Barack Obama: America's Last President?

I remember the reception I got more than 20 years ago when I began warning investors of the coming collapse of the Soviet Union.

Newsweek described my views as "an unthinking attack on reason."

Obviously, I had the last laugh. But I learned that people literally cannot process information that clashes too dramatically with their deeply held beliefs.

December 25, 1991

This certainly comes into play when thinking about the potential bankruptcy and collapse of the United States.

Ask someone on the street and it becomes clear. The idea that the U.S. is on its last legs is preposterous. But as I think about the immediate future, I sometimes wonder whether Barack Hussein Obama may not be the last president of the United States.

I have no idea how this could be quantified in a non-arbitrary way. But Obama seems poised to overdeliver on his promise of change.

Note that even on Christmas Day of 1990, few would have guessed that the U.S.S.R. would dissapear a year later. Yet on December 25, 1991, Mikhael Gorbachev resigned as the last president of the Soviet Union. The Hammer and Sickle banner over the Kremlin was pulled down. And the Soviet Union ceased to exist.

It is interesting that the world's preeminent economic historian, Niall Ferguson, thinks the United States is now at risk of sudden collapse.

In case you don't know Ferguson, he holds not one but two distinguished chairs at Harvard.

He is also Senior Research Fellow at Jesus College, Oxford and Senior Fellow of the Hoover Institution, Stanford University. If you are impressed by credentials, Ferguson has many.

Now Ferguson has stepped forward with a dire warning:

"Imperial collapse may come much more suddenly than many historians imagine. A combination of fiscal deficits and military overstretch suggests that the United States may be the next empire on the precipice."

Don't dismiss this without thinking it through.

Because most of what you think you know about history and almost everything Obama and the Congress do is based on a misleading, outdated theory.

"For centuries," says Ferguson, "historians, political theorists, anthropologists and the public have tended to think about the political process in seasonal, cyclical terms ... we discern a rhythm to history. Great powers, like great men, are born, rise, reign and then gradually wane. No matter whether civilizations decline culturally, economically or ecologically, their downfalls are protracted."

But Ferguson argues that throughout history, imperial leaders have driven their nations into expensive wars. This inevitably leads to a national collapse. And that can happen suddenly and swiftly, within "a decade or two."

In essence, he says, we are fooling ourselves when we think about gradual collapse. And he hammers the point home by saying ...

"The challenges that face the United States are often represented as slow-burning ... threats [that] seem very remote. Matters for our grandchildren. And the grandchildren of the Washington politicians and sell-side Wall Street brokers who spew out all the happy talk you hear on CNBC - about economic recovery and new bull markets, about 'hope,' and a return to 'American greatness.'"

Ferguson doubts that, as I do. And he argues that decline and collapse need not be a gradual, drawn-out process. He writes:

"What if history is not cyclical and slow-moving but arrhythmic - at times almost stationary but also capable of accelerating suddenly, like a sports car? What if collapse does not arrive over a number of centuries but comes suddenly, like a thief in the night? ... If empires are complex systems that sooner or later succumb to sudden and catastrophic malfunctions, what are the implications for the United States today? First, debating the stages of decline may be a waste of time - it is a precipitous and unexpected fall that should most concern policymakers and citizens. Second, most imperial falls are associated with fiscal crises. Alarm bells should therefore be ringing very loudly indeed as the United States contemplates a deficit for 2010 of more than $1.5 trillion - about 11% of GDP, the biggest since World War II."

Ferguson is less specific about the threat of insolvency for the U.S. than I have been with readers of Strategic Investment.

I have highlighted the worrying fact that the Obama Administration has been faking its ability to attract buyers for U.S. government debt. It's been doing this by allowing the Fed to buy Treasuries off the market.

Recently, the Fed announced that it would continue buying more Treasuries to keep its bond holdings stable. But many expect the Fed to actually engage in even more debt monetization later this year.

How many Treasuries will the Fed buy? And how low will interest rates go as a result?

But more pertinent, how high will interest rates go if the Fed STOPS buying Treasuries and lets its holdings mature over time?

This is something neither the Fed nor Obama want to find out. It would hasten the fall of American prosperity over the short term. And Obama has an election coming up in two years ...

Among the factors that mask the peril of collapse is the false prosperity created by the government's lavish stimulus and bailout programs.

I made an effort to express this risk a few months ago when I pointed out some crucial differences between the Austrian and Keynesian business cycle theories. For ease of reference, I repeat myself:

"The Austrians argue that the aftermath of the credit collapse exposes the unhappy truth that the economy is not as wealthy as it appeared. In order to facilitate new wealth creation to build out of the slump, the fastest route to recovery is to abandon malinvestments and permit the most efficient use of real savings by wealth creators.

"The Keynesians balk at the liquidation. They embrace the importance of maintaining GDP as an aggregate of monetary expenditure. In their accounting, there is no difference between investment and malinvestment. Spending equates with income. And more spending leads to a higher national income and higher economic growth, without respect to how the money is spent."

I suggested that the experience of Zimbabwe stands as a vivid counter-example to the Keynesian claim that deficit spending makes you rich.

If that were true, Zimbabwe should be one of the globe's wealthier countries, as the politicians there have spent and spent, literally beyond measure.

Instead, Zimbabwe was busy fighting off an inflation rate of 231 million percent in 2008.

Could that type of hyperinflation hit the U.S.? The U.S. had its own bout of hyperinflation during the Revolutionary War. At the time, Congress authorized the printing of a paper currency called the "continental."

It was easily forged. And essentially became worth less than the paper it was printed on.

If it happened once, it can happen again.

Maybe it won't happen tomorrow ... or even next year. But there is no doubt that the fundamentals in the U.S. are suffering.

That's why I advise getting as far out of the U.S. as you can with your investments. My favorite country is Brazil. And over the next few weeks, I'll prove to you why that's where the greatest opportunities are.

Until then,

James Dale Davidson

I agree with the author.
The tendency of USA to spend without a thought has landed the people in the present crisis.
Even now, their leaders have not asked the people to tighten their belts and still advises them to spend so that the economy recovers.
We have a similar problem in India.
Our leaders are making no effort to control our population with the result the percentage of the BPL is increasing every year.
The name of those entering the Forbes list is splashed in all the papers with much fan-fare.
Those becoming poorer does not hit the headlines unless they take up arms like the Maoists.
Unfortunately, the Maoist cannot lay their hand on these corrupt leaders because of the heavy police/Z category bandobast which protects them.
The common people are made to pay that price