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The Stark Choice Now Facing America

America, and Americans face a stark decision - and a choice that must be made now.

Not next month at the polls, not next week.

Today.

I have been writing on this subject, petitioning Congress, and both calling and faxing Congress - and you - for the last year and a half.

We now sit literally days away, with a high probability, of a credit market "dislocation" that will change American finance and decimate the stock market.

That is, worse - far worse - than what has happened thus far.

Try on for size 2-3,000 points down on the Dow from here.  25% more than has been lost thus far, more-or-less "all at once."  The probability of this event is now in excess of 70% - within the next few days to two weeks.

The Politicians know this.

They were promised that the market would not blow up if they passed Paulson's and Bernanke's bill.

They were lied to, and the first "blowup" happened.

You, the people, were promised that passing this "stabilization" bill was the right thing to do too.

You were lied to.

Now we are sitting on the edge of the second blowup - "The Big One."

Among other things, today we learned that The Fed has lost control of the Effective Fed Funds Rate - their own overnight lending rate.  They were forced to change their interest rate on reserves in order to try to get it back under control - and there is no reason to believe their efforts will be effective.

The truth is that our nation, and indeed the world, has too much debt for its ability to earn income and has had since 1968.  As this became apparent to the people at The Federal Reserve and Treasury, in the 1980s starting with Alan Greenspan, interest rates were artificially kept low for a long period of time to encourage you and others to go into that debt - debt you and these firms cannot possibly repay.

This is why we had the crash in 1987, why LTCM blew up in the 1990s, why we had an Internet Bubble and now why we had a Housing Bubble.

All of these bubbles were intentionally created by The Fed, Treasury and Wall Street Banks to keep the charade alive that you could take on more and more debt and they could make more and more money.

We are now out of bubbles and ability to support bubbles, and America (and the world, in fact) is out of the ability to support more debt.

We are now borrowing money to cover up the fact that millions of Americans and tens of thousands of companies are bankrupt, and the banks and other institutions that loaned them money are likewise bankrupt, as the people who owe them that money can't and never will be able to pay.

The people who in turn loan America the money it needs to operate - over $2 billion a day - have become aware of this fact.

This is very bad, because nobody will loan money to someone forever when they have no reasonable belief that they will ever be paid back.

There are only two options remaining for America, and we as Americans, and our politicians, must choose one of these two paths.

Neither path is easy.

Neither path is pain-free.

The path that will lead us to where we can prosper involves a great deal of short-term pain.  It involves forcing all of the bad debt - perhaps your mortgage, the bad corporate debt, the "Ponzi-Scheme" style debt that has been layered up one on top of another - out into the open and forcing it to default.

On purpose.

This means that if you are underwater on your home, you will lose it and your credit will be destroyed for a few years.  It means you may have to file for bankruptcy.  It means a great deal of short term pain if you are in this position.  It means that companies that have taken on too much debt will be forced to either pay down what they can, or go bankrupt if they cannot.

This path will result in higher unemployment for a time, it will result in lower standards of living. You will not be able to spend money you do not have, and neither will our government.  Both the government and we the people will be forced to live within our means.

The second path is for Ben Bernanke, Henry Paulson our government and you to attempt to do what we have been doing.

That is, to borrow more money to pay the interest on money we have already borrowed.  To refuse to accept that those who borrowed too much, and who can't pay, must declare that fact and face the potential bankruptcy that comes from being too far in debt and unable to make good on obligations.

This is now a critical matter for our nation, because our nation's political leaders have chosen to take the private debt of companies and individuals and attempt to guarantee it with the credit of the United States.

However, The United States is just as broke as we are individually - in fact, more so.

Treasury will have to issue three trillion dollars of new debt over the next 12 months in an attempt to make this work.  But Treasury has been using very short-term debt - mostly four week and 13 week "bills", to fund the existing debt, because they are cheaper.  As such the total amount of these auctions could easily reach five trillion dollars over the next 12 months.

Already, Treasury is issuing more than $100 billion dollars in this debt a week, on average, including new issues and rollovers.  This is about double the total amount of debt that foreigners (or US interests) hold in total, and we have barely begun to actually issue the debt necessary to make the "TARP" operate.

We are, in effect, borrowing to pay interest.  If you have ever tried to do this personally, you know that doing so almost always leads to bankruptcy.

It will for us as a nation if we don't stop it now.

Our choice as citizens is to either accept that those of us who have taken on too much debt will and must go bankrupt, declaring our insolvency and settling what we can, whether we are an individual, a corporation, or even our nation, or whether we will continue to attempt the charade of printing up more and more debt (or money) in an attempt to cover it up.

We are very close to the point where more debt causes the GDP - that is, the totality of our nation's output - to contract instead of expand. 

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At the point that line is crossed, our nation's monetary and economic system will fail with disastrous consequences.

This is, effectively, what happened in Iceland, and it came almost without warning.  The price of everything they import tripled overnight.

We as a nation must choose, and we must do it now.

Nobody wants to accept that they cannot have a new car if they can't put down 10 to 20% of the purchase price, and that they can't "roll over" the old balance into the new loan, but that doesn't make it not true.  It is, in fact, true.

Nobody wants to accept that they really need to put 20% down on a house and that houses can't sell for more than 3x incomes, on average, but it is in fact true.

Nobody wants to accept that having college cost $200,000 for four years is obscene and that allowing our kids to graduate with that sort of debt is outrageous, but it is in fact true.

Your 401k has already been turned into a 201k because our government has decided to lie about the fact that dozens if not hundreds of banks and tens of thousands of businesses, not to mention millions of individual Americans, maybe even you, are in fact broke.

Not everyone, however, is broke - but everyone's 401k, 403b and IRA is being decimated, and if we do not act now, we will all - the broke and the prudent - suffer the consequences of trying to lie about the financial state of our nation's banking system, our nation's companies and our nation's families.

We may be days away from an international credit incident originating outside of the United States.  Foreign nations, banks, and businesses have "levered up", or taken more risk, than we have.  They too have chosen to lie.

As money has flowed from "not guaranteed and possibly lying" firms' debt to that which is guaranteed by the government, the government has seen necessary to guarantee more and more liars, lest further firms and types of debt fail.  As each type of debt becomes guaranteed it "sucks the money" from the non-guaranteed, and within weeks or days The Fed is obligated to guarantee yet another type of debt, lest it collapse too.  We now have general corporate debt blowing out to wide levels, which will soon shut off all new corporate borrowing - even for sound companies - because there is no reason to buy their debt when you can buy guaranteed debt of some other type.

The Federal Reserve, starting with the "TAF", now has an entire alphabet soup of "facilities" to guarantee various debts, and the FDIC has increased its coverage.  In recent weeks The Fed's facilities have even been extended overseas via "swap lines" and various other charades - it is no longer just United States interests being backstopped, it now includes foreign banks as well.

All of this is for one purpose - to cover the fact that many of these businesses are broke - that is, to cover up the lying.

But as each lie is covered up, the market calls the bluff and forces yet another coverup.  The Fed is now creating new facilities to the tune of hundreds of billions of dollars they do not have, effectively displacing private lending on a global scale, now operating with leverage of more than 40:1 - all so the lies do not have to be admitted to.

But with each new charade the spiral tightens at an increasing rate.

At some point the people who have lent all of these firms money will cease to be willing to do so because all debt will become equivalent to US Debt, and all of it will be considered "dangerous."

The people who loan us money - the oil producers, the Japanese and the Chinese - are able to do the same math I am.

They know the same facts I know, and you should know.

They know the same facts that Henry Paulson and Ben Bernanke know, but have not shared in an open and honest fashion with The American People - or with Congress.

We are on the cusp of this dislocation - and this realization - being forced upon us.

I believe Treasury has been attempting to "kick the can down the road" as is the usual pattern in Washington DC.

Unfortunately the can has filled up with cement and there is now a very high probability that instead of the can being able to be kicked down the road until next year after the elections the second-level dislocation - the "big one" - is going to happen within days.

It is my opinion that we must, at all costs, protect the borrowing ability of our government - the Treasury of The United States.

We must not use our government to protect the liars in American business, no matter whether they are banks, automakers, the local store owner or ordinary Americans.

If we are to get through the difficult economic times we are in and which lie ahead, we must guarantee that our government is able to borrow money at a competitive rate.

We must make sure that the government is not lumped in with the liars, lest the government's ability to borrow get cut off or become prohibitively expensive.

This decision to differentiate the government from the liars must be made now.

Our leaders must stand up and demand that Ben Bernanke and Hank Paulson stop backstopping the bankrupt.

We must withdraw the TARP and not allow $70 billion dollars of borrowed money to go to pay bonuses at major Wall Street banks - $70 billion dollars we do not have.

We must not allow this money to be used to run mergers and other corporate "raids."

We must stop Ben Bernanke from expanding his "alphabet soup" of lending facilities, and force those who are in fact bankrupt into the open, where the free market's solution - bankruptcy - awaits.

We must force home prices down so that you can truly afford to buy a house, not keep prices artificially high so that the banks and other lenders don't lose money.

We must recognize and admit that the debt merchants - the banks - are opposed to doing the right thing not because their opposition is good for America and it is to everyone's benefit that they be protected, but because by forcing hidden defaults into the open some of them will go broke, and all of them will, in the future, have far less business to compete for.

Once the bad debt has been forced from the system then and only then should Congress step in, if necessary, and charter new banks.  Spin them off to the public in IPOs with the money was going to be used for the TARP - but only after we have restored the ability of America to use credit once again by defaulting the bad debt that currently exists.

If we do not make this choice, and make it now, those who have the money we are borrowing - the Chinese, the Saudis, The Japanese and others - will make this decision for us.

They will come to the conclusion that they will never be paid back.

At this point our way of life will be irretrievably altered.

Your 401k, which is now a 201k, will become a 101k or even a 51k.  The DOW could fall to below 5,000 and the S&P 500 to 500 or less, with 20 years or more of gains wiped out.

You have already seen nearly half of your money disappear.

You could see another half disappear - within days.

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That is a 75% loss from October 2007 values, and before you scoff at it, look at a chart of the Nasdaq from 2000 to 2003.  Our entire stock market and economy have become just as farcical as the Nasdaq was from 1995-1999.  I ran a company in the Internet space in the 1990s - I saw it all, and most of the firms that failed during the Tech Wreck were more honest than the banks and mortgage lenders during the housing bubble and to this day!

The day for we, as Americans, to make this decision has arrived.

We must do so today, not after the election and not in January.

We must tell Congress now that it is critical for them to protect America's credit as a nation, not the credit of banks, business who have done imprudent things, and even ordinary Americans who have done imprudent things, whether those imprudent things were done intentionally or not.

We must make clear that we understand this will not be an easy decision, or a painless one - but it is a necessary decision, it is our decision, and it is the decision we demand they enforce as our elected representatives.

Congress must "grow a pair" and stand up for Americans, here and now, today, telling the world that these liquidity facilities will not be permitted to continue, that banks and other firms who have concealed the true state of their finances will be closed and their executives jailed if they do not immediately confess, and that house price "supports" will and must be withdrawn, including the provision of "low down payment" and "high debt-to-income" loan options.

Congress must direct Ben Bernanke to either withdraw his "alphabet soup" or Congress must revoke The Fed's charter and replace The Fed with a monetary authority that will tell the truth and act with full transparency.

Treasury must be directed to cease implementation of the TARP and return all funds not yet spent to the general fund.  The short-term cash management debt that Treasury has issued must be allowed to run down and not be rolled over so that the radical expansion of issue in the Treasury market ceases and in fact is reversed.

We must choose America.

You have seen, today, another five percent decline in the stock market, despite the claims that "credit is improving."

That claim is a lie.

Credit is not improving - it is being replaced by The Fed being the only issuer and guarantor of credit - an impossible situation that is ruinous to our nation and its prospects.

We face an imminent collapse of both stock and credit markets if we do not act, and act today.

To Congress: Is there not one statesman or woman who will stand for America and her people, not for the bankers and fraudsters on Wall Street who have given you millions in campaign contributions?

To The People: You were promised a solution, and you didn't get it.  Are you going to sit on your hands while our nation's economy implodes?

Those are your choices, and you must make them today.

Choose wisely.

The Stark Choice Now Facing America (http://market-ticker.denninger.net/archives/623-The-Stark-Choice-Now-Facing-America.html)

So, what can the average person, do about it??

Praying is always a good start. However, you might want to consider doing a few things with God's guidance to help you.