094: How to wait out the financial mania in safety

In today’s podcast, I share more thoughts on Puerto Rico including my experiences opening a business there.

While the island has its problems, I’m still bullish on the long-term future given Puerto Rico’s incredible tax incentives (especially after meeting with their government leader and seeing how open they are to productive people moving in).

I also harp on the latest drama in Argentina…

Less than a year after issuing 100-year bonds, the country (which has a long history of default) is in economic turmoil. And the largest investors who bought these bonds – including JPMorgan and Fidelity – are sitting on huge losses.

These huge investors are so starved for yield, that they willingly lent money to a default-prone government for 100 year. But, as individuals, we have much better options to earn a decent return… with DRASTICALLY less risk.

I share a few of those options near the end of today’s discussion.

You can listen here…

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Why you’re likely exposed to one of the dumbest investments in history

Last June, in one of the most egregious displays of economic insanity, Argentina was able to raise $2.75 billion by selling bonds with a ONE HUNDRED YEAR maturity.

Even more miraculously, the bond turned out to be wildly popular with investors.

So basically investors willingly forked over billions of dollars to a country that has a history of defaulting on its debt, confiscating private assets, and engaging in rampant corruption… for an entire century.

It’s as if everyone was oblivious to Argentina’s past. The country has defaulted twice just in the last twenty years, and eight times since its independence in 1816.

So the chances that Argentina DOESN’T default within the next century (or even the next decade) is slim to none. And slim’s out of town.

11 months later, reality is starting to set in.

Investors have begun to realize that Argentina doesn’t actually have any money, that inflation is more than 25%, and the central bank has blown through $8 billion (more than twice the amount of the bond issuance) trying to prop up their weak currency.

Oh yeah, and the Argentine government has asked the International Monetary Fund (IMF) for an emergency $30 billion credit line to remain solvent.

The worse things get for Argentina, the deeper the bond plunges in value; earlier this month it was worth about 83 cents on the dollar.

And while making 100-year loans to an insolvent country with a long history of default is especially insane, it’s important to realize there are a lot of “Argentinas” out there today.

For example, more than 20% of the companies in the Russell 2000 index and nearly 10% of S&P 500 companies need to borrow money just to pay interest on their debts.

Plus a full 50% of the entire, investment-grade corporate debt market ($2.5 trillion in paper) is rated just one notch above junk.

And what do troubled governments and companies do to get out of this jam of too much debt? They borrow more money…

But that becomes more difficult and expensive as interest rates rise.

Rising interest rates mean heavily indebted companies and governments have to borrow even MORE money just to pay interest on the money they’ve already borrowed.

And this cycle only compounds the problem.

Now, you might be thinking, “OK Simon, but big deal. I’m not dumb enough to buy Argentina’s bonds, or invest in loser companies.”

Great. And that’s probably true.

But due to the interconnectedness of our modern financial system, even if you’re not DIRECTLY buying a toxic asset, you’re probably exposed to someone else who is.

Think about it: even if just you own a basic index fund, you’re exposed to dozens of insolvent companies.

Your life insurance company. Your pension fund. Your bank. The fixed-income mutual fund where you invested your retirement savings.

Any of these could have easily scooped up a bunch of Argentina bonds. Or loaned money to any number of countless insolvent businesses or governments.

Ever heard of JP Morgan? They loaned money to Argentina.

So did Fidelity and Invesco. And those are just a few of the big names.

You don’t have to be crazy enough to buy a toxic asset. You’re probably already exposed merely if one of your financial counter-parties was crazy enough to do so.

It was the same phenomenon back 15-years ago prior to the Global Financial Crisis.

In the early 2000s, banks were providing no-money-down mortgages to borrowers with pitiful credit, then rolling thousands of these loans together into gigantic bonds.

These bonds became some of the most popular investments in the world.

My guess is that you probably didn’t own a single one of those toxic bonds.

But your bank did.

So did your pension fund. Brokerage. Or some company that you might have invested in, like Lehman Brothers or AIG.

(Lehman went bankrupt, and AIG has never recovered from its losses.)

You were financially exposed to somebody else’s stupidity.

And due to the incredible lack of transparency in the banking system, the truth is, you’ll NEVER know if you’re exposed to these risks.
Bernie Madoff is an even better example…

Some people lost every penny they had, and they hadn’t even heard of Bernie Madoff.

But they had money in a pension fund that invested in some feeder fund that gave money to Bernie.

They were three degrees of separation away from Madoff and they STILL got wiped out.

The reality is, you’re exposed to this stupidity whether you realize it or not because you’re probably exposed to someone else who’s invested in this financial lunacy.

That’s one of the reasons I’m holding so much cash outside of this complex, interconnected system.

Specifically, I’ve been buying 28-day Treasury bills for most of the last eighteen months.

These T-bills are basically like a 4-week certificate of deposit that’s held by the Treasury Department.

I make just under 2% per year, and I know exactly who my counterparty is: Uncle Sam.

That’s compared to 0.02% in a checking account, and I have no idea what’s on that bank’s balance sheet.

Now, if you’ve been a reader of this letter for more than a week, you know I have zero confidence in the US government’s ability to repay its massive debts over the next several decades.

And I think you have to be certifiably insane to buy a 30-year bond issued by the US government. That’s way too far out into the future.

But 28 days? That’s pretty low risk. However you feel about Donald Trump, he’s probably not going to default by next month.

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America’s long-term challenge #3: destruction of the currency

On April 2, 1792, George Washington signed into law what’s commonly referred to as the Mint and Coinage Act.

It was one of the first major pieces of legislation in the young country’s history… and it was an important one, because it formally created the United States dollar.

Under the Act, the US dollar was defined as a particular amount of copper, silver, or gold. It wasn’t just a piece of paper.

A $10 “eagle” coin, for example, was 16.04 grams of pure gold, whereas a 1 cent coin was 17.1 grams of copper.

The ratios between gold, silver, and copper were all fixed back then.

But if we apply today’s gold price of $1292 per troy ounce, we can see that the current value of the original dollar as defined by the Mint and Coinage Act of 1792 is roughly $66.75.

In other words, the dollar has lost 98.5% of its value since 1792.

What’s incredible about this constant, steady destruction of the currency is how subtle it is.

Few people seem to notice, because modern day central bankers try to “manage” inflation between 2% to 3% per year.

2% to 3% per year is pretty trivial. But it happens again the next year. And the year after that. And the year after that.

After a decade or so, it really starts to add up.

But there’s an important, other side of the equation: income.

Costs are clearly rising. And it’s fair to say that incomes have been rising too. But which one has risen more?

In 1982, back when I was a toddler, the price of a Ford Mustang was $6,572. Today the cheapest Mustang starts at $25,680 according to Ford’s website.

So a Mustang today is around 4x as expensive as it was 36 years ago.

US Labor Department data from 1982 shows that average earnings were $309 per week, or $16,086 per year. That was enough to buy 2.45 Mustangs.

Today’s earnings are $881 per week, or $45,812 per year. That’s only enough to buy 1.78 Mustangs.

So when denominated in Ford Mustangs, people’s incomes have fallen 27.3% since 1982.

More recently than that, say, back in 2005, an entry level Mustang cost $19,215 at a time when average wages were $40,664 per year– or 2.12 Mustangs per year.

So even since 2005, average income levels have fallen 16%.

Obviously this trend doesn’t just apply to Ford Mustangs.

If we look at housing in the United States, we can see that the median home price in 2003 was $186,000 (according to Federal Reserve data) at a time when the Labor Department reported average weekly wages of $620.

So that was roughly 0.173 houses per person per year.

Today the median home price is $328,000, with average wages of $881, or 0.139 houses per person per year.

That’s a decline in income of 19.6% over the last 15 years.

Again, it’s a slow, subtle destruction. But over time, inflation REALLY adds up. Over the long-term, the average person becomes poorer.

We can view this trend anecdotally as well. Back in the 1950s and 1960s, it was common for a man to go out into the work force and support his entire family.

On a single salary, the average American family could afford a home, a car, modern technology at the time, savings, and even a summer vacation.

Today it’s normal for both spouses in a family to have full-time jobs, just to make ends meet.

Data from Pew Research shows that 70% of American households (married couples with children) back in 1960 were single income, i.e. only the father worked.

Today, 60% of households have BOTH spouses working.

And given the other statistics we routinely see about how the average US household has very little savings and is loaded down with debt, they’re barely making it even with TWO incomes.

That’s because inflation has slowly robbed people’s livelihoods.

What’s truly bizarre is that this exact same inflation is actually OFFICIAL POLICY.

Both central bankers and politicians deliberately try to engineer inflation, and they formally disclose this to the public.

The Fed announces its “inflation targets”, and economists panic if inflation is too low… or even worse, if there’s “deflation” and prices fall.

The government actually has a vested interest in inflation. They like rising prices because the national debt is so obscenely large.

The idea is that, if the government borrows $10 billion today on a 30 year term, they want the value of that $10 billion to be as little as possible three decades from now.

So a slow, steady destruction of the currency is actually to their benefit; the government wants to be able to inflate the debt away.

But as consumers, we prefer falling (or at least stable) prices. Price stability ensures that people’s purchasing power remains the same.

Rising prices are destructive, rewarding those who go into debt (like the government) at the expense of anyone who has been responsibly saving.

Think about it– if you put $100 in a savings account 10 years ago, you wouldn’t be able to buy as much with it today as you could have back then. Saving money actually COSTS you purchasing power.

The month-to-month and year-to-year variations on inflation will be all over the board. But the long-term trend is pretty clear: prices continue to rise.

And it’s fair to say that no nation or empire in history has ever been able to prosper by slowly destroying the value of its currency.

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HUGE opportunity in Puerto Rico… and the developed country whose looming debt crisis is far worse

We just finished a really -sensational- conference here in San Juan over the weekend showcasing Puerto Rico… with all of its challenges and opportunities.

We’ve talked about this before– Puerto Rico is an attractive place to live and do business thanks to some forward thinking tax incentives which stem from its unique status as a US territory.

All US territories, including Puerto Rico, American Samoa, US Virgin Islands, etc. are technically part of the United States.

But unlike the 50 states, US territories have their own tax systems and are NOT subject to US federal income tax.

So whereas a resident of California will pay BOTH California state income tax as well as US federal income tax, a resident of Puerto Rico (in most cases) will ONLY pay Puerto Rican tax.

Until a few years ago there was very little difference; tax rates in Puerto Rico have traditionally been VERY high, so no rational person would have moved to the island trying to avoid taxes.

Then, in 2012, the Puerto Rican government began passing a series of tax incentives; the most famous of them are Acts 20 and 22, though there are many more.

Act 22 allows qualifying individuals to move to Puerto Rico and pay 0% tax on certain investment income.

This is perfect if you’re an investor, trader, or possibly even a crypto speculator. You can buy and sell securities and pay 0% capital gains, living in Puerto Rico TAX FREE.

And because you’re domiciled in Puerto Rico, you’ll owe no tax to the IRS either.

The other one is Act 20, under which entrepreneurs can move to Puerto Rico, set up a qualifying business, and be subject to a corporate tax rate of just 4%.

And if you’re domiciled on the island, dividends that you pay to yourself are tax free… which means your effective tax rate on corporate and dividend income altogether is just 4%.

Several years ago I was skeptical of these incentives; I figured that the government would just reverse the laws and clawback the taxes.

But that didn’t happen. In fact, all of the incentive laws have survived a change of administration, and the new administration has expanded them even more.

The tax incentives have also held up in court as well, so they’ve really been tested thoroughly.

What’s interesting about Puerto Rico right now is that the island has been in a heap of trouble.

Starting in August 2015, the government began a wave of defaults on official debt; total obligations, including government bonds, related debt, and pension liabilities, is about $140 billion.

That’s a lot of money in Puerto Rico; the size of the entire economy here is just $105 billion… so the liability is incredible.

This debt crisis has caused a significant recession over the last several years.

The Hurricane Maria came in and basically wiped the place out. It took months just to restore power to most of the island… and they’re still not at 100%.

Between the storm and the long-term economic morass, locals have been leaving the island left and right.

Several hundred thousand people moved away just in the second half of last year, and the population has fallen by more than 10% since 2000.

In light of a natural disaster, major debt crisis, and a declining tax base, a lot of governments would have resorted to radically increasing tax rates… what I call ‘economic cannibalism.’

But that’s not what they did here.

In Puerto Rico they doubled down on the tax incentives– expanding them, making them more attractive, and working on cutting rates for ALL workers and businesses.

We had some of the most senior officials from the government at our event– including the Acting governor and several key cabinet secretaries, literally passing out business cards making personal invitations to our investor group.

Their message was clear: Puerto Rico is open for business. There are challenges, but also a tremendous amount of opportunity.

And they’re willing to work hard to make sure that talented people have access to those opportunities… and can KEEP what they EARN.

The senior ranking politician on the island, in fact, told us privately that he views himself as a Libertarian, and his goal is to cut regulation and shrink the size of government.

So far their efforts are working.

Thousands of productive people have already come to the island through the various tax incentive programs.

(One of my many businesses, in fact, is based in Puerto Rico; there have definitely been a few bumps in the road dealing with some local bureaucracy, but overall it’s been a solid experience.)

And the Secretary of Economic Development and Commerce told us that applications are up 200% year over year.

This is a VERY good trend that should create more economic activity, more jobs, and more wealth for everyone.

Peter Schiff came to the event as well; he’s an old friend of mine and also has a similar business in Puerto Rico, and he talked about his experiences living and doing business on the island.

He also made some interesting points about Puerto Rico’s debt.

The media makes a big deal about the fact that Puerto Rico has so much debt. And it does.

But who has even more debt than Puerto Rico? The United States of America.

At $21 trillion, the US national debt is FAR larger than Puerto Rico’s.

And if you add America’s unfunded pension liabilities (according to the Treasury Department’s own data), the total debt is $70 trillion.

That’s over $200,000 for every man, woman, and child in America.

Yet in Puerto Rico, the per-capita obligation is about $45,000.

Puerto Rico is getting all the bad press right now for its debt crisis.

But it’s only a matter of time before the world realizes that the US federal government is in far worse shape.

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093: The future of crypto in Puerto Rico and avoiding fanaticism

I’m writing from San Juan, Puerto Rico today.

The Sovereign Man team is here to host 150+ Total Access members over the weekend.

And on today’s podcast, we discuss the amazing tax benefits in PR… and why crypto wealth is flocking to the island.

These people think crypto is going to the moon. And by being residents in PR, they’ll pay 0% capital gains tax on any appreciation after they move here.

So I share my thoughts on this, and why they may be in for a tax surprise with their crypto holdings – even with the amazing tax benefits.

Also, following one of the big themes we’ve been covering this year, I discuss fanaticism surrounding crypto (both the bulls and the people calling it a fraud)… and why you should banish fanaticism when making investment decisions.

You can listen in here.

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America’s long-term challenge #2: the looming retirement crisis

Last week, the financial services giant Northwestern Mutual released new data showing that 1 in 3 Americans has less than $5,000 in retirement savings.

It’s an unfortunately familiar story. And Northwestern Mutual’s data is entirely aligned with other research we’ve seen in the past, including our own.

The Federal Reserve’s most recent Survey of Consumer Finances, for example, shows that the median bank balance among US consumers is just $2,900.

And Bank of America’s annual report from last year showed that the average balance per HOUSEHOLD (i.e. -not- per person) was $12,870… which was actually LESS than the average account balance that Bank of America reported in 1997!

On average, the typical US household has less savings today than they did 20 years ago… and almost nothing put away for retirement.

In fact 21% of Americans (based on Northwestern Mutual’s data) have absolutely nothing saved for retirement.

And 33% of Baby Boomers, the generation closest to retirement, have between $0 and $25,000 saved for retirement.

That’s hardly enough savings to last more than a few years… and a major reason why most retirees currently rely on Social Security to meet their monthly living expenses.

According to a Gallup poll from last May, 58% of US retirees said that they rely on Social Security as their major source of income. They simply don’t have enough of their own personal savings stashed away.

But as we’ve discussed many times before, Social Security is rapidly running out of money.

The most recent report from Social Security’s Board of Trustees (which includes the US Secretaries of the Treasury, Labor, and Health & Human Services) tells us that the program’s cost has exceeded its tax revenue since 2010.

Last year this shortfall was $59 billion, 11% worse than in 2016.

And in order to make up the difference and cover this deficit, Social Security has to dip into its trust fund, effectively burning through the program’s savings.

The problem with this approach is that, eventually, these annual deficits will burn through ALL of the program’s savings.

The government knows this; the Board of Trustees even state this in their annual report, projecting that the Social Security trust funds will become fully depleted in 2034.

Sixteen years may seem like a long way off. But we’re talking about retirement here. You’re supposed to think long-term about retirement. And the math simply doesn’t add up.

The Trustee Report states explicitly that, once the trust funds run out of cash, the program will have to, at a minimum, reduce the monthly benefit that’s paid to its recipients.

So if you’re planning on being retired at any point past 2034, the government is LITERALLY TELLING YOU that they won’t be able to pay the retirement benefit that’s been promised to you.

Longer term (pay attention to this if you’re under 40), the numbers get even worse.

The way Social Security works is that retiree benefits are essentially paid for by people who are currently in the work force.

If you have a job, a portion of your paycheck each month goes to Social Security and ends up in the pockets of people who are currently retired.

In order for Social Security to function, there has to be a certain number of workers paying into the program for each retiree.

Social Security tracks this worker-to-retiree ratio VERY closely. The higher the ratio, the better.

In 1995, for example, there were 4.9 workers paying into the program for every retiree receiving benefits.

By 2020, Social Security projects the ratio will be down to 3.7 workers per retiree. And by 2040, just 2.75.

That’s simply not enough workers.

Do the math– at 2.75 workers per retiree, you’d have to pay nearly 40% of your salary just in Social Security tax (i.e. NOT including Medicare, federal, or state income tax) to keep the program running.

It’s also noteworthy that, just this morning, the US government released data showing that the birthrate in the United States is at a 30-year low.

If you project this alarming trend forward by a few decades, you can see how the worker-to-retiree ratio could easily fall below Social Security’s already dismal forecast.

It’s not just Social Security either. State and local pension funds, and even a lot of union and corporate pension funds, are also terminally insolvent.

A report issued a few months ago by the American Legislative Exchange Council estimates that the total amount of unfunded liabilities for state and local government pensions now exceeds $6 TRILLION.

Bottom line, Social Security is broken. State and local pensions are broken. And the federal government is far too broke to be able to bail any of them out.

Even the Social Security trustees admit this– they’re practically giving us a date to circle on our calendars for when the program will run out of money.

Yet a disturbing number of Americans has little to nothing set aside for retirement… and they’re expecting to be able to rely on Social Security.

Something is obviously wrong with this picture, and it would be utterly ludicrous to expect this won’t have a substantial impact.

Either future workers and businesses are going to be hammered with all sorts of new taxes to bail out Social Security–

— or retirees who have no savings and rely exclusively on the program to survive are going to have their benefits drastically slashed.

Either way, retirement is a nuclear problem set to explode in the Land of the Free.

One way or another, tens of millions of people are going to have their lives turned upside down.

And it is beyond the powers of the government to do anything to stop it.

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It gets worse: Tesla now has to compete with $50,000 electric BMWs going for $54/month

As if things weren’t bad enough for beleaguered Tesla…

The company lost $1.1 billion in cash in the last quarter, executives are leaving the company in droves, it’s facing production issues with its Model 3 and, as I recently discussed, Elon Musk insulted analysts on the latest earnings call by dismissing their questions – regarding the company’s survival – as “boring” and “boneheaded,” (just after shareholders approved his obscenely large pay package).

Now, in addition to all that, the company has to compete with BMW leasing its $50,000 i3 electric vehicle for only $54 a month. That’s not a typo. Bloomberg recently confirmed you could lease an i3 for less than your monthly cable bill.

Lest you think BMW is making money on that lease, I assure you it’s not. The entire EV sector is losing money.

It’s a race to the bottom… Everyone in the space (including Tesla) is competing against each other, resulting in laughably low monthly leases.

But it’s not just the i3. You can lease a 2018 Honda Clarity for $199 a month. A Chevy volt costs about $100 more each month.

The electric vehicle space is difficult. Vehicle prices are high and there isn’t enough demand for manufacturers to make money (even with generous government subsidies). EV sales made up just 0.6% of total sales last year. And 80% of battery-electric car customers in the US lease instead of buying (not including Tesla, which doesn’t divulge that info)… partly because the resale value is horrid – an i3 is worth only 27% of its original price after three years.

But the old guard auto manufacturers, like GM and BMW, can sell other, profitable vehicles to plug the loss gap.

General Motors loses about $9,000 every time it sells a Chevy Volt (a $36,000 car). Fiat loses an absurd $20,000 on each electric Fiat 500 it sells.

And Tesla, the highest-selling EV company, is the granddaddy loss maker of them all. Which is why the company lost a staggering $2 billion on $8.5 billion in sales last year.

Still, Musk maintains his cult leader status amongst shareholders, who believe he will walk across water and change the world.

But the reality is quite grim…

Tesla had $2.7 billion in cash at the end of the first quarter (down from $3.4 billion at year-end 2017). And the street doesn’t think Tesla has enough cash to last another six months.

In addition to its general, cash-hemorrhaging operations, the company will need to pay down a $230 million convertible bond in November if it stock doesn’t hit a conversion price of $560.64 (meaning the stock would have to nearly double from today’s price) and a $920 million convertible bond next March if the stock doesn’t hit $359.87.

While the company’s recently-falling stock price troubling, the bond market is forecasting real pain for Tesla…

Last August, Tesla issued $1.8 billion of unsecured bonds with a 5.3% coupon due in 2025. Credit rating agency Moody’s downgraded those bonds to B3 (deep junk territory) in March with a negative outlook (they traded at 90 cents then). Today those bonds trade at 88 cents on the dollar for a yield of around 7.5%.

So if Tesla needed to tap the debt markets again today, it would likely be paying around 8% interest on unsecured debt.

And there are likely suckers out there who will make that loan, despite the horrible economics of the EV business…

It doesn’t make sense to have electric vehicles until you have really cheap electricity. If you can get solar down to 1 cent per kilowatt hour, then you have something.

But, for now, you have to charge electric vehicles with energy produced from coal-fired power plants.

I believe Tesla is doing some really cool things. But, under normal economic circumstances, its business simply would not be viable.

The only way this company is able to exist and shower praise and money on an executive that is consistently non-transparent (and is also taking an enormous chunk of the company) is because there is too much cash in the world.

Companies that consistently post losses are able to fool people into loaning them massive quantities of money.

And big investors, like pension funds and mutual funds, are looking for scale. They’ve got trillions of dollars to invest. So, the bigger the investment opportunity, the more attractive it is.

And in a crazy paradox of our time, a company that issues loads of debt is actually a more attractive company than a financially sound one… because these big investors need to put money to work by any means necessary.

Capitalism is upside down today. Central banks have printed money for 10 years.

Now they’re reversing course. And that will have serious consequences.

Companies will get wiped out. It will probably be worse than the “dotcom” bubble. At least with the dotcom bubble, there wasn’t much debt – these companies raised equity.

Today, valuations are higher than the dotcom bubble and there’s loads of debt on top of it.

Warren Buffett famously avoided tech stocks back then. And people said he was stupid as they continued to pump money into a high-flying sector.

It’s the same as today.

People are loaning money to companies that are hemorrhaging cash and facing massive business headwinds.

Tesla is borrowing money and has to compete with BMW that is leasing its cars for $54/month.

As the Federal Reserve, European Central Bank and Bank of Japan all reverse their easy-money policies, they’ll suck liquidity out of the system. That will push interest rates up, which will force people to be more selective with their investments.

And a lot of crappy companies will get wiped out. I’m not just talking about Tesla. Even “blue chips” like GE and other companies that are heavily indebted and aren’t generating solid free cash flow are in trouble.

At a certain point, individuals need to be rational in how they invest their savings.

And if you’re investing in these fantasy, irrational investments, that has consequences.

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Breaking down America’s worst long-term challenges: #1- Debt.

On October 22, 1981, the national debt in the United States crossed the $1 trillion threshold for the first time in history.

It took nearly two centuries to reach that unfortunate milestone.

And over that time the country had been through a revolution, civil war, two world wars, the Great Depression, the nuclear arms race… plus dozens of other wars, financial panics, and economic crises.

Today, the national debt stands at more than $21 trillion– a milestone hit roughly two months ago.

This means that the government added $20 trillion to the national debt in the 37 years between October 22, 1981 and March 15, 2018.

That’s an average of nearly $1.5 BILLION added to the national debt every single day… $62 million per hour… $1 million per minute… and more than $17,000 per SECOND.

But the problem for the US government is that this trend has grown worse over the years.

It took only 214 days for the government to go from $20 trillion in debt to $21 trillion in debt– less than eight months to add a trillion dollars to the national debt.

That’s an average of almost $52,000 per second.

Think about that: on average, the US national debt increases by more in a split second than the typical American worker earns in an entire year.

And there is no end in sight.

At 105% of GDP, America’s national debt is already larger than the size of the entire US economy. (By comparison the national debt was just 31% of GDP in 1981.)

Plus, the government’s own projections show a steep increase to the debt in the coming years and decades.

The Treasury Department has already estimated that it will borrow $1 trillion this fiscal year, $1 trillion next year, and another trillion dollars the year after that.

They’re also forecasting the national debt to exceed $30 trillion by 2025.

To be fair, debt isn’t always bad. In fact, sometimes debt can be useful.

Businesses and individuals use debt all the time to shrewdly finance productive investments.

Real estate investors, for instance, often borrow most of the money they need to purchase a property once they determine that the rental income should more than cover the debt service.

In this way, when applied prudently, debt can actually help build wealth.

And the US federal government did the same thing in its early history.

It was an incredibly astute move on the government’s part, for example, to go into debt to finance the Louisiana Purchase back in the early 1800s, which dramatically expanded the size of the budding nation.

These days, however, the government flushes money down the toilet in the most wasteful ways imaginable, both big and small.

We’ve covered some of the more ridiculous examples in our normal conversations, from that $2 billion Obamacare website to the $856,000 that the National Science Foundation spent teaching mountain lions to run on treadmills.

Even the government’s more legitimate expenses are absolutely colossal now.

Last year the government spent HALF of its budget just to pay for Social Security and Medicare.

The situation is so dire that the government spends more than its entire tax revenue just on these mandatory entitlement programs, plus Defense and interest on the debt.

Even if you could eliminate entire departments of government, they would still be running a budget deficit and going deeper into debt.

The larger the national debt becomes, the more interest the government has to pay each year.

And interest payments increase even more rapidly as rates continue to rise… which is exactly what’s happening now.

A few years ago, the government paid less than 1.5% on its 10-year Treasury note. Today the rate has doubled.

This has a profound impact on Uncle Sam’s cash flow: they have to borrow MORE money just to pay interest on the money they’ve already borrowed… and spend a larger and larger share of the budget on debt service.

It’s a financial death spiral.

Think about it: if the government is having this much trouble making ends meet when they’re paying 2% interest on $21 trillion in debt, what’s going to happen when they’re paying 5% on $30 trillion?

It’s foolish to think that this trend has a consequence-free outcome. No nation in history has ever become prosperous by borrowing record amounts of debt to finance reckless spending.

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One family’s TWO YEAR nightmare of having their child taken by the state

This one is really infuriating.

It started back in 2016… on April 6th to be specific. A Philadelphia-area mother walked into a clinic because her 7-month old baby was being excessively fussy.

The doctor performed a cursory examination, concluded the baby had an ear infection, and prescribed an antibiotic.

Later that day, the mother noticed what seemed like a bone popping in the baby’s side and thought this might be the source of the discomfort.

Concerned, she went right back to the clinic to show the pediatrician.

The doctor claimed that he could not feel any popping and reassured the mother that the baby had an ear infection.

By the next day, the baby was in even worse shape. So the father took her to the hospital and insisted on an X-ray.

The parents’ instinct turned out to be correct– the baby had a mild fracture of her ribs.

Now– this is problem #1 in our story. Certainly the US health care industry is filled some incredibly hard-working and talented professionals.

But the system is designed the churn and burn… to push people through the clinics as quickly as possible.

The standard of care now is to prescribe some medication (usually antibiotics) and send people on their way without taking the time to conduct a comprehensive examination.

This is a major reason why the United States typically ranks so poorly in global health care studies.

According to one study by the Commonwealth Fund and Johns Hopkins School of Public Health, the US ranked dead last among 11 other wealthy countries (UK, New Zealand, Canada, etc.) in terms of quality of care… yet ranked #1 in terms of cost.

Moreover, recent research published by the Mayo Clinic shows that a full 20% of patients in the United States who have a serious medical condition are mis-diagnosed by their physicians.

This is a pretty sad testament to the state of medical care in the Land of the Free.

But this story isn’t about medical care. This is a story about a family being ripped apart by the ‘Justice’ system.

That’s because, after the physicians finally saw the baby’s cracked rib, they called in the local Child Protective Services.

A hearing was immediately convened, and the parents couldn’t explain the injury. Their best guess was that their older child may have accidentally injured the baby, but they didn’t know for certain.

And it was based on this uncertainty that BOTH children were taken away.

The older child was placed in the custody of his grandmother, and the baby was shipped off to a foster home.

This is where things become truly bizarre.

The local authorities conducted an investigation and found no “aggravated circumstances”. So the older child was soon returned to the parents.

But the baby remained in a foster home… in the care of complete strangers.

FOUR MONTHS LATER, there was finally an initial court hearing. The judge acknowledged that the older child had already been returned to the parents and was safe in their home.

But she refused to return the baby.

More importantly, the judge mandated that the parents should have SUPERVISED visitation, i.e. they had to go to the foster home to see their own baby under the supervision of a government employee.

Another four months later (now we’re in December 2016), another hearing was held.

Once again, the judge refused to return the baby… and even refused to transfer the baby from the foster home to the custody of the grandmother.

Bear in mind that the older child had already been returned to the parents several months prior.

So if they’d had any evidence that the parents were unfit, you’d think that BOTH of the children would have been in foster care.

But that wasn’t the case at all. That’s because the investigation showed no evidence of wrongdoing. The police weren’t involved. And no charges were being filed.

This was simply a matter of a single judge abusing her authority to separate a family, solely because she wasn’t satisfied that the parents didn’t know how the baby had sustained her injuries.

At that point the family hired a SECOND attorney who appealed the decision.

Another four months went by, and in March 2017, the judge held further hearings on the matter.

At that hearing, the attorney attempted to introduce evidence supporting the family’s claim, as well as testimony from other physicians citing a number of plausible reasons how the baby could have been injured.

But according to court records, the judge “refused to take any testimony in the case” because she thought the new attorney was “disrespectful and a little bit arrogant”.

The judge concluded the hearing by punishing the family even more– she suspended the grandmother’s right to visit the baby, denied the parents request for unsupervised visitation, and authorized the city to start the process to put the baby up for adoption.

More hearings took place over the next several months, until, in October 2017, the judge “involuntarily terminated Parents’ rights.”

In other words, the judge stripped the baby away and shipped her off like cattle to another home. Permanently. The parents were no longer the parents.

Now, it took a looong time. But last week the appeal was finally settled, with a different judge in a higher court.

And the appeals court sided with the parents.

More importantly, the appeals court issued a scathing condemnation of the other judge’s behavior, calling it “abuse of discretion” among other choice phrases.

It took more than TWO YEARS for this family to be reunited… not to mention a ton of money in attorney fees and an incalculable amount of stress.

This is pretty despicable… and worth any rational person questioning how free you really are, when all that’s required for the state to take your children away from you is a judge with an ax to grind.

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Meet America’s next pension casualty: the inventor of chocolate sprinkles

In 1923, a young Jewish immigrant from a small town in modern-day Ukraine founded a candy company in Brooklyn, New York that he called “Just Born”.

His name was Samuel Bernstein. And if you enjoy chocolate sprinkles or the hard, chocolate coating around ice cream bars, you can thank Bernstein– he invented them.

Nearly 100 years later, the company is still a family-owned business, producing some well-known brands like Peeps and Hot Tamales.

But business conditions in the Land of the Free have changed quite dramatically since Samuel Bernstein founded the company in 1923.

The costs to manufacture in the United States are substantial. And business regulations can be outright debilitating.

One of the major challenges facing Just Born these days is its gargantuan, underfunded pension fund.

Like a lot of large businesses, Just Born contributes to a pension fund that pays retirement benefits to its employees.

And in 2015, Just Born’s pension fund was deemed to be in “critical status”, prompting management to negotiate a solution with the employee union.

The union simply demanded that Just Born plug the funding gap, as if the company could merely write a check and make the problem go away.

Management pushed back, explaining that the pension gap could bankrupt the company.

And as an alternative, the company proposed to keep all existing retirees and current employees in the old pension plan, while putting all new employees into a different retirement plan.

It seemed like a reasonable solution that would maintain all the benefits that had been promised to existing employees, while still fixing the company’s long-term financial problem.

But the union refused, and the case went to court.

Two weeks ago the judges ruled… and the union won. Just Born would have no choice but to maintain a pension plan that puts the company at serious risk.

It’s literally textbook insanity. The court (and the union) both want to continue the same pension plan and the same terms… but they expect different results.

It’s as if they think the entire situation will somehow magically fix itself.

Those of us living on Planet Earth can probably figure out what’s coming next.

In a few years the fund will be completely insolvent.

And this company, which employs hundreds upon hundreds of well-paid factory workers in the United States, will probably have to start manufacturing overseas in order to save costs.

Honestly it’s some kind of miracle that Just Born is still producing in the US. The owners could have relocated overseas years ago and pocketed tens of millions of dollars in labor and tax savings.

But they didn’t. You’d think the union would have acknowledged that, and tried to find a way to work WITH the company to benefit everyone in the long-term.

Yet thanks to their idiotic union, these workers are stuck with an insolvent pension fund and zero job security.

Now, here’s the really bizarre part: Just Born contributes to something called a “Multi-Employer Pension Fund”.

In other words, it’s not Just Born’s pension fund. They don’t own it. They don’t manage it. And they’re just one of the several large companies (typically within the candy industry) who contribute to it.

So this raises an important question: WHO manages the pension fund?

Why… the UNION, of course.

The multi-employer pension fund that Just Born contributes to is called the Bakery and Confectionery Union and Industry International Pension Fund.

This is a UNION pension fund. It was founded by the Union. And the President of the Union even serves as chairman of the fund.

This is truly incredible.

So basically the union mismanaged its own pension fund, and then legally forced the company into an unsustainable financial position that could cost all the employees their jobs. It’s genius!

Just Born, of course, is just one of countless other businesses that faces a looming pension shortfall.

General Electric has a pension fund that’s underfunded by a whopping $31 billion.

Bloomberg reported last summer that the biggest corporations in the United States collectively have a $382 billion pension shortfall.

Not to worry, though. The federal government long ago set up an agency called the Pension Benefit Guarantee Corporation to bail out insolvent pension funds.

(It’s sort of like an FDIC for pension funds.)

Problem is– the Pension Benefit Guarantee Corporation is itself insolvent and in need of a bailout.

According to the PBGC’s own financial statements, they have a “net financial position” of MINUS $75 billion, and they lost $1.3 billion last year alone.

The federal government isn’t really in a position to help; according to the Treasury Department’s financial statements, Social Security and Medicare have a combined shortfall exceeding $40 TRILLION.

And public pension funds across the 50 states have an estimated combined shortfall of $1.4 TRILLION, according to a 2016 report by the Pew Charitable Trusts.

It doesn’t take a rocket scientist to see what’s coming.

Solvent, well-funded pensions and state/national retirement programs are as rare as mythical unicorns.

Nearly all of them have terminal problems and will likely become insolvent (if they’re not already).

The unions are driving their own pensions into the ground; and the government has ZERO bandwidth to bail anyone out, least of all itself.

So if you’re still more than two decades out from retirement, you can forget about any of these programs being there for you as advertised.

But there is a silver lining here:

The government can’t fix this. The union can’t fix this. But YOU can.

YOU have the ability to take matters into your own hands and establish a robust, well-funded, tax-advantaged retirement plan.

One example is a “solo 401(k)”, an extremely cost-effective and flexible plan that allows you to squirrel away tens of thousands of dollars each year and invest in a wide range of potentially more lucrative asset classes, from private equity to cryptocurrency.

There’s a multitude of other options out there.

Fixing this problem merely requires a little bit of education, and the will to take action.

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