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Monday, September 27, 2010

Urban Survival Planning - Financial Indicators: The Debt Crisis, since our inception, has been counseling on Survival Planners having a list of indicators that would precede and foretell the coming collapse. The idea is this list is self developed; based on factors and indicators you think are important to identify the near term coming collapse; and, should consider all factors – social, economic - financial and political.

UrbanMan uses a lot of financial sources, probably none more credible that Leeds who we have hyperlinked to this site just below the title.

Sandy Leeds, CFA is a Senior Lecturer at The University of Texas at Austin . He teaches graduate level classes in the MBA program and also serves as President of The MBA Investment Fund, L.L.C. Prior to teaching, he had careers as a lawyer and a money manager. He did his undergraduate work at The University of Alabama and also has a law degree from The University of Virginia and an MBA from the University of Texas . At UT, he has received many teaching awards, including Outstanding Professor in the MBA Program. He is married and has three children.

Leeds’ latest article, go to here:

Talks about the debt crisis and why you should be worried,…and if you are worried you should be preparing maybe just alittle more.

This is Leeds’ article in his words:

Here are a few quick points why you should be worried about the US :

1. By 2040, the US ’ debt-to-GDP ratio will be 425% (according to the BIS). This estimate is worse than the estimates for Portugal , Italy , Ireland and Greece.

2. We can only print money to solve the problem if we don’t mind inflation.

3. Even if you adjust for the effects of the economic cycle and you exclude interest payments, the US has a -7.3% structural budget deficit.

4. If the US wanted to reduce our debt-to-GDP to 60% by 2030, we would need to have a fiscal adjustment (lower spending or higher taxes) of 8.8% of GDP. While that might sound like a small number, realize that our tax revenue is approximately 18% of GDP.

Factors That Cause a Debt Crisis

1. Excessively large debt (pretty obvious).

2. Excessive dependence on foreign capital (which may flee).

3. Economic weakness (the debt-to GDP ratio grows if GDP is stagnant).

4. Political weakness (excessive spending and insufficient taxation).

5. Irrational exuberance (b/c investors don’t learn about the risks of debt from the past).

In the US , we could argue that we’re five-for-five (on these factors).

Six Ways Out of a Debt Crisis

1. Higher GDP growth.

2. Lower interest rates (to reduce impact of excess debt).

3. Bailout – capital from abroad.

4. Raising taxes / cutting spending.

5. Inflation (printing money).

6. Default.

Here’s a quick summary of these six exit strategies. The US is too mature for high growth. Eventually, risk premiums make low rates impossible. We’re too large to be bailed out. We don’t have the political will to cut spending or raise taxes. We’re unlikely to default (b/c we can print money). So, high inflation seems likely.

Key Lessons From History

1. Governments do not cut spending or entitlements. Similarly, they do not reduce taxes to stimulate growth. They do not tax consumption to stimulate savings. They do not grow their way out of the problem (without defaulting or depreciating).

2. Governments encourage central banks and commercial banks to load up on government debt. They often discourage foreign investment so that investors are left with little choice but buying domestic debt. They tend to default on commitments to weaker creditor groups. They condemn bond investors to negative real returns (through inflation).

3. Not all debt crises are the same. We have issued much short-term debt – so rates may rise ahead of inflation. We could have high rates in a deflationary period! This may mean that inflating our way out of the problem won’t work and we would have to default.

See…short and sweet. I didn’t clutter this report with any reason to be optimistic.

end of Leed's article.

In our view, this makes more certain and hastens the growing gap between the haves and the have nots, which is another way of declaring the extinction of the American middle Class. What happens when there are 30 million, 60 million or 50 million have nots who cannot afford to live?

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