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The western world stumbles


Over the years, Martin Hennecke has gained the respect of the folks at CNBC for his track record in the financial prediction department, which, while not perfect, is better than that of most.

Hennecke, the senior manager of private clients at Tyche, has a graphic he e-mails to anyone willing to listen. It's by Standard & Poor's, and it shows the government bond ratings going forward for the United States, France, Germany and the United Kingdom.

At the moment, government bonds are thought of as one of the most secure investments out there, second only to cash in terms of risk for investors. But that will change over the next two decades as these governments struggle under the backbreaking weight of unsustainable borrowing to finance government spending and the skyrocketing cost of entitlements, and, ultimately, their citizens' questionable ability to pay the borrowed money back.

According to the chart, France will stumble first. By 2011, French government bond will lose their AAA rating and slide to AA+. The other countries aren't far behind.

U.S. bonds, the main financing vehicle for deficit spending, will begin their downward slide in 2017. The decline, once it begins, will be rapid for the four countries. Their ratings will slip to BBB- status in the 2020s and full junk bond status by around 2030, the chart shows.

This isn't some doomsday scenario, put out by a fringe group. Standard & Poor's is one of the world's three most respected ratings agencies. The others predict similar trends.

As the cost of borrowing skyrockets, Hennecke explained to me in a recent radio interview, hyperinflation will sink in. When that happens, Americans used to driving a new car every two years and mortgages on demand won't recognize the new country they live in.

Hyperinflation wrecks the purchasing power of public and private savings, leads to the hoarding of assets, drives the monetary base from a country and makes investment all but impossible. Under these conditions, business growth will grind to a halt and large job losses will soon follow.

The problem, Hennecke says, is that the chart was published in 2005, before the credit crisis and before the recent bailouts here and abroad. Now, Hennecke says, there are signs that the coming government credit crash could begin sooner than predicted.

Recent bond offerings in Europe to finance their "bailout" resulted in few takers. Hennecke wonders what will happen when the U.S. attempts to sell the bonds to finance the multi-trillion dollar bailout the government has pledged this fall. Speculation already abounds about a possible dip in our bond rating to AA.

There is only one hope to stop the coming economic slowdown, Hennecke says. The country must radically reduce spending in all government sectors, including pulling its troops home.

Instead, American is choosing to go in the opposite direction, with Treasury Secretary Henry Paulson throwing billions of borrowed federal dollars at healthy banks to achieve goals that are unclear at best. In a 60 Minutes interview last week, President-elect Barack Obama said that Americans need not worry about more deficit spending "next year or even the year after," while we attempt to fix our fiscal crisis.

The plan, it appears, is to continue President Bush's policy of propping up businesses that will go bust the minute the unsustainable flow from the federal spigot slows. In addition, the incoming administration plans to blow trillions more in borrowed cash on stimulus through endless new programs, public works and jobs projects and more massive stimulus bills.

Meanwhile, a 253-word article buried in USA Today in March that got little notice. Medicare, the paper reported, is forecast to spend more for hospital care in 2008 than it raises in taxes. Unless Congress acts, the trend will continue until money runs out in 2019.

"The projections represent the greatest and most intractable fiscal problem facing the federal government, experts agree," USA Today reported. "Yet they were announced with little fanfare."

"Dire warnings," Secretary of Health and Human Services Michael Leavitt told the paper, "have become a seasonal occurrence."

You'd never know this to have watched the presidential and congressional elections we just had. The entitlement spending situation in this country came up only as an afterthought when it warranted mention at all. Starting in the presidential primaries, candidates were given a pass on their sketchy plans to reform the system. Politicians simply had to slap a few vague ideas under the "entitlement reform" category on their Web sites and reporters would give them a pass on what should have been the central debate in this election.

So four more years will pass, and maybe even another four. But a time is rapidly coming when the bill will come due, and when it does, it will leave no American family untouched.

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