»The Daily Reckoning by Bill Borner

Promises to zombies will be broken...
29 JANUARY 2015

- By Bill Bonner

Bill Bonner
Rancho Santana, Nicaragua

Dear Diary,

Dow down 195 points yesterday. But gold sank too - down $9.

Now, with the European Central Bank in the QE action, stocks should be catching a bid. Instead, they seem to be following commodities - down.

But who knows? The whole situation is so crazy that only a disabled person could understand it.

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Why do we say that? Because a report released last week told us that one out of every three people on Social Security's disability program is a mental defective. In Washington, DC, the rate of nuttiness among the disabled is even higher - at 42%. No surprise there. And just to show we're not making this up, here's the report:

    (CNSNews.com) - One in three, or 35.2 percent, of people getting federal disability insurance benefits have been diagnosed with a mental disorder, according to the latest data from the Social Security Administration (SSA).

    Washington, D.C., the seat of the federal government, ranked in the top-ten list of states where disabled beneficiaries were diagnosed with mental problems.

    In 2013, the latest data from SSA show there were 10,228,364 disabled beneficiaries, up 139,625 from 2012 when there were 10,088,739 disabled beneficiaries.

    Disabled beneficiaries have increased 49.7 percent from a decade ago in 2003 when there were 6,830,714 beneficiaries; and the number is up 14.3 percent from the 8,945,376 beneficiaries in 2009, the year President Obama took office.
Who better to understand what is going on in the financial world, than a crazy person? Fortunately, America's zombies are going crazy in ever greater numbers.

Look, central banks are using money they don't have to buy 'assets' - usually debt instruments - from the banks. Most of these 'assets' are in fact the liabilities of governments, at whose whistle the central banks wag their tails. They are also liabilities that most of these governments have less no intention of fully honoring. In fact, that is why the central bank is buying them - to try to drive up the rate of inflation and thereby reduce the value of the bonds. Are you following me, dear reader?

European governments - as well as those in North America and Japan - are finding it increasingly difficult to keep up with their promises - especially their promises to zombies, oops...we mean, old people. All over the developed world health and pension programs are under funded...or completely unfunded. Economies are slowing. Citizens are aging. Zombie populations (people who live at others' expense -- some disabled...some crazy...and some very clever people) are multiplying. And if government debt/private sector GDP tests were administered like highway breathalyzers, they'd be way over the limit.

It's the private sector that ultimately pays all the bills. In France, for example, the private sector is only about 40% of the economy (the rest is government). But this private sector has to carry the weight of current government spending as well as government debt that is more than twice its size (90% of GDP).

But here's the crazy thing: France's government debt trades at the highest prices in history, so high the yields are negative. The 10-year bond yields all of 0.53%. Over the last 5 years, inflation has averaged between 1.5% and 2%. Either inflation is going a lot lower, and will stay there for years, or investors are going to lose money.

Currently, there is $4.6 trillion of government debt in this negative yield category. And so along comes the central bank bidding driving yields down further! Have we ever seen anything like it? Not that we can think of. The ECB is buying assets at record prices. And to what end? To drive them higher?

Back in the US, many Diary readers have written to protest. They may be on the list of Social Security recipients. But they are not zombies, they tell us.

They paid into the fund for many years (as we did). They earned the money honestly. And Social Security is just a pension plan in which they were, often unwilling, participants. So hold the 'zombie' badge for someone else!

Yeah. Yeah. We turn to Google. We type: "Social Security, unfunded liabilities." What do we find? Here's a report from 2013 (we couldn't find anything more current):
    Security Faces $9.6T in Unfunded Liabilities--$83,894 Per Household

    (CNSNews.com) - The Social Security program faces $9.6 trillion in unfunded liabilities over the next 75 years, which is up $1 trillion from last year's projection of $8.6 trillion, according to the latest report from Social Security's board of trustees.

    The unfunded liability is the amount that has been promised in benefits to people now alive that will not be funded by the tax revenue the system is expected to take in to pay for those benefits. (The Social Security trustees calculate the unfunded liability for a period of 75 years into the future, from 2012 to 2087).
How can Social Security's honest pension fund participants expect to get almost $10 trillion more than they put in? How can governments facing that kind of obligations borrow at less than the rate of inflation? How can central banks put a $1.3 trillion bid under the priciest bond market in history?

Go figure. Maybe the fruitcakes in Washington can make sense of it.

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