The bankruptcy warning signs for America are the same as for individuals or small businesses

Ever see ‘Flight of the Phoenix”?  I mean the original version of the movie with Jimmy Stewart.  It was a great movie about a plane load of people who crash-land during a sandstorm in an Sahara desert.  Most of the passengers survive the crash and they realize quickly that they will not be rescued and thus they must rely on themselves to stay alive and to find a way out of the desert without outside help.

A German engineer comes up with an ingenious plan.  He says that they can build a new aircraft with one of the engines from the old aircraft but this would require to attach parts of the wings from the old aircraft to this engine.  This would require a significant amount of work and re-design but the German engineer (played by Hardy Kruger) informs the others that he builds aircraft and that it indeed can be done.  After an intense debate session the survivors decide that they have few other choices so they go ahead with the project.

They work diligently, mostly at night to avoid the heat, and they fight a great deal throughout the process.  Most of the movie is about their struggles during this aircraft conversion process.  Hardy creates more dissention as he takes extra rations of water for himself during the airplane conversion and several of the group die during this time.  When the aircraft is finally complete and ready to fly someone finally decides to ask Hardy Kruger what kind of airplanes he designed.

Hardy tells him proudly that he designs small model aircraft and that the largest one was may 3 feet wide.  The others are shocked but Hardy assures them that the mechanics are the same no matter how large or small the aircraft is.  He is proven right after the re-designed full-sized aircraft does indeed fly the crew to safety.

I would argue that we bankruptcy attorneys who deal with bankrupt individuals, couples, and small businesses every day can spot bankruptcy warning signs even if it is for something as large as the federal government.  We attorneys are just like the character Hardy Kruger played in Flight of the Phoenix.  We work on smaller bankruptcies everyday but the warning signsUSA are the same for our clients as they are for the feds.

They federal government has been borrowing and spending money to finance a lifestyle they cannot afford for some time now.  We have 16 trillion in debt and we will have 20 trillion in four years.  We keep spending and borrowing and we fail to cut our spending to equal what we get in revenue.  The interest on this debt is growing every day and if the interest rates rise then the interest alone will be beyond our ability to pay.

This is really the sign of bankruptcy for individuals, businesses, or municipalities.  And the signs are the same for the small entities and the large ones.  We attorneys deal with small entities but just like Hardy Kruger we realize that the dynamics are the same big or small.  Hardy’s plane flew and our government is bankrupt.

This is what Peter Schiff concludes in his new book, “The Real Crash: America’s coming Bankruptcy”.  He argues that the crash is coming due to the government’s continual lowering of interest rates that creates all of these bubbles; the dot-com, the housing, and now the government spending bubble.  The government will eventually have to raise interest rates to attract investment and when they do the interest we pay on our national debt could consume all of our revenue.  We would then be unable to function as a country.

Another book about the coming bankruptcy for America is “America’s Ticking Bankruptcy Bomb” by Peter Ferrara which appears to say virtually the same thing about our massive debt problem and what it will lead to.  Also there is the book by Senator Tom Coburn “The Debt Bomb: A Bold Plan To Stop Washington From Bankrupting America”.

Though these books so far are written primarily by conservatives I believe that everyone will agree that the debt belongs to all of us regardless of who got us there.  America must own the problem now and something must be done to avert the potential problems that the debt will create.

Forget for a moment that America as a sovereign cannot declare bankruptcy.  There is no higher governing authority than the nation-state at this point to oversee a bankruptcy of a country.  We must print money to inflate our way out of debt which could lead to something like the Weimar Republic with hyper-inflation or we must default.  If we default and just refuse to pay the debt then we will have extreme trouble in getting anyone to lend us money again without exorbitant interest rates.

But I am seeing a greater and greater number of authors, commentators, and others using the word bankruptcy in relation to America without knowing the warning signs as well as we bankruptcy attorneys do.  I agree with these people about the bankruptcy danger in America.  America seems to be headed in the direction of bankruptcy even though the federal government cannot actually file for bankruptcy.

We are spending and borrowing, spending and borrowing without a pause.  We are time and again failing to match our spending with our “revenue” and even if we do we have to somehow pay back all of the money we borrowed previously.  In the meantime we have to service the debt.  Our interest rates are low but our interest payments increase each year because we borrow more and we will have an impossible time paying back the debt we already owe, just like my clients.

I am a San Diego bankruptcy attorney.  For further questions please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation or for any other advice about bankruptcy or debt at (619) 702-5015.  Call now for free credit report and analysis!

For a free e-book on “13 things to do to prepare for your bankruptcy filing” please e-mail me at farquharesq@yahoo.com.

USA photo courtesy of Kevin Hutchinson.

Are we headed for deflationary depression instead of hyperinflation?

At least one analyst thinks so.  According to financial advisor and author Dan Shaffer America and the rest of the world are currently at the beginning of a deflationary depression period.  He believes that we are presently seeing the beginning of this depression and it will last for many years to come.  Presumably overall prices will fall dramatically in this period according to Shaffer’s prediction.

He says that governments have borrowed huge amounts of money and this has driven up public debt dramatically.  We have had TARP and the stimulus package to name a few of these public spending programs but none of them have stimulated the economy.

We still have high unemployment and no sign of a real recovery.  According to an article posted online recently in Yahoo Finance the economy is sputtering.  Unemployment rose in May officially from 8.1% to 8.2%.  Far fewer jobs were created than were anticipated according to the article.

Shaffer points out that Chinese manufacturing is stalling and there is the European economic crisis.  Several countries in Europe have massive debt problems with Greece at the forefront but Spain, Italy and others are all in trouble too.  Manufacturing in Britain is shrinking at a fast pace and even France and Germany are showing a slowdown in the manufacturing sector according to the Yahoo Finance article.

Shaffer seems to indicate that all of this government spending has only served to pump more air into a series of bubbles.  We have already seen the housing bubble burst but their are others that are ready to burst he says.  There is the manufacturing bubble and the student loan bubble not to mention the overall consumer debt bubble.   He indicates that all of these bubbles must eventually burst when the air (government spending) is withdrawn as it inevitably must be.

In America the Fed has responded to this overall economic crisis by dropping interest rates to historic lows.  Interest rates are now lower than what they were even in the great depression and they are at the lowest level in history according to Dan Shaffer.  According to the Yahoo Finance article the Fed has bought $2.3 in bonds to help the recovery.  The Fed has also signaled that it will keep these interest rates low until late 2014 at least.

In the article they state that there is little more that the Fed can do as it has dropped interest rates as low as they can for the foreseeable future and it seems to have little effect.  The federal government too is in trouble too as it has borrowed and spent with TARP and the stimulus package around $2 trillion and this has not created growth in the economy.

So now the government is out of options.  They have borrowed, spent, and the fed has lowered the interest rate to zero.  What else can the government do?  We now have a $16 trillion public debt to show for these borrowing and spending policies and little economic recovery.  The spending has indeed left us with nothing but record large government debts.

I hear echoes of history here where FDR’s treasury secretary Henry Morgenthau, Jr. said “we have tried spending money.  We have spent more than we have ever spent before and it does not work”.  He was speaking here of FDR’s new deal which he was a primary architect of.  The new deal policy was to borrow and spend money endlessly in an attempt to stimulate the economy but at the end of 8 years the unemployment rate was just as high as it was when FDR’s administration began spending money.

Today we have done almost exactly what was done in the 1930s with similar results.  You think we would learn from history that this massive borrowing and then spending does not lead to recovery but just to massive debt.  Now with the heavy debt load and the lack of recovery the American public naturally wants to put a brake on the spending.

A public demand has been building for the last few years that government spending be curtailed.  We have seen this with groups like the Tea Party and others that have demanded an end to this spending and a reduction of deficits.  Whether you agree with these groups or not their demand have reached the ears of Congress.

This is where Shaffer seems to believe that we will get into trouble.  He claimed recently on Fox business that this government spending does eventually find its way into the private sector.  When government spending is lowered in the near future he says this will result in less buying power for world markets.  This could result in deflationary pressures throughout the world as the bubbles burst.  Prices could then dramatically decline instead of increase.

He seemed to say that government spending has propped up the stock market although temporarily.  Now that the times have changed and people want to put the brakes on borrowing and spending this removal of the government money will result in severe economic problems because of a collapsing of prices.

The government has also tried printing money with QE1 and QE2 and there are calls to do a QE3.  I argued in a previous blog that this will only lead to massive inflation and that could lead to disaster.  This is what lead Germany to Hitler through the massive money printing and inflation of the Weimar republic.  The National Socialists (NAZIs) were just another political party with limited influence until the money printing inflation cycle drove the German economy to a terrible crisis.  This all made people turn to Hitler for a solution and we all got the holocaust of World War Two with 60 million dead.

I believe that Shaffer’s theory of a massive price reducing deflation instead of hyperinflation must be considered as a real possibility.  It is certainly another possible outcome of the current economic crisis.  Prices could dramatically fall when government spending is inevitably withdrawn.

Is it more likely that prices will collapse as government withdraws spending?  Are we headed into a deflationary downward spiral or is it more likely that massive inflation will occur as governments print more money?

We don’t know for sure.  Our debt situation and money printing policies are similar to the Weimar Republic of the 1920s but the argument for deflation is also compelling.  Will prices drop dramatically or will they inflate beyond all expectations?  Either way we appear to be headed for a crisis in the world.  We have been there before but the results were not good.  When economies collapse and order is gone people yearn for someone to restore order.  That person or persons could become a detriment to the whole world like Hitler was in the 1940s.

I am a San Diego bankruptcy attorney.  For further questions please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation or for any other advice about bankruptcy or debt at (619) 702-5015.   Call now for free credit report and analysis!  For a free e-book on “13 things to do to prepare for your bankruptcy filing” please e-mail me at farquharesq@yahoo.com.