And the Band Played On

[Editorial Notes: What you're about to read is scary. It's meant to be. It's not a movie, its real life. This is happening and some of the outcomes are inevitable. If you're scared at the end of this piece, good. Do something about it. Get involved and tell your representatives to start building lifeboats.]

On Monday, the financial world (cue the eye-rolling "not again" reactions) was stunned by the announcement from ratings giant Standard and Poor's that it has downgraded the financial outlook of the United States.

Most people on the street metaphorically shrugged their shoulders and said, "So?" I'm going to answer that question by continuing an allegory that I'm using with the people I meet.

Last November, I likened the U.S. economy to the Titanic. I spoke about the QE2, "Quantitative Easing", as being akin to applying full power to the economic ship while headed straight for the iceberg. Extending that metaphor, yesterday's announcement was that we've not only hit the iceberg, but, as Titanic's builder Thomas Andrews told Captain Smith, "We have about two hours," -- the ship of the United States is sinking and the outcome is a foregone conclusion.

You see, what this means is the Wall Street -- Thomas Andrews -- is finally acknowledging what analysts -- Frederick Fleet, the lookout -- have been warning of for years: there's an iceberg looming and we're going to hit it. In fact, we have hit it. And now we're "down by the bow."

For years, Captain Smith (successive administrations) and J. Bruce Ismay (Congress) have been blithely ignoring the ice warnings issued by numerous other ships (Greece, Spain, Portugal and the E.U.) have issued and have instead confidently sailed directly into ice fields with "full steam ahead." And yet, as I noted above, they are "stunned" when the ship hits an iceberg.

In the case of the Titanic, Captain Smith was, by many reports, so distraught and unbelieving that he was almost, at times, catatonic and paralyzed into inaction. And our leaders, and Wall Street, are now having the exact same reaction.

On the Titanic, Captain Smith told his officers not to "panic the passengers" by telling them to muster on the boat decks. In the United States, the Obama administration and a compliant media is focusing on so-called "recovery stories" and partisan wrangling.

But they're not the only ones. In our own state of Wisconsin, which like the Federal Government, is bankrupt (yes, that's right, both have no money - literally, not figuratively), the Unions and state workers are scrambling over each other to scream about their "rights". As the ships of state sink out from under their feet, they're only concern is, like those first class ladies on the doomed Titanic, that they are "properly dressed for the occasion."

In hindsight, its easy to see the series of miscalculations, mistakes and accidents that lead to the sinking of the grand ship. Its easy for us to shake our heads and make the judgement, "Couldn't they see they didn't have enough lifeboats? How stupid!" And yet our governments have done the exact same thing.

The British Board of Trade regulations in 1912 required only that one have lifeboats according to the tonnage of the ship, regardless of the number of actual passengers. It was an outdated and outmoded way of thinking with disasterous consequences.

Likewise, our governments have been following the Keynesian model of economics which prescribes that governments spend money to stimulate the economy. It is an outdated and outmoded way of thinking with disasterous consequences.

Even China, often touted as the superpower of this century that will eclipse the United States, has subscribed to this discredited economic theory and is soon to face its own massive financial crisis.

On the evening of April 12, 1912, there were no ships (save the Californian, whose radio was off) close enough to Titanic to affect a rescue. Likewise, given the current state of affairs in Europe and the impending Chinese meltdown, there is no one to save the United States. Its up to the passengers, each and every citizen, to make the officers, our legislators, take immediate action to save as many as possible.

Ladies and gentlemen, we have hit the iceberg. We are sinking. The builder Mr. Andrews has admitted that we are going down. The question now isn't "how do we save the ship", the question is, will we have enough lifeboats for everyone. And given that our government plans as well as J. Bruce Ismay, the answer isn't encouraging. It is up to each of us, regardless if First Class or Steerage, white collar or Unions, to take our fiscal lives and those of our fellow passengers in our own hands. We are all in the same sinking boat.

I am sending this column to my legislators at both the state and Federal level. I am going to hound them about priorities and building life rafts. And I'm making sure my own life jacket (my financial "house") is secure. What are YOU doing?

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The Launch of the Titanic

Oh, God, not another "financial" piece... but please, bear with me.

On May 31st, 1911, the Titanic slid down the greased rails at the Harland & Wolff shipyard in Belfast. That day, it was impossible for anyone to envision the fate that awaited it, less than a year later. On November 3rd, 2010, the QE2 slid down the rails of the Federal Reserve, greased by the incompetence of Benjamin Bernake, the fiduciary misconduct of the Obama administration and the criminal complicity of Congress. This time, it's possible -- no, it's unmistakeable -- to see the iceberg "right ahead".

The QE2 in this case is the second round of so-called "Quantitative Easing". What this boils down to is that the Federal Reserve has decided to "print" more money in what they believe is a move that will "promote financial growth". In essence, the Federal Reserve Chairman, Ben Bernake, decided to print up more money on the theory that this will spread more money around and therefore stimulate the economy. Sounds good on the surface, right? "But wait," as they say, "there's more!"

What Bernake and the Fed are trying to do is Keynesian economics. They are trying to spend their way out of debt. This doesn't, as I've explained before, work at all. The idea is completely discredited. It's made even worse because the value of "a dollar" does not have any intrinsic value -- it is not tied to a commodity. Instead, it represents the "good faith" of the United States.

These days, that "good faith" is sorely lacking. The economy of the U.S. is in the dumper and printing more money, as anyone with a fifth grade education (excepting, of course, those who teach at Princeton) can deduce, simply devalues every dollar even further.

There are two major problems, here: illiquidity and insolvency. I don't intend this to be an Econ 101 course (if it were, I'd invite Mr. Bernake) but I'll give a quick explanation for the layman (me!):

• Illiquidity is when you don't have "cash on hand". Think of this as when you own a car (without a loan) or a washer and dryer, but you don't have cash to buy groceries.
• Insolvency is bankruptcy. It's when you owe even on your car and washer/dryer. You don't own anything, anymore. Your debt is greater than your total worth.

Thanks to the policies of the Obama administration and a Congress of accomplices, the United States has a debt that has exploded. The candidates made promises in 2008 to anyone who would listen. They promised "money for nothing". They promised "the government will take care of you." All you had to do was vote for them, then sit back and collect your "Obama Money." Plenty of people, inculcated by over a half-century of burgeoning federal nannyship bought this hook, line and sinker.

While fiscal conservatives warned that there would be a day of reckoning, shouting "ICEBERG! RIGHT AHEAD!", the liberal intelligencia and administration "Goebbels" did their best impression of Captain Smith, increasing speed into the ice field and rearranging the deck chairs. They started handing out money (as my father would say, and keeping in the theme of this piece) like a pack of drunken sailors, increasing the debt from $869 billion in 2007 to $2.2 trillion! Just to put this in perspective, the QE2 ("our" QE2 in this story) is $850 billion.... that's nearly the ENTIRE debt from 2007!

So here's the issue - you can solve illiquidity (at least in the short term) by converting something to cash. The Federal Reserve does this not by pawning real goods, but by printing more money. But this "solution" supposes that you'll have the cash coming in to replace it so you can get your goods out of hock. It flat out does not work if you are insolvent nor does it fix insolvency.

If you don't own anything yourself then you can't hock it; and in the case of the United States, we are insolvent. So printing more money (pawning goods) does nothing! It simply causes us to owe even more and go further into debt.

To put it very simply in our analogy, Bernake is applying full power to the engines with the iceberg looming.

But we do have a chance, yet, to get the ship of state out of harm's way. A new Congress has been elected. It's up to us, the passengers, the voters who put them there, to hold their feet to the fire. It's not good enough to "compromise" -- "we'll just turn the wheel a little and we'll slow down a few knots" -- instead what's needed is full rudder and all astern on the engines. That's what we sent these people to Congress to do and its up to us to make sure they do it.

If we don't, then we may as well start singing "Nearer, My God, to Thee" because there aren't enough lifeboats to go around.

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