by DAVID BROWN | CLEARNFO.com |Original date: December 27, 2012

Debbie Downer (Debbie Reynolds)

Not trying to be Debbie Downer here but a friend is someone who will tell you if your house is on fire and it is.  The question is do you want the red pill or the blue pill?

“You take the blue pill and the story ends. You wake in your bed and believe whatever you want to believe.  You take the red pill and you stay in Wonderland and I show you how deep the rabbit-hole goes. Remember — all I am offering is the truth, nothing more.”

If you took the red pill, here’s your updated Joe Friday moment…”Just the facts ma’am…”

The US National debt is what is usually reported in the news media but this is just the tip of the financial iceberg that lurks beneath the churning financial sea upon which 313 million Americans bet their futures.  Everyone has an uneasy feeling about an impending financial Armageddon rather than facing fact and reality we choose to believe in magic…that someone has a magic bullet or a solution that will save the day.  But there is no magic.  We are on uncharted waters and unfortunately the news is much worse than is reported.  Let’s take a look beneath the churning waters to take measure of what awaits us and why.

First a few sobering facts the news media are hesitant to report:

Balance Sheet (11/26/13):

• -US National Debt:  $17 trillion
• -US Unfunded Liabilities: $127 trillion
• -Total Liabilities: $144 trillion
• -Total National Assets: $106 trillion

Net Worth: Negative $38 Trillion

Income Statement (11/26/13):

• -US Federal Tax Revenue: $2.8 Trillion
• -US Federal Spending: $3.5 Trillion

Annual Net Income (deficit): Negative $ 0.7 Trillion

Insolvency is the inability of a debtor to pay their debt…

1. Cash flow insolvency involves a lack of liquidity to pay debts as they fall due.
2. Balance sheet insolvency involves having negative net assets—where liabilities exceed assets. Insolvency is not a synonym for bankruptcy, which is a determination of insolvency made by a court of law with resulting legal orders intended to resolve the insolvency.

The Net Worth of the US is actually much worse than the figures above when the debt of the state, local, personal, banks are added into the mix.  To fund all the excessive spending and promising, the Federal Reserve continues to create more debt to keep this financial fantasy going just a few days more having no real solution at hand.  In the meantime, the US Dollar is losing its place as the world’s reserve currency which is estimated to reduce the living standard of the US by 40% once this trend completes.

At this point, you might say that things can’t get much worse but they do.  The World-Wide derivatives bubble is currently sitting at an estimated $1.5 Quadrillion or $1,500 Trillion and 80% of these are interest rate swaps.  World-wide GDP is only about $70 trillion.  Why is the interest rate swap so important?  Because as the interest rates go up the bonds go down and most of the major banks would be insolvent if the bonds they hold lost value.  This is the real reason that the Fed is keeping the interest rates low.

In the economy of the 60s – 80s we would have let troubled banks go bust but we have allowed them to get “too big to fail”.  They are too big to fail because if they did fail, it would bring down the entire world economy.   How did they get so big?  It is a direct result of the repeal of the Glass–Steagall Act in 1999.  The Glass-Steagall Act was enacted in 1933 to limit commercial bank securities activities and affiliations between commercial banks and securities firms.  In short it was a wall of separation between commercial and investment banking.  The 1999 repeal permitted Wall Street investment banking firms to gamble with their depositors’ money that was held in affiliated commercial banks.

And it gets worse.  The recent Libor interest rate rigging scandal is being called the biggest financial fraud in history and will have major ramifications to the world economy.   This scandal impacted an estimated $800 trillion in transactions and is just getting started.  Karl Denninger of Market-ticker.org calls this, “the largest organized theft ever committed in human history.”

If the banks are responsible for just 1/10 of one percent of the $800 trillion in Libor transactions, it would represent $800 billion in liability to the banks.  The total cost will be much higher, and some banks will go under as a result of litigation and loss of reputation.  Ron Hera of Hera Research  said “Truth is, if you take back more than 1% of what the banks have stolen, they’re busted.”

Then we have the sovereign bond market bubble sitting at a 300 year high, just waiting to burst.

So you can see that it is not a question of if but when one of these bubbles will burst and the whole house of cards come tumbling down.