Of politics, economics and reality

In my regular 'Around the blogs' segment yesterday, I drew attention to Borepatch's analysis of President Obama and his Republican challenger, Mitt Romney.  The comments have been flying thick and fast over at his place, and there have been a few here, too.

With respect, I'd like to suggest that much of the debate is moot.  No matter who's elected, the economy is going to hamstring their policy options, whether they like it or not.  A President may propose policy and take executive decisions;  Congress and the Senate may offer alternative policies and pass legislation;  but if the money's not there to implement either, their functions are moot . . . and that's precisely the point we're approaching in the USA right now.  (I've mentioned this before, of course.)

Our economy is barely sputtering along at present.  It's misfiring badly, and the engine is threatening to shut down altogether.  Consider these realities:

• The US economy is recovering very slowly indeed from the 2007-09 recession - much more slowly than in previous recessions.  This is crippling economic growth and - most importantly - job creation.  In fact, as I've mentioned before, official unemployment statistics are a bare-faced lie from beginning to end.  The Washington Post has just published an excellent exposé of one aspect of this reality.  Our real unemployment rate, right now, is almost certainly significantly higher than 20%.  When official statistics put it at just over 8%, they're understating the true position by about two-thirds.  No President can fix a problem of that scale without a vibrant economy to provide jobs - and that economy simply doesn't exist right now.
• There are so few investors willing to purchase US treasuries (i.e. bonds to fund US government debt) that the Federal Reserve is currently 'buying' 70% of them,.  They aren't really being 'sold' at all, of course:  the Fed is offering them for sale, then 'buying' them itself by creating money (literally generating strings of digits in a computer system).  No actual money is changing hands at all, but the US government is spending hundreds of billions of dollars every single month that are financed by this method.  It's nothing more or less than a financial house of cards.  So bad has the situation become that last week, respected investment analyst Peter Schiff called US treasuries 'junk bonds' and warned that the dollar was headed for collapse.  'Printing money' like this must, repeat, MUST inevitably lead to serious inflationary problems - to pretend otherwise is to deny mathematical and fiscal reality.  Just ask the National Inflation Association.
• Europe, which as a joint entity is a larger economy than ours, is in even worse economic shape than we are;  yet our economy is inextricably interdependent with theirs.  If they go down, we go down with them - and that's very likely to happen.  Daniel Hannan pointed out last week:

"The EU is in a downward spiral. The worse things get, the more reluctant its governments are to tackle the underlying problem, viz. excessive expenditure. Lacking any alternative narrative, voters blame the lack of growth on 'cuts', 'bankers' and 'deregulation'. They then support parties committed to even higher spending – which, of course, exacerbates the problem. And, as if national governments were not burdensome enough, Europeans must also contend with more rules and more taxes from Brussels."

Need I go on?  The political maneuverings that we're going to see for the rest of this year are nothing more or less than play-acting.  Whoever wins in November will have to confront this economic reality . . . and it's not going to be a pretty sight.

Let me close with this graphical representation of the total debt load of the world's ten largest mature economies, courtesy of Pinnacle Digest.

The USA's total debt, during the second quarter of last year, stood at 279% of the nation's Gross Domestic Product.  It's got worse since then.  The same can be said of most of the nations listed above - all of whom are among our major trading partners.  Furthermore, the chart above lists only US debt that's actually been incurred - money that's already been spent.  It does not list amounts that have been promised to voters (e.g. future Medicare/Medicaid, Social Security and welfare benefits, etc.) but not yet incurred or spent.  Those liabilities are very significantly higher than current levels of indebtedness - so high, indeed, that they simply can't be afforded at all.  Despite all promises to the contrary, they will never be paid in current-value US dollars.  They cannot be paid, except in dollars that have been reduced in value due to inflation - which will be the inevitable (and, I believe, deliberately intended) result of the Fed's money-creation policies.  That's the simple economic reality of the situation - and that reality will overshadow all the political posturing in the months and years to come.  None of the current candidates for the Presidency shows any signs of being ready, or willing, or able to deal with it.

Peter