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What the Government Will Never Tell You About the Debt Crisis By Dan Ferris, editor, The 12% Letter Saturday, July 23, 2011

Last week, I devoted the latest issue of The 12% Letter to the debt ceiling… and how it will affect us as investors. After sifting through the government's numbers and mindless claims of "Armageddon," I believe it should not worry you as an investor. And I'm convinced as ever the "debt ceiling" debate is a dog and pony show that distracts Americans from our country's biggest problem. Politicians like Barack Obama and Tim Geithner tell us that a failure to raise the debt ceiling by August 2 will result in catastrophe. They say many government employees and vendors will not get paid starting on August 3. I doubt this is true. The government will always find a way around the rules to borrow and spend. But let's take the government at its word for a moment… The Bipartisan Policy Center (the "BPC") – a non-profit group that studies solutions to political problems – has published a report on the debt ceiling "crisis." The report's conclusion is generally in agreement with Obama and Geithner: If we do not raise the debt ceiling by August 2, we could cause serious trouble for our economy. That's not surprising. The BPC was created by members of Congress, so it will toe the political line to keep us scared. According to the BPC, if the debt ceiling isn't raised by August 2, the U.S. government will wake up on August 3, and find itself unable to pay about 45% of the bills due between August 3 and August 31. In its debt ceiling report, the BPC considers two broad scenarios under which the Treasury Department might pay some agencies and not pay others. Imagine, for example, all IRS refunds not being disbursed starting on August 3. Imagine $14.2 billion in federal salaries and benefits not getting paid. Imagine nearly $32 billion in defense vendor payments not being made. Defense-related stocks would be cut in half instantly. Imagine the lights going out at Veterans Hospitals and active military duty pay not going out. I have no illusions about the turmoil of a real government shut down. It's ugly. For some period of time, it would be hell for millions of people. I don't want that. I'm sure you don't, either. No one wants mass economic hardship. I'm fully aware we're talking about people's lives here… But if the government shrinks 45% starting August 3 and remains permanently smaller, the hardship would be temporary. We'd come out the other side of it a better, stronger, wealthier, and maybe even less arrogant nation. Simply reducing the deficit wouldn't mean you'd pay less in taxes – so it's not that we'd all have more money in our pockets starting August 3. It's that there'd be less government, which means less government meddling in the economy. There'd be fewer parasites and more potential producers. We'd be freer to create new wealth and grow new businesses. A little more freedom would go a long way. It would be good to have more productive minds looking for ways to create new wealth with fewer government impediments to doing so. It's much better than having those same productive minds rotting behind government desks, meddling in other people's lives, and destroying wealth instead of creating it. But I do think the debt ceiling will be raised by August 2. Among other reasons for this belief, there's something you'd learn in the ensuing crisis if the ceiling was not raised, something nobody wants you to learn… You'd find out government is the problem not the solution, and that we'd all be better off with a lot less of it. That's why Treasury Secretary Geithner says it would be a "catastrophe" not to raise the debt ceiling. It's why Fed Chairman Ben Bernanke says it would be "calamitous." It's why Komrade Obama says it would be "financial Armageddon." They're all trying to scare you. Everybody thinks people would starve without the big, strong government to feed them. It's not true. We'd be a more productive, dynamic, and wealthy society. You'd see this happen right before your eyes if a large portion of the government shut down permanently. But nobody in government wants you to see that. Our economy doesn't suffer from a lack of government intervention. It suffers from too much government intervention. The solution to too much government intervention in the economy isn't more government intervention. It's less government. That's what you'd get on August 3, without a higher debt ceiling. Laying all my cards on the table, I freely admit that I relish the potential shutdown of huge swaths of our bloated, oppressive federal bureaucracy. And I relish the prospect of hundreds of thousands of government employees, people with perfectly productive minds, some of them quite brilliant, making the change from parasites to producers… though I realize it's unlikely to happen. Imagine for a minute the unleashing of entrepreneurial energy in the wake of a shutdown of 45% of the federal government. The U.S. government is filled with intelligent, highly educated, highly trained people. Many are experienced leaders. Many are more than capable of positively heroic feats of entrepreneurship, feats we'll never witness if they don't leave their government jobs and get to work. Frightened children like Obama, Bernanke, and Geithner see scary monsters everywhere. Adults with vision and experience see opportunities. I promise you those opportunities are real. They exist. If the government wakes up August 3 and can't pay 45% of its bills, it won't be long until many of those opportunities are seized and exploited, to the benefit of us all. Good investing, Dan Ferris P.S. I've been contacted by several people asking if they can pass along this commentary. My answer is yes. Please… absolutely pass this along. Send it to everyone you know. The more people realize it's better to run your own life instead of letting the government run it for you, the better.

Further Reading: The U.S. government's debt binge continues to worsen. But Dan has found some great ways to handle your income portfolio in the coming debt crisis. Stop listening to tips from the media, he says. They're bound to be biased. Instead, opt for safe, "sleep at night" income ideas. Earlier this month, legendary investor Chris Weber traveled to Ireland to investigate its debt crisis first hand. What he found was not encouraging. The biggest banks have failed. One out of seven jobs that existed four years ago is gone today. Many newly built homes stand empty, and sometimes not even finished. But Chris suggests a solution, one that could help our country's debt problems as well. Get the details here: One of the Saddest Stories in the World: A Lesson We Can All Learn From.

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CHART OF THE WEEK: STOCKS AND COMMODITIES ARE STILL "RISK ON, RISK OFF" Our chart of the week provides an update on a giant trend you'll rarely hear about – how stocks and commodities have become a big "risk on, risk off" trade. Many folks take a position in commodities like crude oil, copper, sugar, and corn because they think they're diversifying their portfolio. And that's often the case. But in the past few years, stocks and commodities have joined at the hip to move in lockstep with each other. They now move up-and-down with investors' beliefs about global economic growth. You can see this extraordinary "correlation" with our chart below. It graphs the performance of the benchmark S&P 500 stock index (black line) and the benchmark commodity index (blue line) over the past 2.5 years. As you can see, stocks and commodities have moved in the same up and down fashion and have posted the same returns. So when asked the question, "Should I buy stocks or should I buy commodities?" one can only keep this trend in mind and reply with, "What's the difference?"