Zerohedge.com has a very powerful paragraph that everyone must read.

Yes, paragraph.

The US Avoided Technical Default by Three Days between Christmas and New Years, but as one pointed out, if no one has the balls to call a person/company/government on the fact that they default does it really matter that a default has happened?

Seriously, if one doesn’t think the country is on the financial brink they really need to wake up and look at the signs around them.

If you live in the United States, on thing you may hear on a regular basis is the economic condition of the state of California.  The short version of the story – it is not good at all.  The state is in (or, very, very, very close too) economic collapse.  At one point this year the state had to issue IOUs.  If there was ever a sign you have economic problems, IOUs would be a good indicator to me.

Anyway.

What people don’t seem to realize, or be paying attention to, is that 9 other states are in the same economic boat as California.  The Pew Center on the States did a comparison to see which fall into the “California dead zone” in their piece “How does your state compare with California?” The 9 state most like California (economically speaking) are:

• Oregon
• Nevada
• Arizona
• Wisconsin
• Illinois
• Michigan
• New Jersey
• Rhode Island
• Florida

Obviously, some states are hurting more than other but with budget gaps in Arizona (41.1%), Illinois (47.3%), and Nevada (37.8%) so large, can it be long before something negative happens?

The Cash for Clunkers program is fading fast in the rear view mirror and it’s quickly becoming apparent it was all for not. Just as many suspected, the government created a small, unsustainable, bubble in the automotive sales numbers in hopes of providing what some might call a “silent bailout”.

Take a look at this quote:

Manager Adam Silverleib said business was “pretty intense’’ as a result of the federal stimulus program, with the dealership hustling to accommodate customers and handle the piles of paperwork required for them to receive reimbursement on vouchers. “Now we’re kind of back to where we were in the spring,’’ he said.

Interesting to see that the sales are back to where they were now that there isn’t an artificial demand in place. Just to stimulate your memory, here is what the industry was looking at (in terms of sales) this past spring:

“I’ve seen everything except that a Martian is going to run General Motors,” the automaker’s sales chief, Mark LaNeve, said on a conference call. “We’ve been fighting every one of these rumors, and I can tell you they don’t help sales.”

GM beat the average estimate for a 37 percent sales decline, based on a survey of 5 analysts. Purchases by fleet customers buoyed results, while sales to individual consumers fell 45 percent, Detroit-based GM said. Honda was projected to drop 27 percent, based on 4 estimates.

Ford’s slide exceeded the 30 percent average estimate among 5 analysts surveyed by Bloomberg, and Chrysler outstripped projections for a 37 percent drop. Toyota’s decline was greater than the 37 percent average of 4 estimates, while Tokyo-based Nissan’s slump exceeded a projected decrease of 28 percent. April had 26 selling days, the same as a year earlier.

If this dealer is representative of the rest of the nations, automakers are back to sales of 30% to 50% off on a year over year perspective. So, the bailouts and government assistance given to the automakers (the 1st direct loans, second direct loans, and the bailout) was simply to give a lifeline to the industry as they limp along looking for the end of the recession.

There was another interesting comment that should have a huge impact on industry watchers:

Nationwide, customers snatched up 700,000 new cars, most of them foreign-made, and the government ended up paying out nearly $3 billion toward the purchases.

Sorry GM, sorry Chrysler… sounds like you didn’t get your part of pie, though I would be interested to know what constitutes “most.” What percentage was domestic, and what was the brand breakdown of that percentage.

I believe the Cash for Clunkers program is a micro example of our current economic situation. Once the housing tax credit vanishes, so will the buyers. Once the government spending stops, so will the “growth” many say they are witnessing.

The consumer represents roughly 2/3rd of economic spending in the United States and it’s quite clear that the consumer isn’t spending, and if that continues, it would make sense that the economic conditions within the next six months would begin to once again move downward.

As for the car companies, the end of the recession is not yet within sight. If sales do reflect the beginning of 2009, it is a matter of time before they ask for more assistance.

Yesterday I raised the question “what’s up with the mix signals on the economy?” The economic numbers just didn’t seem to match what the Federal Reserve was saying. I simply couldn’t see how the world is ending mentality gave way to a 6 week market rally and the Fed to say things are fundamentally sound.

Jim Rogers, a one time monster hedge guru, just isn’t buying the economic and stock market recovery:

I am not buying U.S. companies mainly because I think we may have seen a bottom but I don’t think we have seen the bottom. I am skeptical about the rally, the world economy for the next year or two or three. But if stocks go down, I can make money with commodities. In the 1970s, commodities went through the roof even though stocks were a disaster. In the 1930s, commodities rallied first and went up the most long before stocks pulled it together.

Yes, politicians are making mistakes. In Japan, the problem has lasted for 19 years. I hope that it doesn’t last 19 years in the U.S. The approach that works is to let them (U.S. banks and automakers) collapse and clean out the system. The idea that phony accounting is the solution (through changes in mark-to-market rules) is ludicrous. And the idea that a debt problem and an excessive spending problem can be cured with more debt and more spending is ludicrous.

It’s laughable on its face, but politicians think they’ve got to do something. Unfortunately, they are doing the wrong things and they are going to make it worse.

For the record, I do think that mark-to-market rules need to change but they would not solve the problem.

It’s no longer speculation or academic debate, the United States has sacrificed principles in order to save the economy.

“I’ve abandoned free-market principles to save the free-market system, to make sure the economy doesn’t collapse…I am sorry we’re having to do it, I feel a sense of obligation to my successor to make sure there is not a, you know, a huge economic crisis. Look, we’re in a crisis now. I mean, this is — we’re in a huge recession, but I don’t want to make it even worse.”

One thing I have learned about government is this: when government takes away a right, freedom or principle from the people it governs, it is very hard to, if unlikely, persuade that the government to give that right, freedom or principle back to the people.

It is becoming very clear the “Car Czar” will be involved with price setting or product selection, which is not a free market practice, and add government ownership to major financial institutions and the United States is that much closer to a socialist economy – much like China.

So, let’s a return the discussion back to the world of academia. To use a quote from Benjamin Franklin:

They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety

Can this quote also apply to the theory of the free-market economy?

Think about this – is a country only deserving of capitalism or free-market principles only when the times are good, or should that country apply the same theories at all times, regardless of the potential impact on society?

I want to pull out one comment President Bush said:

“Look, we’re in a crisis now. I mean, this is — we’re in a huge recession, but I don’t want to make it even worse.”

Has anyone bothered to ask the question about government interference in the economy? What is the long term impact of near zero percent interest rates? How will government dictation of what products to sell change business moving forward? How will the huge debt interfere with the ability to deal with social security?

Changing horses midstream may actually cause more harm than good, yet no one seems to be talking about it. Sacrificing free-market practices and principles today may cause more economic problems tomorrow, and chances are we will never regain the free-market principle of the past.