U.S. accounting rules still require some minimal standards of accounting, specifically that once a loss is "crystallized" (by default), such losses must be reported or recorded irrespective of the fantasy-valuation which the U.S. banks would like to use. What the data from the
Grandfather Debt Report
implies is that U.S. banks are fraudulently hiding trillions of dollars in crystallized losses -- which even those farcical accounting rules don't allow.
Because the implications of this data are so serious, I contacted Hodges personally to verify what he appeared to be stating with his statistics. He emphatically stood behind his numbers, giving me a choice. I could put my faith in a respected, independent economist, or I could put my faith in the statements and accounting of U.S. bankers. In other words, there was no choice.
In many respects, these numbers do nothing more than confirm what I have been saying all along: The Wall Street oligarchies are hopelessly insolvent and that insolvency is only hidden by grossly fraudulent accounting. As I have repeated on many occasions, U.S. big-banks were leveraged by an average of 30:1 at the time the U.S. Ponzi-schemes imploded. With such leverage, it would take losses of only 3% on the underlying assets (primarily U.S. residential real estate) to take the entire U.S. financial sector down to zero.
As we all know, U.S. housing prices fell roughly 30% after the first bubble in the U.S. housing sector imploded -- 10 times the amount needed to take the entire U.S. financial sector to zero. We know those valuations have not improved from the data we get from U.S. bank failures. Since the start of the collapse of the U.S. financial sector, the ratio of losses-to-assets at these failed banks has increased by 500% in little more than 2 years (see
). If anything, the value of "toxic assets" on U.S. bank balance sheets is continuing to shrink.
What Hodges' numbers do show is that not only are U.S. banks hopelessly insolvent but they are actually bankrupt today. The only way they have been able to avoid immediate, formal declarations of bankruptcy is to illegally hide trillions of dollars in losses. While it is always tempting to compare Wall Street to "organized crime", I'm guessing that even the Mafia demand more accuracy in its own accounting.
Jeff Nielson studied economics for four years at the University of British Columbia, before going on to attain a law degree from that same institution in 1989. He came to the precious metals sector around the middle of last decade as an investor, but quickly decided this was where he wanted to focus his career. After publishing his own, amateur blog for a year, in 2008 he founded Bullion Bulls Canada: a web-site providing information and analysis to precious metals investors. Today, bullionbullscanada.com reaches a global audience of precious metals investors in more than 120 countries.