It seems to me that this process is more open and most like a general election. To win the general you need independents and party-switchers. This is why Ron Paul is in the best position to beat Obama. He wins in those segments in poll after poll. Something that should negate any question of “electability”.

Following the results, something the PPP folks noted on Twitter was the following:

Young voters and indys unusual winning formula for GOP caucus but if Paul really gets them out he can win.

This comment is specific to Iowa, but Iowa is probably the best microcosm we have at this time of a general election. Paul is rather notorious for getting supporters out to vote for him. He wins or places in just about every straw poll in the country, including a very close 2nd in this summer’s Iowa Ames Straw Poll. So that is truly the bottom line, if Paul’s unusual strategy works then he can win Iowa. And that unusual strategy happens to be the exact strategy to take votes away from Obama in the general election.

Some of Paul’s detractors make the claim he’d be “dangerous for America”. Well, okay, that depends upon how you define America. If by America you mean the statist-status-quo in Washington DC and Obama’s re-election chances then yes, he’s extremely dangerous for America.

If by America you mean the country of “peace, commerce, and honest friendship with all nations, entangling alliances with none” and if by America you mean a country that places individual liberty as its highest value then Ron Paul would be the best friend America ever had.

So yes, if you want to beat Obama, Ron Paul is your choice, but he’s also so much more than that.

by Peter Schiff, CEO of Euro Pacific Capital, and host of  The Peter Schiff Show, broadcasting live from WSTC Norwalk CT from 10am to noon Eastern time every weekday, and streaming at

New Special Report: For an in depth look at the prospects of international currencies, download Peter Schiff’s and Axel Merk’s Five Favorite Currencies for the Next Five Years.

We have re-launched a campaign to impeach the President. The sample letter below will explain why we have done this.

WARNING: Those who maintain partisan loyalties may wrongly believe we are pursuing this campaign for partisan reasons, or out of personal animosity for the President. Nothing could be further from the truth. We want to make this clear . . .

• Our organization is legally non-partisan, and temperamentally ANTI-partisan.
• We distrust all political parties, and all politicians.
• We take NO position for partisan political reasons, for the simple reason that we have NO partisan political loyalties, AT ALL.

Instead, we are doing this because we think the legal situation requires it. The sample letter below will explain in more detail. But . . . out of respect for those who may disagree . . . we are placing this campaign on the “Heresies” page on our website. As always, you are a free to disagree with us, and to tell us you disagree.

On the other hand, if you strongly support our position, you may want to help us notify the media about it (see more details below the sample letter).

The hardwired portion of this campaign’s letter to Congress reads . . .

Please begin impeachment proceedings against the President.

I have added the personal comments that follow. Assuming you agree with our position, you may copy or edit my comments to send your own letter to Congress…

I’m asking you to impeach the President because I believe he is guilty of murder. The President ordered the military to kill an English-speaking, natural-born American citizen, Anwar al-Awlaki (ah-law-key), using a drone missile.

This is illegal. No citizen can be harmed by any agent of the state except through the application of legal due process (Fifth Amendment). President Obama violated this requirement. This makes him a murderer.

The only legal redress available when the President becomes a criminal, is impeachment by Congress. Therefore, the rule of law requires that you make use of this procedure now.

You may think that the President deserves the benefit of the doubt in this case, just because he is the President. I believe the exact opposite.

With great power comes great responsibility. The President must be held to an even higher standard, precisely because he is the President, and exactly because he has so much power over the lives of others. No person with the power to order missile attacks on individuals can operate free from the strong constraints of legal due process.

Remember, the President, and every other agent of the state, including all members of the military, were required to presume that Awlaki was innocent. The President assumed otherwise, and took upon himself the powers of a vigilante, making himself the judge, jury, and executioner (Separation of Powers).

The President has failed to honor his legal and moral obligations, so now the responsibility falls on you. You must use the impeachment process to prosecute the President for murdering an American citizen.

I well understand that the thought of this action must make you squeamish. I understand that you operate in a hypocritical and lawless environment, where citizens are held to high legal standards, but politicians are allowed to get away with anything and everything (except perhaps posting naked pictures of themselves). I understand that nearly all members of Congress violate the law, especially the Constitution, nearly every day. But this situation is unique . . .

* An American citizen has been murdered
* Congress, for once, is not complicit in the crime
* So this is Congress’s chance to be on the right side of the law for a change
* Democrats can show that they aren’t partisan hypocrites by leading the charge
* And Republicans can show that they’re through excusing wanton criminality in the name of national security

I am waiting to see if the political class will hold itself to the same standards you constantly apply to “mere citizens.” The President has confessed to murder. Impeach him.

END LETTER

You can send your own impeachment letter to Congress here.

This morning, during the 9 AM hour, DownsizeDC.org issued a press release to thousands of media outlets.

Your contribution can help us send more releases.

Perry Willis
Vice President
DownsizeDC.org, Inc.

P.S. A call for the impeachment of any President is considered by many to be an overt partisan act. But it’s NOT in this instance. DownsizeDC.org President, Jim Babka, explains why on our blog.

D o w n s i z e r – D i s p a t c h

Official email newsletter of DownsizeDC.org, Inc. & Downsize DC Foundation.

by Peter Schiff, CEO of Euro Pacific Capital, and host of The Peter Schiff Show, broadcasting live from WSTC Norwalk CT from 10am to noon Eastern time every weekday, and streaming at

This morning many on Wall Street were stunned by the big fat zero put up by the August jobs report, the worst showing in 11 months. The data convinced many previously optimistic economists that the United States will slip back into recession. I believe that we have been in one giant recession all along that was only temporarily interrupted by trillions of useless and destructive deficit and stimulus spending.  Unfortunately, the August numbers will increase the talk of government efforts to stimulate the economy.

But while President Obama prepares to unveil a new plan for the Federal Government to create jobs, evidence is rapidly piling up on how his Administration is actively destroying jobs with stunning efficiency. Recent examples of this trend are enough to make anyone with even a casual respect for America’s former economic prowess hang their head in disgust.

The assault on private sector employment began in April when the democrat controlled National Labor Relations Board (NLRB) issued a complaint seeking to force Boeing aircraft to move Boeing’s newly opened non-union production facilities in South Carolina back to its union controlled plants in Washington State. Although Boeing simply says that it is looking to open a cost effective domestic manufacturing facility (an endangered species) to employ American workers, the NLRB alleges that the company was punishing union workers in Washington for past strikes. Despite a lack of any direct evidence that Boeing was being punitive, and the fact that the company was not laying off any union workers, the NLRB has not backed down. Against little public support and nearly universal revulsion among business leaders, the NLRB is continuing its campaign to keep Boeing from exercising its freedoms and to employ people in a manner that makes sense for its business.

The Boeing move served notice that the Obama’s loyalties were firmly tied to the Union interests that were so critical to his election in 2008. This week, the anti-business tendencies of the administration came into even sharper focus.

In the telecommunications industry, service provider AT&T made the seemingly essential move in its attempt to acquire wireless specialist T-Mobile. But the Justice Department sued to block the $39 billion deal on antitrust grounds, saying that the merger between the second and fourth largest cell phone providers would unfairly restrict competition and raise prices.

In so doing, the DOJ seems to be operating under the assumption, without any direct evidence, that at least four companies are needed to provide healthy choice in the marketplace, and that three providers simply won’t cut it. More broadly, competition may increasingly come from outside the telecommunications sector (in particular from cable and satellite industries). Plus, with the speed of technological change, who knows what types of competitors will arise in the years to come. The situation reminds me of the broken merger in 2004 and 2005 between Blockbuster Video and Hollywood Video. Based on antitrust concerns emanating from the Justice Department, Blockbuster backed off from the deal. Of course, just a few years later the whole sector was made obsolete by Netflix, and any advantage Blockbuster would have gained would have only been temporary.

In light of the current and future competition that is sure to change the way consumers talk with one another over great distances, AT&T and T-Mobile are much better positioned to survive as a combined entity. In any event if AT&T can’t buy T-Mobile, someone else will. The company’s parent, Deutsche Telecom, has stated its intention to divest itself of its American subsidiary.

So why not help American business survive in an increasingly competitive market? Most likely antitrust lawyers at the DOJ have been otherwise bored with the lack of merger deals to scrutinize (another downside to a weak economy), and this transaction just happened to be in the wrong place at the wrong time. But the legal activism will certainly cost jobs. Even the unions recognize this and have supported the merger.

But the absurdity of the current environment reached a peak when the DOJ, and agents from, get this, the U.S. Fish and Wild Life Service, raided the Nashville factory of the legendary Gibson Guitar company. The raid resulted in agents carting off more than a half million dollars of supplies and essentially shutting the company down. The take down of one of America’s commercial icons apparently resulted from Gibson’s purchase of partially finished ebony and rosewood guitar fingerboards (these endangered trees are carefully managed) from an Indian supplier.

Now here’s the interesting part. The Indian government had issued no complaint about the transactions and there was no evidence that the company had violated U.S. law. The DOJ acted simply on suspicion that Gibson had violated Indian law. Since when do U.S. companies have to make sure that they comply with laws of every country in the world before they produce a product?

I had the good fortune on interviewing Henry Juszkiewicz, the CEO of Gibson on my radio show this Thursday.

The Supreme Court must now rule on this question, but we shouldn’t have to wait for that.I sent a letter to Congress telling them to repeal Obamacare now.

The hard-wired message says simply, “Please repeal Obamacare.”

I added these comments…

Uncertainty over what Obamacare will really cost companies is probably the major reason they’re reluctant to hire new people. Repeal Obamacare quickly, and this uncertainty will disappear. Unemployment would probably fall instantly, and dramatically.

Repealing Obamacare is probably the best thing you could do to create jobs.

But that’s not the only reason to repeal it.

Obamacare never had public support. It still doesn’t. The American people hate it. Plus…

The “individual mandate” is an affront to a free society. It violates the Constitution. The 11th Circuit agrees, and the Supreme Court will probably agree too.

And if the individual mandate goes, so must the rest of Obamacare. The individual mandate was essential to the scheme, because Obamacare also requires insurance companies to cover people with pre-existing conditions. The only way companies could afford that is through the requirement that everyone has to buy their product. But that won’t work if the court rejects the individual mandate.

This is a dangerous situation. If the Supreme Court kills the individual mandate, but not the whole of Obamacare, then the uncertainty companies face will grow. Job creation will remain stagnant.

America can’t afford to wait for a Supreme Court ruling, and then for further Congressional action to clarify things after the ruling. Instead, Congress should “fix” the problems of Obamacare by repealing ALL of it now.

You should also take IMMEDIATE steps to make health care more affordable, which is the key to expanding access. You can do this by allowing INDIVIDUALS to choose for themselves, with their own money. Here are some ideas…

* Introduce legislation allowing Americans to buy health insurance from any provider in the country, not just those licensed in their own state. This will reduce premiums for nearly every American.
* Remove all tax and regulatory incentives that tie health insurance to employment. This will give individuals full ownership over their own health insurance policies. This would also reduce the risk that people will end up uninsured because they change jobs, which is especially important to those Americans who have a family member with a pre-existing condition.
* Transition Medicare to a true voucher program with Health Savings Accounts (HSAs). People are always more prudent with their own money than they are when spending other people’s money. Therefore, HSA’s would reduce healthcare prices across the board.

Repealing Obamacare care now will help the economy immediately. It could also pave the way for more individual choice in healthcare. Choice would bring lowered costs, improved quality, and expanded access.

You can do better than Obamacare. Repeal it now. Then start over, using better ideas.

END LETTER

I urge you to send your own letter, or borrow from or copy the above. You can send your letter using DownsizeDC.org’s Educate the Powerful System.

And we invite you to share Downsize DC with your friends. “Like” us on Facebook and share us with your friends: http://www.facebook.com/downsizedc

Jim Babka
President
DownsizeDC.org, Inc.

D o w n s i z e r – D i s p a t c h

Official email newsletter of DownsizeDC.org, Inc. & Downsize DC Foundation.

by John Browne, Senior Market Strategist at Euro Pacific Capital

President Obama has continued and increased the reckless spending of the previous Administration. Now, as the federal debt reaches its statutory limit, he is spreading fear and panic in the hopes of having it raised.

Many of the key people responsible for America’s historic mess, including the President, Treasury Secretary Geithner, former NEC Director Summers, and Fed Chairman Bernanke, have pronounced publicly that a failure to lift the debt ceiling will cause a catastrophic Treasury debt default.

This is simply not true. The US Treasury has tax revenues that cover the service of its current (staggering) debt of some $14.3 trillion.

Yet, that doesn’t mean the US government won’t be forced to default in other ways. Failure to pay the
nominal interest and principal on bonds is only the narrowest definition of “default.” When a broader definition is used – which includes the use of inflation to erode the real value of US debt – the US government has in fact been in a state of continuous default for almost a century.

A 2011 dollar is worth just four cents in terms of a 1914 dollar. As that new money circulates, your dollar will lose some 53% of its purchasing power, productivity increases notwithstanding. That’s just in the last three years!

However, despite this continued stealth default and the constant underfunding of government obligations, hitting the debt ceiling would represent a very serious escalation of the United States’ insolvency. For, while Treasury bonds would continue to be honored, many other obligations would not. This is the time when seniors and soldiers should being paying attention.

If the debt limit were not raised, the Administration would be forced to literally choose which checks to send and which to cancel. On the chopping block could be Social Security checks, Medicare reimbursements, military salaries, federal pensions, and myriad boondoggles that the federal government has taken upon itself to fund. Perhaps the President would cancel his next campaign stop to save the expense of fueling Air Force One? Not likely!

While President Obama would find himself walking through a minefield of special interest groups as he chose where to cut, I expect the overall effort to be broadly popular. This is, after all, what the boisterous American Tea Party has been demanding all along. And the ultimate result would be a renewed faith in the US dollar and Treasuries.

In fact, the Republicans have in their hands the opportunity of a lifetime, the chance to force the Administration into good sense, while avoiding the political fallout.

Increasingly, it appears likely that the Republicans will buckle. If they do, Americans will be faced with a package that both sides will claim as a victory. The losers will be hard working, patriotic Americans and those around the world who believed the United States was good for its word.

On May 31, the House rejected President Obama’s request to raise the debt limit with no spending cuts. In addition to every Republican, 46% of Democrats opposed this bill.

* This demonstrates the power of polls, which shows even a substantial percentage of Democrats oppose raising the debt ceiling
* But it also demonstrate the power of your RELENTLESS PRESSURE on Congress

More and more Democrats realize the U.S. is on an unsustainable path and that reforms must be implemented NOW instead of putting them off any longer.

The vote was good news, but this is only the beginning of the fight. WE ARE HOLDING THE LINE . . .

NO increase on the debt ceiling.

Unless you tell your Representative and Senators where you stand, they may be tempted to cut a deal which will raise the debt limit while making only symbolic and marginal spending cuts.

Both Democrats and Republicans need to learn from history, particularly the Democratic Truman Administration. That’s why I sent this letter to Congress, from which you may borrow or copy . . .

I understand the concern you have about making the drastic spending cuts necessary to balance the budget and maintain the current debt ceiling.

However, the last time the national debt was this high relative to Gross Domestic Product (GDP) was at the end of World War II.

Economists Jason E. Taylor and Richard K. Vedder tell us what a Democratic-controlled White House and Congress did to the budget after World War II. They . . . .(http://www.cato.org/pubs/policy_report/v32n3/cpr32n3-1.html)

* slashed spending by more than 50% in one year
* removed ten million servicemen and one million civilian employees from the federal payroll
* lifted wartime economic controls, AS WELL AS many New Deal era regulations

Instead of a new Depression, the opposite occurred . . .

* The economy grew by 10% in two years
* Unemployment was under 4.5% in the first three postwar years
* By 1947, budget surpluses reached 6% of GDP, and the U.S. started paying down the debt

This isn’t surprising. It makes economic sense . . .

* More money is available for capital investment and economic growth, when government spends, taxes, and borrows less.
* It is less expensive to hire new workers, when regulations are reduced.

Please do now, what Congress did then:

1. End the wars, cancel defense contracts, and bring the troops home.
2. Cut spending to balance the budget, AND lift regulations that strangle the economy.

Follow the 1946, Truman formula, and America will adapt quickly to a more free and more prosperous reality.

Cap the debt!

END LETTER

You can send your letter using DownsizeDC.org’s Educate the Powerful System.

And we invite you to our Cap the Debt Facebook page. “Like” it and tell your friends! http://www.facebook.com/CapTheDebt

Jim Babka
President
DownsizeDC.org, Inc.

D o w n s i z e r – D i s p a t c h

Official email newsletter of DownsizeDC.org, Inc. & Downsize DC Foundation.

To counter the increasing demands that government reduce its micromanagement of the economy, last week the Obama Administration offered a fig leaf in the form of a white paper entitled “Reforming America’s Housing Finance Market.” In addition to marking the official end of the Bush era “ownership society,” where increasing the level of home ownership was a national priority, the document contains a recommended regulatory overhaul of the Federal Housing Authority (FHA) as well as Fannie Mae and Freddie Mac (together known as Government Sponsored Enterprises “GSE’s”), that intends to bring the share of government owned home loans from the current 95% to 40% over the next 5-7 years.

In the report, the Obama Administration makes the important admission that government interference in housing had dangerously distorted the market. And, while the goal of reducing the government’s footprint in the housing market is certainly laudable, the reform plan is not only too little too late, but fails miserably to address the nucleus of the problem. Even if all the recommendations are adopted, the government would actually extend its explicit guarantees to bail out failing lenders. Most importantly, the proposal completely overlooks the most significant government distortion of the housing market: the Federal Reserve’s manipulation of interest rates. Thus, this plan will insure that government’s role in the mortgage market will likely expand in the years ahead.

Banks are in the business of borrowing on the short end of the yield curve and lending on the long end. Since interest rates are generally lower for shorter time durations, banks make profits by capturing the spread. But if the gap between long term and short term rates narrow, or sometimes vanish completely, banks have a much harder time operating. Rapid and dramatic changes in interest rates also expose banks to money losing risks.

In a free market, whenever the supply of savings contracts the cost of money tends to increase. Those rising interest rates curb the demand for borrowing and increase the propensity to save. Conversely, increased savings rates lower the price of money, thereby encouraging more borrowing. Consequently, in a free economy market forces tend to stabilize interest rate volatility. However in the United States interest rates are anything but free.

When interest rates are set by a few people behind closed doors, as they are by the Federal Reserve, massive distortions can occur in the supply demand metric. For example, the S&L crisis of the late 80′s and early 90′s was brought about by the loose monetary policy of the 70′s. Rising interest rates, which were a direct response to rising inflation, soon found S&L’s paying out more on their short-term borrowed funds than they were collecting on their long term assets. The consequences for those imbalances caused by our central bank rendered nearly one thousand banks insolvent.

To mitigate this problem, early in the last decade banks began turning more and more to securitization as a way to unload the mortgages on their books by packaging and selling loans to outside investors. Not only does securitization bring in fees and reduce banks’ risk exposure but it also sucks in more capital to the real estate market, while increasing financial sector profits. It’s no wonder that the securitization market grew to over $10 trillion in the U.S. before the credit crisis of 2008. On paper this was a good solution to the problem, but additional government involvement in the securitization market threw in a monkey wrench.

Given the size and diversity of the investment market in the U.S. and around the world, there was adequate private demand for securitized mortgages. With relatively low risk and more generous yields than government debt, pension funds and other institutional investors bought heavily. However, as the Federal Reserve continued to lower rates and as the government engineered housing boom finally went bust, this private label demand dried up almost completely. The GSEs now provide financing for 9 out of 10 mortgages. Therefore, the real estate market today is virtually 100% distorted and manipulated by government forces.

Treasury Secretary Geithner–the President’s main pitch man for the program–touted the proposed solution of a hybrid federal reinsurance plan that would include a standing federal catastrophic reinsurer for private guarantors of mortgage-backed securities. The government has already clearly shown that its erstwhile implicit guarantee is now in fact explicit for GSE debt. That condition would remain intact. However, now government involvement would also morph into an explicit guarantee to reinsure private label mortgages. Therefore, in typical government fashion, the proposed reforms are merely a repackaging of the previous sham. Even if the plan were to be successfully carried out, the GSEs would still account for nearly half of all mortgage financing. Only now the government would also back private insurance for private label MBS with yet another explicit guarantee in case of emergency. Who can doubt that such conditions will inevitably arise? As to how this can ever satisfy the need to remove moral hazard or getting the government out of the housing market is beyond me.

In other words, there is no meaningful governmental withdrawal from the market. Most importantly, the plan does nothing to address the Fed’s role in making interest rates much lower and more volatile than they would otherwise be. Unfortunately the housing market will remain in government control for years to come and another real estate crisis will inevitably occur.

In current economic analysis, inflation is largely in the eye of the beholder, and depending on how you choose to look, very different stories emerge. In the U.S., food and beverages count for just 16.4% of the CPI calculation. The Chinese apparently believe that the basic necessities of life should count for more, assigning a 33% weight to the nutritional components. These differences in measurement are partially responsible for the divergent inflation climate in both countries, and make most people believe that inflation is fickle and localized. From my perspective, inflation is a global wave that will ultimately swamp all shores.

As the world’s economic leaders gather in Davos Switzerland, much of the discussion has been focused on a report jointly issued by the Global Economic Forum and McKinsey & Co. which forecasts a $100 trillion increase in global debt in the coming decade. The authors of the report argue that such an increase will be needed to maintain global economic health. Strangely, while acknowledging how the massive increase in credit caused the global financial crisis of 2008, the report’s authors admit no fear of even greater leverage today. They conclude: “Credit is the lifeblood of the economy, and much more of it will be needed to sustain the recovery and enable the developing world to achieve its growth potential.”

But the global credit stock has already doubled from $57 trillion in 2000 to $109 trillion in 2009, with disastrous consequences. The WEF report wouldn’t be so alarming if it wasn’t emanating from a gathering of global central bankers, business leaders and politicians. These are, unfortunately, the folks with all the power to turn these ideas into reality.

In his State of the Union address, President Obama kept pace with the madness in Davos by vowing to “slash” government debt by just $400 billion in 10 years. However, almost simultaneously the Congressional Budget Office upped its 2011 deficit projection to $1.48 trillion, which is over $400 billion more than it previously forecasted — effectively wiping Obama’s cuts before they are even formally proposed.

The myopia extends into the legislative branch. In a recent appearance on NBC’s Meet the Press, Senator Harry Reid said, “When we start talking about the debt, the first thing people do is run to Social Security. But Social Security is fully funded for the next 40 years.” Apparently the Senator pays no attention to the non-partisan CBO either. Last week the office states that Social Security will run permanent deficits beginning this year, 5 years sooner than expected. If we aren’t going to be honest about the insolvency of Social Security and Medicare, how can they possibly be fixed, and how can the costs ever be contained? The unfortunate truth here, once again, leads to the conclusion that financing our nation’s entitlement programs will be done courtesy of the Federal Reserve.

The CBO also said that the government will run up an additional $12 trillion in debt over the next decade if current taxing and spending policies remain in effect. Their report contained this foreboding comment: “…a growing level of federal debt would also increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget, and the government would thereby lose its ability to borrow at affordable rates.” The fact that our elected leaders fail to understand basic economics, or simply bury their heads in the sand, underscores why inflation will be a major factor in the years ahead.

For me, there is no escaping the conclusion that inflation will continue to surge. Inflation is, after all, the increase in money supply. And there appears to be no escaping the likelihood of massive floods of new money rolling off presses around the world, especially in Washington. But to a degree that is virtually ignored by many economists, a currency’s purchasing power is not only affected by money supply growth but also from the mere perception of it. Just like Enron shares became worthless overnight, if the U.S. is deemed to be insolvent because it cannot pay back its debt, the currency could plummet in a very short period of time, even if that pending supply of dollars has yet to be printed.

When you understand these basic issues, the decision to include precious metals, and other stores of value, in investment portfolios becomes a foregone conclusion.

by John Browne, Senior Market Strategist at Euro Pacific Capital

Following the huge gains made by Republicans in the midterm elections, it was widely expected that President Obama would use the State of the Union address to signal a major policy shift toward the center of the political spectrum. On the surface, at least, he appeared to do just that, hinting that he took budget management very seriously and that Americans should be prepared for shared sacrifice. However, as the final applause still echoed in the House chamber, many astute pundits were left trying to make sense of the many contradictory policy prescriptions the President proffered.

Classical political maneuvering dictates that when clouds are grey, politicians must offer good news, tell jokes, and remind us warmly of our childhood (or in Obama’s version, America’s triumph over Russia in the Space Race). Disclosure of specific measures should be avoided at all costs. President Obama followed these tactics closely.

While he did address plans to cut non-defence, discretionary federal spending – a small fraction of the overall budget – the President also announced his intention to increase spending on several existing and new initiatives. The scope of the new initiatives will surely eclipse the modest cuts pledged.

The President was careful to refer to all his spending plans as “investments.” The word is used in order to illicit a pleasant feeling among voters who instinctively favor capitalism over socialism, not because any thinking person expects these resources to be better allocated than they would have been by the market. Governments don’t make investments because they aren’t subject to profit-and-loss feedback. Governments provide public goods for which no profit can be measured or expected – or else we would just have the private sector take care of it. This disingenuous use of the word investment disguises the fact that the President simply intends to borrow even more money to spend on public-sector jobs.

The essential point is that while jobs in the private sector create wealth, public sector jobs actually consume wealth. When I was a Member of the British Parliament, I represented a county that spent the least amount per pupil on education of anywhere in the entire country. Yet, the achievement level of the students was by far the highest. It was vivid proof that it is not the amount of money that is crucial to success, but the quality of the spending. If the President were to lower taxation, cut the number of government regulations, and replace a political atmosphere of uncertainty with one of certainty, he might stand a chance of reviving wealth creation.

More seriously, the President made no mention of the massive debt problems facing US state governments, such as California and Illinois. The potential eruption of these debt and currency problems could well dominate investment strategies for 2011.

Yesterday, the Congressional Budget Office issued a highly embarrassing assessment that the federal deficit for 2011 would rise from the previously projected $1.1 trillion to $1.48 trillion. At a stroke, this nullified the President’s debt reduction plans. The CBO also pointed out that Social Security posted a $45 billion deficit in 2010 and will bleed more than $600 billion over the next ten years. I assume these estimates to be conservative. It is clear that the President, and the rest of Congress for that matter (with the possible exception of Congressman Paul Ryan whose austere recommendations have been ignored by most of his fellow Republicans), are dancing around the bonfire of our sovereign credit and hoping that their twirls will distract us from the conflagration.

Also yesterday, the Federal Reserve’s policy statement claimed that its massive stimulus plans are working, and that it will maintain both QE II and near-zero rates well into 2011. If the economy were indeed improving, as Messrs. Bernanke and Obama claim, why would the Fed and the Treasury need to keep administering life support? Clearly the White House and the Fed have little confidence in their own assertions; so, how should average investors react to more promises which are highly unlikely to be kept?

Rather than buying into Washington’s scripted recovery propaganda, investors should focus on the bottom line. Low interest rates are distorting the value of money and the key investment relationship between risk and reward. One side effect is that investors are being incentivized to favor equities over fixed income. A lack of viable alternatives has likely played an unsung role in supporting the current stock market rally.

Investors would be well-advised to retain a jaundiced view of all political statements, especially those of central bankers and politicians positioning themselves for the next election. In 2011, investors should focus their eyes not on the sky, but at the brick wall our Union is fast approaching.

The Fed’s lucky streak of luring bond investors with low interest rates may be drawing to a close. Nevertheless, the extended period of low borrowing costs has bred a new breed of investor. To the bulls and bears, we can now add the ostriches – those who bury their heads in the sand of declining debt service ratios while refusing to face up to intractable levels of total US government debt. If these ostriches were to actually look at the numbers, they would realize that it is their investments which are made of sand.As the issuer of the world’s reserve currency, the US government has enjoyed the benefits of low interest rates despite its inflationary practices. When we run a trade deficit with a country like China, they have a strong incentive to ‘recycle’ the deficit back into our dollars and Treasuries. This practice has hidden what would otherwise be much higher borrowing costs and much lower purchasing power for the dollar. This artificial price signal allows people like Paul Krugman to claim that the Obama Administration’s stimulus programs should be much larger. Because our yawning fiscal deficits have not driven bond yields significantly higher, he sees no reason to curtail spending. Krugman wants to spend like its World War III, and then has the nerve to call those worried about the budget mindless zombies!

Krugman is just one partisan Democrat shouting at mirrors, but the misunderstanding has struck the right-wing as well. Last week, in a debate with me on CNBC’s The Kudlow Report, Brian Wesbury, Chief Economist of First Trust Advisors and writer for The American Spectator, claimed that our $9.3 trillion national debt is of little consequence because our GDP is a far greater. However, he failed to note that our $14.7 trillion of GDP only yields about $2.2 trillion in revenue for the Treasury. To fully access that entire GDP, the government would have to raise all tax brackets to 100% without producing any reduction in output or decrease in revenue. This is, of course, preposterous. As was demonstrated in the 1970s, even small increases in marginal tax rates have a substantial negative impact on output. A healthier appraisal would center on the fact that our publicly traded debt is now 422% of our annual tax revenue.

Wesbury did mention that if the government could not raise revenue to pay off the bonds, it could simply monetize the debt with few significant consequences. Apparently, paying back one’s creditors in worthless paper is not technically “default” to an economist.

So neither Krugman nor Wesbury, both intelligent, highly educated economists, see our current course leading to imminent crisis. Unfortunately, both have been led astray by the low debt service ratio which has masked our economy’s underlying insolvency. To see through the haze, you have to look at the numbers behind this so-called “deleveraging consumer” and then look at the debt of the nation.

The data point most utilized by those who espouse the idea of a healthy consumer is the household debt service ratio (DSR), a metric that relates debt payments to disposable personal income. This figure peaked at 13.96% in the third quarter of 2007; it has since dropped by 15%, to 11.89%. It is hard to see this as a significant amount of deleveraging, especially when looking at longer term trends. But it gets worse! Most of that modest decline is simply a function of lower interest rates, which have made debt easier to bear. Total household debt has gone down much less. This figure peaked at $13.92 trillion in Q1 2008, and has since declined only 3.5% to $13.42 trillion. How’s that for deleveraging?!

It’s also worth noting that back in the first quarter of 2008, most homeowners were sitting on a pile of home equity to offset that debt. Today, most of the equity has vanished, yet the debt still remains.

When looking at the national debt, the situation is even more depressing. At the end of 2006, total debt held by the public was $4.9 trillion. According to the Treasury Department, the average interest rate paid on that debt was 4.9%. Therefore, the annualized interest payment at that time was $240 billion. At the end of 2010, our publicly traded debt has increased to $9.3 trillion, but the average interest rate on that debt has plummeted to just 2.3%. So, despite an 87% increase in debt in just a 4-year time span, the annualized debt service payment actually fell 11% to $213 billion. Krugman and Wesbury look at this and see progress.

Meanwhile, the average maturity on our debt has declined to 5.5 years. Compare that with the UK’s gilts, which average about 14 years, or even to Greece’s bonds, which average about 8 years. Falling interest rates and reduced durations have merely given the illusion of solvency to the US as compared to these other ailing sovereigns.

By 2015, our publicly traded debt is projected to be at least $15 trillion. Even if interest rates simply revert to their average level – not a stretch, given surging commodity prices and endless Fed money printing – the debt service expense could easily reach over $1 trillion, or about 50% of all federal revenue collected today. Just imagine what would happen if rates were to rise to the level of Greece, nearly 12% on a 10-year note, as opposed to our current 10-year yield of just 3.5%. I bet Athens, Georgia wouldn’t look much better than its namesake. Don’t forget: as interest rates rise, GDP growth slows, sending the debt-to-GDP ratio even higher.

Earlier this year, it wasn’t the nominal level of debt that suddenly sent euroland into insolvency, but rather a spike in debt service payments. Right now, the US national debt is the biggest subprime ARM of all time. Much like homeowners who thought they could afford a mortgage that was 10 times their annual incomes, Messrs. Krugman and Wesbury are blinded by deceptively low current rates of interest. These ostriches won’t poke their heads up to see the writing on the wall: low rates and quantitative easing cannot coexist for long. As rates continue to rise, the reality of US insolvency will be revealed.