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Lots of folks are starting to panic a bit now that the stock market has shed roughly 15% in the last 10 days. And rightly so. We haven’t seen the market tank this bad since the recession started back in 2008. But this time it’s a little more interesting. Well, maybe scary is a better word.

Unlike the recession of 2008, we don’t have the same mechanisms at our disposal to try and quell the panic and stimulate the economy. We’re also starting off in a worse spot. Interest rates are near 0%, and they can’t go any lower. The government has already printed trillions of dollars out of thin air to “stimulate” the economy, which failed to work. The credit rating has been downgraded from the highest level of AAA to AA+ by S&P, which means there is significant concern on their part that the government debt is starting to get out of control. We now have a 100% GDP to debt ratio which is increasing year over year. Consumer confidence is at an all-time low. Unemployment is at 9.1% and holding steady. In case you didn’t know, that’s all bad.

Even worse yet, if the United States slips back into a second recession before it has recovered from the first, we could see huge losses, not only in the stock market, but in private sector and public sector jobs. The outcome of which will be much worse than the first recession because as I mentioned previously, we are starting off in a worse spot.

One could easily make the argument that we have already entered a second recession. The GDP has decreased to 1.3% and unemployment has been steadily increasing. The national trade deficit has increased. The dollar has also been declining for months. To top it off, the consumer price index is also trending negative, providing more evidence that the economy is going to start slowing down even more. And today, the market dropped -634 points, the 6th largest drop on record. Most economists now give the United States a 50-50 shot of a double-dip recession.

I’ll make this prediction: If we have entered a second recession, it’s going to get really bad. Jimmie Carter bad. Unemployment could easily hit 14%. The stock market could easily lose 40% of its value. We would most likely enter a period of stagflation, where the economy actually contracts while interest rates climb. Government revenues will decrease leaving the Federal Reserve all out of options, but one; print more money. This will make matters immensely worse in that inflation would set in very quickly. A second downgrade on US credit would be probable. Interest rates would start to climb making it more expensive to borrow money. The government would be forced to make huge cuts in entitlement programs and defense spending just to service the debt. States would lose revenue due to foreclosures and a high unemployment rate. They too would be forced to make drastic cuts in spending and entitlements such as pensions.

Sound unlikely? During Jimmie Carter’s era, inflation hit 18% per year. Military pay increases were frozen. The prime interest rate hit 21.5% which caused home mortgages to exceed 16%. There was an energy crisis which lead to long lines at gas stations.

Eventually, the country would correct itself and get back on its feet. Ronald Reagan was able to pull the country out of similar economic conditions he inherited from Jimmie Carter in a little over 4 years. I however have little confidence that the government we have today would be smart enough to fix these problems. It will be up to the People to vote out the folks who got the country into this mess. That means removing political figures from both sides of the isle.

“If the US Government was a family, they would be making $58,000 a year, they spend $75,000 a year, & are $327,000 in credit card debt. They are currently proposing BIG spending cuts to reduce their spending to $72,000 a year. These are the actual proportions of the federal budget & debt, reduced to a level that we can understand.” – Dave Ramsey

The main focus of the Tea Party is to cut Federal Government spending. That’s it. Nothing more, and nothing less. So based on the above quote, why are the Tea Party folks considered insane, delusional, terrorists, and anti-American? Why is everything their fault?

If the above quote does not sound insane, then I ask you; Is that how you run your family finances? Does that sound normal? Of course not. The Tea Party movement is trying to make the Federal Government more sane when it comes to spending. They want to cut spending. Not increase it.

On the other hand, we have the left-wing Liberals/Progressives who want more of the same. They want more stimulus and more spending. They want more debt and a larger deficit. Based on the quote above, and if you had a friend who was is a similar situation, would you find them to be insane if they said they needed to cut spending, or would you find them insane if they said they needed to spend more? The Tea Party is the whole reason there were cuts in this latest spending budget bill, because the liberals were well poised to raise the debt limit without a single spending cut.

And as of today (august 5th, 2011), the United States Government for the first time in its history has had its AAA credit rating downgraded to an AA+ rating. This downgrade wasn’t a result of spending cuts. It was a result of spending too much money without enough cuts. While this is nothing but a small downgrade, it speaks volumes for a couple reasons.

The first being, no one thought S&P would ever downgrade the credit rating – no matter what. They didn’t during the housing mortgage crisis, the recession of 2008, or the Jimmie Carter era when the inflation rate was up around 18% a year. After all, this is the United States of America! How dare they! But guess what? They didn’t succumb to the government’s pressure … and cut it anyway.

Despite all the pressure coming from the government not to cut its rating, S&P still felt that Government spending no longer met the criteria of a AAA rating. And they are right. Especially when the debt to GDP ratio is now 100% (9th worse out of 129 countries in the world). The recent budget bill only cuts about $2 trillion from the debt over the next 10 years (70% of the cuts don’t happen until the year 2017), but the budget also spends $7 trillion over the same amount of time. So in reality, there is no cut. It’s simply a reduction in how much they are spending and it’s based mostly on the wars in Iraq and Afghanistan coming to an end.

The Tea Party folks who were being anti-American, terrorists, delusional and insane were in fact trying to stop the very thing that just happened; the first ever downgrade of the United States credit rating. They were the only ones who were protecting this great country. They were the ones yelling “STOP!”, we are heading towards disaster. All they wanted were cuts. And they barely got anything.

Instead, the liberals and progressives (President Bush was a progressive) who said we should spend more are the ones who just made it much more expensive for all of us to borrow money. Car loans, house loans, credit cards, student loans will be more expensive in the near future (maybe not now, but trust me, there will be inflation). They are the ones who have made the national debt a national security concern. They are the ones who have burdened our children with hundreds of thousands of dollars in debt the minute they are born.

It’s the liberals who wanted the Tea Party folks to get out of the way and simply pass the budget bill with a debt ceiling raise with no spending cuts attached. They are the real terrorists who fear-mongered virtually every senior into thinking they wouldn’t get their social security paycheck, the Medicare coverage, or their Medicaid coverage if the debt ceiling wasn’t raised, when in fact this was completely false. It was a complete and total lie.

So I ask you this … the US credit rating has been downgraded from AAA to AA+ for the first time ever because we didn’t cut enough in the budget bill (Those are S&P words, not mine). If the Tea Party wanted to cut spending and not raise the debt ceiling, how are they at fault?

I’m not an economist and this is only my interpretation of what I see happening with the stock market, the economy and the treasury market.

The market has completely panicked. The DOW fell -265 points on August 2nd, 2011 and -512.76 August 4th 2011, as investors fled stocks and put their money into government backed securities like short-term and long-term treasury’s.

The fear of a debt default, which was completely unfounded (politicized by Obama and Geithner), has been eliminated now that the debt ceiling has been increased and the government has the authority to borrow more money. At the same time, the economy appears to be heading towards a double dip recession as the entire year of 2011 had its GDP numbers revised downward. In addition, manufacturing data, unemployment, and the dollar’s value are all getting worse and there doesn’t appear to be any positive momentum to reverse these numbers.

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There’s a lot of talk these days about US Treasury Bills, and a lot of folks don’t know what one is, or why they are important.

US Treasuries are certificates issued by the United States Government. Think of them as IOUs or loans. The government will issue Treasury Bills when they need to raise money they don’t have, usually to fund things like war, big spending projects or in recent times, pay their bills (I won’t get into why that is bad in this post). Treasuries can be bought by any person, or any country.

There are 3 important aspects related to a US Treasury; treasury price, maturity date, and yield (also called the interest rate). The easiest way to explain this is through a couple examples.

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Ask yourself this question: Who prevents a crime targeted at you from happening?

Most people would answer, the Police. But do they? How often has a police officer stopped a home invasion? What about a mugging? How about a home burglary? What about a bank robbery? How often has a police officer stopped a murder from happening? Or a fight from breaking out in a bar? Unless they happen to be in the right place and the right time, it’s unlikely they could prevent any crime from happening.

People who live in nice neighborhoods aren’t crime free because police cars are constantly patrolling the streets. If that were the case, the city of Compton in California would be one of the safest cities in the country. The reason some neighborhoods are nice has to do with the common civil morality of the people who live there. Not because there are police there. When a crime does take place, no matter where that might be, it’s probably because a police officer wasn’t present.

… and when they aren’t present, is when a crime occurs.

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