James Dale Davidson’s latest special report, “The Plague of the Black Debt,” went live to Notes readers yesterday. For those of you who missed it, you can access it here.  James’s message is simple: the $110.7 trillion in outstanding US debt is about to bury the US economy.

Unfortunately, it’s too late to reverse course for America. President Obama’s spending program is speeding up the collapse, not slowing it down. Right now, 21 cents out of every $1 paid over to the feds in income tax goes to paying off the interest on the national debt. Soon, it will be almost double that amount. It doesn’t take a genius to work out that this is unsustainable.

It doesn’t take a genius, either, to figure out that higher spending and higher debt mean higher taxes and a weaker dollar. Here are just some of the shocking forecasts James makes in this explosive report:

• No matter who you are, your taxes will go up. The government will continue to raise taxes in an attempt to keep its spending programs alive. The Obama administration is already planning to raise corporate taxes, already the second highest in the world. The costs of this will be passed on to you whenever you buy something.
• The US dollar is already being undermined as the world’s reserve currency as US debt holders led by China, Russia, India and Brazil move to protect themselves against dollar depreciation. Soon the dollar will lose its reserve currency status.
• The Social Security Ponzi scheme will collapse. The government will be unable to borrow the funds it needs to replace all the money it has already spent from the Social Security trust fund.
• Interest rates in the U.S. will rise to 6% plus as the government needs to raise the rate to stimulate foreign demand.
• Excessive government borrowing will push up mortgage rates and trigger another leg down in the housing market. Huge numbers of prime borrowers have already begun to default on their mortgages, triggering what is destined to become another wave of toxic asset writedowns at banks.
• The government will default on Social Security payments and Medicare and Medicaid obligations. It will not do so in an open way. Instead, it will fail to accurately index-link Social Security benefits to the cost of living… it will ration hospital stays and doctors visits… and it will deny expensive treatments and medication to state-insured patients (beginning with the elderly)
• The US will enter a long period of economic stagnation coupled with inflation.
• In years to come, the period between 2008 and 2018 will be known as America’s “lost decade.”
• Oil prices fall to $25 a barrel before breaking through their July 11 2008 high of $147.90 a barrel.
• Unemployment rates will rise to 20%.

James is a personal friend. And he’s one of the best thinkers about the global economy we know. Back in 1993, James sent out a similar warning to investors. His forecasts, 14 years before the subprime collapse was ever heard of, were scarily accurate…

· I see at millions unemployed or in make-work public assistance jobs.

· I see millions more homeowners “upside down” – with a mortgage bigger than the value of the home.

· Banking industry problems will prove too big for the government to paper over.

We strongly urge you to read James’s latest report. Of course, he could be wrong. The nearly $12 trillion national debt could just keep on growing to infinity with no serious repercussions for America’s economic standing in the world. The breakneck increase in the money supply since the outbreak of the economic crisis may not trigger a dangerous inflationary cycle. And President Obama might pull a white rabbit out of a top hat instead of increasing taxes to pay for his bloated budget. But we doubt it. As we like to say here at Notes, “Smart investors hope for the best, but they prepare for the worst.”

The Congressional Budget Office (CBO), the non-partisan federal agency responsible for providing economic data to Congress, knows the game is up, too. This from the CBO’s director’s blog:

Under current law, the federal budget is on an unsustainable path, because federal debt will continue to grow much faster than the economy over the long run. Although great uncertainty surrounds long-term fiscal projections, rising costs for health care and the aging of the population will cause federal spending to increase rapidly under any plausible scenario for current law. Unless revenues increase just as rapidly, the rise in spending will produce growing budget deficits. Large budget deficits would reduce national saving, leading to more borrowing from abroad and less domestic investment, which in turn would depress economic growth in the United States. Over time, accumulating debt would cause substantial harm to the economy. […]

Keeping deficits and debt from reaching these levels would require increasing revenues significantly as a share of GDP, decreasing projected spending sharply, or some combination of the two.

We believed in Santa as a kid. But we don’t believe that Team Obama is going to decrease spending “sharply” or otherwise. So “revenues” (aka taxes) will have to rise.  And to soften the blow, you can count on the administration reneging on its Social Security and Medicare obligations.

What Barack Obama and Joe Biden just don’t get is that too much taxation drove the American Revolution. And with the federal government now consuming about 28% of GDP and state and local governments another 15%, tax hikes are inevitable. In fact, they are already here. This from well-known fiscal conservative Pat Buchanan:

Obama plans to repeal the Bush tax cuts and take the income tax rate to near 40%. Combined state and local income tax rates can run to 10%. For the self-employed, payroll taxes add up to 15.2% on the first $106,800 for all wages of all workers. Medicare takes 2.9% of all wages above that. Then there are the state sales taxes that can run to 8%, property taxes, gas taxes, excise taxes and “sin taxes” on booze, cigarettes and, soon, hot dogs and soft drinks.

Comes now national health insurance from Nancy Pelosi’s House. A surtax that runs to 5.4% of all earnings of the top 1% of Americans, who already pay 40% of all federal income taxes, has been sent to the Senate. Included also is an 8% tax on the entire payroll of small businesses that fail to provide health insurance for employees.

One thing you can be sure of is that the world’s economic mandarins are slow to learn from the mistakes of history. This from the Daily Reckoning:

After the expansion comes the contraction. After the bubble comes the clean-

up. After the storm comes the sun.

But what is going on in China? What comes after the biggest export-led
bubble ever? Another bubble?

It doesn’t seem possible. China’s number one customer is broke. It has far too
many factories for those that are left. It should be closing up shop…and
waiting out the bad weather. And yet, China is growing. A combination of hot
money…and hot financial policy…is falling on everyone’s favorite green shoot
like Miracle-Gro. Its trade surplus and foreign direct investment – the usual
source of reserves of foreign currencies – are only half what they were last
year. But the speculators are coming in…and they are bringing cash. This has
boosted Chinese reserves past the $2 trillion mark…and provided the liquidity
for another round of bubble-like conditions. Trading volumes in Chinese
stocks, for example, are running three times last year’s.

The world’s investors and economists think they are looking at the Second
Coming. Chinese growth will power the world out of its slump.
Hallelujah…we’re saved! Things will be ‘back to normal,’ soon. Stocks rose
yesterday in anticipation – with the Dow up.

Daily Reckoning readers are warned: this too shall pop.

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