Sprott Wonders If Treasury Has Created Its Own Epic Ponzi Scheme

Sprott Asks If Treasury Has Created Its Own Epic Ponzi Scheme

Sprott Asset Management, which has about $4 billion under management, just released its December newsletter. To say the least, it's quite provocative.

Titled, "Is It All Just a Ponzi Scheme?," the newsletter makes the case that the Treasury Department has invented its own bond market.

This isn't an entirely new thesis; Dr. Chris Martenson has been saying the same for months. But Sprott's research is very compelling.

In fiscal 2009, foreigners scooped up $698 billion of Treasuries while the Fed upped its holdings by $286 billion. But the public debt increased $1.9 trillion.

So who bought all the rest?

According to Treasury, “other investors” bought $510 billion, up from just $90 billion in 2008.

Can the Treasury maintain this charade in 2010? If they can't conjure up more phantom buyers, the bond market will dry up and the only alternative will be the Federal Reserve's printing press.

Either way, it's an ugly and frightening scenario.

Like any pyramid or Ponzi scheme, the system is in continuous need of new money to refinance debts and keep itself afloat.

I encourage everyone — all concerned citizens — to read this crucial report, which can be viewed here in PDF form.

US GPD Fueled by Debt

In what should hardly come as a surprise, US third-quarter GDP has once again been revised downward from the initial projection of 3.5% annual growth. The figure was initially revised downward to 2.8%, and now it has been further revised down to 2.2%.

That means the government overestimated the nation's third-quarter economic performance by 37%, a rather large error.

GDP numbers are often revised, seemingly at will, allowing the government to control the message and spin the story. After six consecutive quarters of negative GDP, the government was desperate to create some good news. As it turns out, that news was too good to be true.

Our meager third-quarter growth was largely the result of further government spending, not private sector spending. Auto purchases were in fact undergirded by government support.

Under the latest revision, the government's Cash for Clunkers program now accounts for 66% of the remaining GDP "growth," up from 47% in the initial report. This is an error of $185 billion, which is larger than the $152 billion Bush stimulus package of 2008.

The reality is that this 2.2% growth was fueled by even further government debt, as well as consumer debt. The latter is exactly what got us into this economic malaise in the first place, and the average US household is still overburdened and saddled with debt.

According to data released in July by the Federal Reserve Board, revolving consumer debt in the United States totals about $928 billion.

Federal Reserve surveys suggest that about 75% of households have at least one credit card and 25% have none. If we count only those households that report actually having one or more credit cards, the average household credit card debt is $10,482.

However, the Federal Reserve puts total household debt, including mortgage debt, at about $13.7 trillion, or 125% of annual after-tax income, a burden that many economists believe will take several years to pare down to what is viewed as a more sustainable level of 100%.

When one considers that consumer spending makes up more than two-thirds of the U.S. economy, and about one-fifth of the global economy, you realize it won't be able to play a leading role in any recovery. Seventeen percent of US workers are either unemployed or under-employed.

The federal government has jumped into the breach to try to make up for the resulting decline in consumer spending. But that is only increasing an already whopping federal debt.

U.S. government debt has reached 85% of annual economic output and is showing no signs of slowing; the White House estimates that the government will have to borrow about $3.5 trillion more over the next three years. On top of that, it has to service all that debt – in addition to current debt – with interest.

Paying down this enormous national debt will eventually require Americans to pay more taxes. That will only hamper consumer spending even further. Consumers will ultimately feel the combined burdens of private and public debt because we all owe a share of the national debt.

A 1998 Congressional Joint Economic Committee study concluded the optimal size of government to maximize economic growth was about 18% of gross domestic product.

However, in May, Business Week reported that, even before this year's unprecedented debt and spending, all levels of government in the U.S. controlled 37% of GDP. Recent federal spending will drive up government’s share to more than 40%.

Our entire economic system is based on perpetual growth. However, there is no real growth; there is only more debt.

Unemployment Benefits Extended Up To 99 Weeks; May Cost $140 Billion

Unemployment has been so widespread, so lasting and so costly that the federal government projects that 40 state programs will go broke within two years and need $90 billion in loans to keep issuing benefit checks.

Collectively, states are projected to run a $57 billion deficit in the program in 2010 alone. The federal government is obligated to lend them the money to cover that gap.

Many states will be faced with the unpleasant choice of raising taxes, cutting benefits, or both. Nationally, the average tax is about 0.6 percent of payroll; the average weekly check is about $300.

Currently, 25 states have run out of unemployment money and have borrowed $24 billion from the federal government to cover the gaps.

Unemployment benefits are typically paid for 26 weeks. But, due to the length and severity of the recession, Congress has repeatedly extended that period since June 2008.

The emergency extensions had previously allowed laid-off workers to collect benefits for up to 46 weeks in some states. But in other states the benefits had stretched up to 79 weeks, the longest period since the unemployment insurance program was created in the 1930s.

However, that period has now been extended up to 99 weeks in some states.

Saturday morning, the Senate approved a $626-billion defense bill that included a two-month extension of unemployment benefits for the long-term jobless.

The benefits of 1.5 Americans were set to expire at the end of this year. Those benefits will now be paid through the end of February.

According to AP, the costs of another extension of unemployment benefits will reach $100 billion. The estimated price tag includes the costs of extending unemployment benefits through 2010 for those who have been unemployed for more than six months, as well as costs to provide subsidies to assist in paying health insurance premiums.

This is in sharp contrast to the unemployment benefit costs of just two years ago. Back in 2007, the cost of unemployment benefits was only $43 billion dollars. Since that time, unemployment has ballooned from 4.8% to 10%.

Obviously, the unemployment problem will not improve significantly in the next two months, and Congress will once again be faced with the task of extending benefits further. The cost to the federal government and the states will be burdensome, and require taking on even further debt.

Even before the last round of extended benefits in November, the White House estimated the cost of unemployment compensation to exceed $140 billion for fiscal 2010, which began in October.

The Labor Department projects that eight million Americans will exhaust their regular 26 weeks of unemployment benefits in 2010.

The 10 Countries Most Likely To Default

The recent economic meltdown in Dubai may turn out to be the proverbial canary in the coal mine.

The Emirate's massive debt problem may ultimately serve as a warning of the troubles brewing in other nations. Could other sovereign debt defaults be on the horizon?

Remarkably, there are countries even worse off than Dubai.

The Business Insider recently ranked "The 10 Countries Most Likely to Default."


#10 Lebanon
Cumulative Probability of Default: 17 %

Reuters: "Lebanon, one of the most heavily indebted states in the world, completed a debt swap in March for around $2.3 billion of foreign currency paper maturing this year.

Strong economic growth has helped reduce Lebanon's ratio of debt to gross domestic product to 153 percent in June from around 180 percent three years ago. The country's gross debt stands at $48 billion."

#9 State of California
Cumulative Probability of Default: 18 %

Though it is just a U.S. state and not an independent nation, the Golden State has the world's eighth largest economy, and it is a mess. California’s budget deficit will balloon to $20.7 billion during the next year and a half, the nonpartisan Legislative Analyst’s Office predicted in a November report. As of November, year-to-date revenues were more than $1 billion below what had been expected.

According to The Press Enterprise, “California will pay $6 billion in debt service in the current fiscal year, or nearly 7 percent of the state’s general fund. And that expense is only for part of the bonds voters and legislators have approved: California has $83.5 billion in outstanding debt, including $64 billion in general obligation bonds. But the state has $47.5 billion in already authorized bonds that it has yet to sell, too.”

#8 Lithuania
Cumulative Probability of Default: 19 %

Bloomberg: "Lithuania will probably miss a 2011 European Union deadline to bring its deficit in line with the bloc’s budget threshold, ruling out euro adoption before 2013, Finance Minister Ingrida Simonyte said..

The former Soviet state’s budget shortfall will swell to 9.8 percent of gross domestic product this year, and narrow to 9.7 percent in 2011"

#7 Iceland
Cumulative Probability of Default: 23%

Bloomberg: "Iceland’s economy contracted the most on record last quarter after the island’s banking failure left locals poorer and as businesses lacked funds for investment.

Gross domestic product shrank an annual 7.2 percent, after contracting a revised 6.2 percent in three months through June, Reykjavik-based Statistics Iceland said on its Web site. From the previous quarter, GDP shrank 5.7 percent."

Iceland’s banking collapse last year plunged the Atlantic island into its worst economic decline since gaining independence from Denmark in 1944 and forced the government to seek an international bailout to avert default."

#6 Emirate of Dubai
Cumulative Probability of Default: 29%

Dubai's inability to pay its debts on time forced it to request a six-month extension on loan repayments. That news rocked world markets and sent shivers throughout the financial world. Dubai may simply be the beginning of further sovereign defaults in the coming year.

#5 Latvia
Cumulative Probability of Default: 30%

Bloomberg: "Latvia’s economy contracted a preliminary 18.4 percent in the third quarter, the biggest decline in the EU. The country’s banks may have the highest need for new capital in eastern and central Europe along with Lithuania because they rely on collateral that’s been falling in value amid house price declines, Fitch Ratings said in a report today...

The country is rated two levels below investment grade at BB by Standard & Poor’s. Moody’s Investors Service ranks Latvia at the lowest investment-grade level of Baa3."

#4 Pakistan
Cumulative Probability of Default: 36%

Business Recorder: "The country's external debts and liabilities have posted a raise of some three billion dollars to a new peak of 55.2 billion dollars by end of September 2009."

#3 Argentina
Cumulative Probability of Default: 49%

WSJ: "Fitch Ratings said Argentina's credit ratings are likely to remain in highly speculative territory even if its planned $20 billion debt exchange is executed successfully, noting the country's continuing economic and financial pressures as well as high debt ratios.

Argentina's Senate voted to approve a bill that would allow the government to reopen a 2005 debt restructuring. At issue are about $20 billion in face value of bonds that weren't included in a 2005 transaction. Economy Minister Amado Boudou said recently that the government plans to reopen the offer under similar terms to try to attract as many of those investors as possible."

#2 Ukraine
Cumulative Probability of Default: 55%

Bloomberg: "Ukraine will keep its B2 credit rating, with a negative outlook, the ratings company said in a statement released late yesterday, after Ukrzaliznytsya defaulted on a principal payment on a Barclays Capital-led syndicated loan on Nov. 20...

The B2 rating reflects “weak macroeconomic fundamentals, a banking system that remains under strain, and distinctly poor coordination between fiscal and monetary policies,” Moody’s said. “While some of these problems may well reflect political in-fighting in the run-up to the presidential election, the fiscal loosening inherent in recent legislation -- which may raise the budget deficit by up to 7 percent of gross domestic product in 2010 -- is a serious concern. Hence, the negative outlook on the B2 sovereign rating remains in place.”

#1 Venezuela
Cumulative Probability of Default: 60%

WSJ: "one week ago, the government was forced to begin shutting down seven small banks that together represent up to 12% of banking system deposits, after the public began to get wind of some of the banks allegedly using depositors' funds for corrupt ends.

Those takeovers alone would have frayed nerves in financial markets. But Chavez piled on by saying he would nationalize the entire banking system if needed. The comments, last Wednesday, sent Venezuela's bolivar currency and sovereign bond prices tumbling."

Somehow, Greece didn't make this list. Perhaps it should have.

Late Wednesday, Standard & Poor's downgraded Greece to a BBB+ rating, matching a downgrade from Fitch Ratings just over a week ago, on concerns the country will struggle to rein in a deficit that stands at more than 12% of gross domestic product.

U.S. Already $296 Billion in Red for 2010

According to the Congressional Budget Office, the government spent $292 billion more than it took in during October and November.

It was a record 14th straight monthly deficit.

However, according to the Treasury Department, the budget deficit was $176.4 billion in October and $120.3 billion in November, meaning that the deficit actually amounts to more than $296 billion.

The 2010 fiscal year began on October 1, meaning that just two months in, the nation is already nearly $300 billion in the red.

The deficit was even worse than the same period last year, when the government was on its way to posting a record $1.4 trillion deficit for the fiscal year that ended Sept. 30.

Tax revenues have plunged just as spending on safety-net programs like unemployment insurance and food stamps have skyrocketed.

The CBO noted that government outlays through the first two months were $559 billion, meaning that the government had already spent more than double what it had taken in.

The Obama Administration expects the 2010 deficit to set a new record at $1.5 trillion.

There is a widespread sentiment among economists that all of this red ink will lead to higher interest rates and borrowing costs. That outcome would hinder any potential recovery, though it would reward savers.

The National Debt is presently $12.1 trillion, and climbing at a rate of $1 million every minute.

Meanwhile, the gross domestic product has been shrinking during the economic contraction, and will be $13.7 trillion for 2009.

Obviously, the National Debt and the GDP are moving in opposite directions. We've been warned repeatedly that this situation is simply unsustainable. None other than the government's former top accountant, David Walker, has made this point numerous times.

The meager economic growth in the third quarter was the result of nothing more than government spending. Any further growth in the fourth quarter will be the result of even more than the same.

No matter how deep the hole gets, our elected leaders can't stop digging.

One in every six dollars in the U.S. economy is now the product of government spending. At a minimum, that is both unhealthy and unproductive.

The government, and the public, can continue to ignore this for a little while longer, but at our own peril. Sooner or later, there will be very uncomfortable, and destructive, implications.

The U.S. debt clock can be seen here.

Bank Failure Tally Reaches 140

Seven banks across six states were shut down on Friday, bringing the total number of failed banks this year to 140.

Friday's closures will cost the FDIC an estimated $1.7 billion.

An average of 11 banks have failed every month this year. The spike in failures has raised concerns about the FDIC's deposit insurance fund, which has slipped into the red for the first time since 1991.

This year's tally of bank failures is the highest number since 1992, when 181 banks failed. But the total is far from 1989's record high of 534 closures which took place during the savings and loan crisis, when the insurance fund also carried a negative balance.

FDIC Chair Sheila Bair told CNBC that bank failures will continue to accelerate into next year despite "some encouraging signs" that things are turning around for the battered industry.

The continuing bank failures will be driven by unusually high unemployment that is expected to lead to more foreclosures and other commercial loan failures.

So far, the total cost of these 140 failures to the FDIC fund is more than $30 billion.

U.S. Debt Bomb Ticking Away

According to Morgan Stanley, total U.S. credit market debt as a percentage of GDP is higher now than at the peak of the Great Depression.

Now, as then, the government and financial sector are attempting to stave off the economic contraction through debt-financed spending.

But, at present, the collateral supporting much of our public and private debt is worth less than the debt it is supposed to be supporting.

The U.S. is by far the world's biggest debtor nation. US private sector debt is now 350 percent of GDP.

Currently, there is about $3.75 in debt for every $1 in national income. Yet, the national economy can normally support around $1.50 in debt for every dollar of income.

The fact that U.S. and global debt levels are higher now than during in the 1930s leads to the conclusion that the current deleveraging will likely be a staggering economic event.

The dollar has declined 40 percent in value in the last seven years.

Meanwhile, the national debt is soaring and the monetary base has increased by 142 percent over the past two years.

Yet, government spending continues, unabated. Our national debt now exceeds $12 trillion. Military and war spending are a significant aspect of our excess.

In real dollars, defense spending in both the Korean war and the Vietnam conflict, was not as high as it is today. According to Lawrence Korb, the former assistant secretary of defense in the Reagan administration, the indirect costs of our two current wars — veterans benefits, long-term care of the physically and mentally wounded, and interest on the national debt — could bring their total cost to $5 trillion.

President Obama's latest Afghanistan troop increase will bring total forces to nearly 100,000 — at a cost of $100 billion a year. That's nearly $1 million per soldier.

The U.S. dedicates more money to military spending each year than the rest of the world combined. That kind of spending has unintended consequences.

This week, the House will vote to raise the U.S. debt limit by as much as $1.9 trillion. This will raise the cap on government borrowing to about $14 trillion, or equal the size of our nation's GDP.

It will be the ninth hike since 2002, and the fourth in just 18 months. The government has raised the debt limit more than 90 times since 1940.

Such an increase would be more than twice the size of each of the past three debt limit increases. The move will allow lawmakers to avoid having to raise the limit again before next year’s midterm elections.

A surging budget deficit has pushed US government debt to nearly 98 percent of the gross domestic product. If the U.S. was forced to conduct its finances like a corporation, it would be nearly insolvent.

About 46 percent of America’s debt is held overseas by countries such as China and Japan. Interest payments on those debts consume about a tenth of the United States budget.

Remarkably, that percentage is actually down from recent years as interest rates have dropped. When rates eventually go back up, as they inevitably will, the interest payments will rise in response.

Debt payments are already larger than the budgets for NASA ($19 Billion), the Department of Energy ($25.5 billion), the Department of Education ($53 Billion), and Department of Transportation ($73 Billion).

To fund this overspending (aka federal budget deficits), the U.S. Treasury makes and sells a fresh batch of IOUs every quarter. It then uses the cash from these sales to pay off old Treasury debt that has come due, while also maintaining the interest payments on the rest of the paper that is still outstanding.

The government cannot raise enough revenue through taxation to satiate its unwavering desire for rampant spending. The public wouldn't tolerate it and would vote incumbents out of office. So, the Fed prints money (backed by nothing) and then buys Treasuries to finance our government's relentless deficit spending.

And even if the government tried to raise taxes (largely on the highest income earners), it might forestall any potential recovery.

These record deficits have arrived just as the long-feared explosion in spending on Medicare and Social Security begins. As a result, the hole we're in will just keep getting deeper.

The White House estimates that the government will have to borrow about $3.5 trillion more over the next three years. On top of that, the Treasury has to refinance, or roll over, a huge amount of short-term debt that was issued during the financial crisis. Treasury officials estimate that about 36 percent of the government’s marketable debt — about $1.6 trillion — is coming due in the months ahead.

The Treasury Department’s private-sector advisory committee on debt management has warned of the risks ahead.

“Inflation, higher interest rate and rollover risk should be the primary concerns,” declared the Treasury Borrowing Advisory Committee in November.

In essence, we've been warned.

"Right now, this year, we have 1.6 trillion in debt coming due. That's roughly twice individual income-tax revenue. Our only plausible strategy for paying that back is to borrow more money." – Leonard Burman, an economist at Syracuse University

Bank Failures Reach 133

Three more U.S. banks were closed on Friday, bringing the total number of bank failures this year to 133.

Apparently, things will get worse in 2010.

FDIC Chair Sheila Bair told CNBC that bank failures will continue to accelerate into next year despite "some encouraging signs" that things are turning around for the battered industry. Bair did not quantify how bad the failures would get, but said the worst isn't over yet for institutions that will suffer even as the economy improves:

The continuing bank failures will be driven by unusually high unemployment that is expected to lead to more foreclosures and other commercial loan failures.

So far, the total cost of the 133 failures to the FDIC fund is more than $28 billion.

The FDIC recently announced that 552 banks are at risk of going under.

Horizontal Drilling Expands Natural Gas Reserves

Using a relatively new new technique, oil engineers and geologist are now able to drill horizontally to extract natural gas from shale.

The technique has been used across Texas, Oklahoma, Louisiana and Pennsylvania for the past decade, resulting in a 40 percent increase in U.S. natural gas supplies in recent years.

The increased production has created a glut of the gas in the U.S., helping to drive down gas prices and utility costs.

Daniel Yergin, chairman of IHS Cambridge Energy Research Associates, calls the new method of producing gas “is the biggest energy innovation of the decade.”

Natural gas produces fewer emissions of greenhouse gases than either oil or coal, making it a favorable alternative.

Now Europe is seeking to expand in its reserves of the cleanest fossil fuel. The hope is that the continent can reduce its dependence on Russian natural gas.

Initial estimates of recoverable shale gas in Europe range up to 400 trillion cubic feet. Though that is less than half the industry’s estimates of what is recoverable in the United States, it could eventually drive down prices, which are sometimes twice as high as those in the U.S.

By some estimates, the horizontal drilling technique could result in at least a 20 percent increase in the world’s known reserves of natural gas.

One recent study by the Cambridge consulting group, calculated that the recoverable shale gas outside of North America could turn out to be equivalent to 211 years’ worth of natural gas consumption in the United States at the present level of demand, and maybe as much as 690 years.

The low figure would represent a 50 percent increase in the world’s known gas reserves, and the high figure, a 160 percent increase.

If the U.S. can convert more of its transportation fleets to use natural gas rather than gasoline, it would increase energy independence and security, as well as reducing costs and carbon emissions.

On a global scale, those benefits would obviously be greatly magnified.

Amidst all the dire peak oil news, this at least provides us with some semblance of hope.

Number of Failed U.S. Banks Reaches 130, and Counting

Six more U.S. banks were closed on Friday. These latest failures are expected to cost the FDIC's insurance fund at least $2.3 billion.

A total of 130 U.S. banks have now failed this year. The cumulative cost of all these failures to the federal deposit insurance fund is more than $28 billion, and counting.

The problem is that this fund has been in the red for over two months.

Last week, the FDIC announced that 552 banks are at risk of going under.

This begs the question: Is your bank safe?

The FDIC is counting on struggling banks to pay three years worth of insurance fund fees (amounting to $45 billion) to help offset the continuing losses.

Yes, the FDIC is relying on insolvent banks to come up with money they don't have, in order to save themselves.

It boggles the mind.

Declining Job Losses Nothing to Celebrate

The good economic news today was that the economy only shed 11,000 jobs in November, giving Wall St. cause for celebration.

However, it was the 23rd consecutive month of job losses – the longest losing streak since the 1930s.

Indeed, jobs losses must decelerate before ceasing, and losses must cease before net job creation is realized. But amid all this hubbub, one thing cannot be overlooked: the U.S. economy is still losing jobs every month.

Two years since the start of the Great Recession, nearly 8 million jobs have been lost. In fact, all job creation for the entire decade has been destroyed and is now negative. That hasn't happened since the Great Depression of the 1930s.

The fact is, there are twice as many unemployed people today as there were two years ago at his time.

Though the labor market has seen a steady decline in first-time jobless claims, and Initial claims have fallen five weeks in a row, it's not the layoffs that are hurting us as much as the lack of hiring.

In essence, while fewer people are being laid off, fewer are being hired as well.

Nearly six million of the 15.7 million people officially classified as unemployed have been out of work longer than six months. And that doesn't count the part-timers who cannot find full-time work, or those who have simply given up looking.

About 2.3 million persons were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.

There are 9.28 million people working part time, but who want a full time job. A year ago the number was 7.3 million. Employers will start increasing the hours of part-time workers before they start hiring full-time workers. This should give us pause.

Truthfully, all of these facts should temper some of the jubilation about a potential recovery.

The so-called U-6 unemployment figure still remains above 17%. This figure counts all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc.

Many of these job losses will be permanent. Millions of Americans will have to find new jobs or even new careers, which will be a lengthy process. The economy is both restructuring and recovering at the same time.

Service-producing industries added 58,000 jobs, while goods-producing industries cut 69,000 jobs. This is exactly the wrong kind of job creation, and the continuation of a decades-long pattern.

For far too long we've consumed too much and produced too little. We need to recover our manufacturing base in a hurry.

Unfortunately, there are continually fewer high-skill, high-paying jobs. In their place are evermore low-skill, low-paying service jobs.

"Hi, welcome to Wal-Mart," and "Hello, welcome to McDonald's, can I take your order?" have become all too common refrains for far too many educated and overqualified workers.

According to Lawrence Katz, a labor economist at Harvard, for every job that becomes available, about six people are looking. That creates an enormous amount of competition and leaves many out of luck.

Here's the reality check:

The government says that 1.3 million jobs need to be created every year from 2006-2016 just to keep up with the growing labor force. The hole we're in is very deep. Experts note that it will take years to reverse these massive losses.

Even if the nation could add 2.15 million private-sector jobs per year starting in January 2010, it would need to maintain this pace for more than 7 straight years (7.63 years), or until August 2017, to eliminate the current jobs deficit.

Washington, Wall St. and the mainstream media should hold of on the celebrating for now. The recovery hasn't really started yet. And whenever it does, there's still a very long road ahead.

Worldwide Economic Instability a Major Threat

The U.S. Director of National Intelligence, Dennis Blair, has told Congress that instability in countries around the world caused by the global economic crisis and its geopolitical implications, rather than terrorism, is the primary near-term security threat to the United States.

And another leading figure on the world stage has voiced similar concerns.

In March, Dominique Strauss-Kahn, the head of the International Monetary Fund, warned that the global economic crisis threatened millions of people with being pushed into poverty.

At a meeting of the International Labour Organisation, Mr Strauss-Kahn issued this warning:

"'Bluntly the situation is dire. All this will affect dramatically unemployment. And, beyond unemployment, for many countries it will be at the roots of social unrest, some threat to democracy, and maybe for some cases it can also end in war."

He also warned governments against ploughing even more fiscal stimulus into their ailing economies.

"You can put in as much stimulus as you want. It will just melt in the sun as snow if at the same time you are not able to have a generally smaller financial sector than before, but a healthy financial sector at work."

The Federal Reserve didn't heed the warning; instead it has increased the monetary base by 142% over the last two years.

Meanwhile, bank balance sheets continue to deteriorate as home foreclosures spiral, and as the commercial real estate collapse gains momentum.

And people are noticing.

Standard & Poor’s has given warning that nearly all of the world’s big banks lack sufficient capital to cover trading and investment exposure, risking further downgrades over the next 18 months unless they move swiftly to beef up their defences.

Every single bank in Japan, the US, Germany, Spain, and Italy included in S&P’s list of 45 global lenders fails the 8pc safety level under the agency’s risk-adjusted capital (RAC) ratio. Most fall woefully short.

And then there's the Dubai default / debacle, which sent a shockwaves through markets around the world. Dubai is likely the canary in the coal mine, signaling the weakness of the global financial system, and the limits of debt.

It appears that 2010 isn't shaping up to be a very happy new year.