That's a heck of a thing to say in an election year, but it's nevertheless true. It no longer matters what either President Obama, or his Republican wannabe challengers, offer as policies for this country. All those policies depend on a functioning economy to underpin them . . . and
our economy is teetering on the verge of ceasing to function. We're venturing into uncharted territory, dealing with numbers the like of which the world has never seen. Nobody knows for sure just how bad things might get, because no-one's ever had to deal with these levels of debt before . . . but we can be absolutely sure of one thing. This economic collapse
will happen. It's as certain as the sunrise, because
not one of the likely Presidential candidates in 2012 is facing this reality, and/or offering any workable solutions for it.I've written about our economic problems before, but there are still many who don't get it. Let's look at the cold, hard facts of the situation. First,
inflation. We've spoken before about how official US government figures deliberately underestimate the rate of inflation, for political reasons. John Williams at
Shadowstats calculates inflation according to traditional measurements, before they were 'updated' due to political interference. Not surprisingly, his numbers differ sharply from the official ones. Here's how he sees inflation.
In January 2012, the US inflation rate was officially put at 3% overall. Mr. Williams believes it's closer to 11%. Based on my own experience of buying household necessities and watching the markets, I concur with Mr. Williams' figures.
What's caused that inflation? There's a very simple answer. There are far more dollars in circulation than there were a few years ago, because the
Federal Reserve ('Fed') has been creating them out of thin air to fund the operations of the US government and bail out banks and corporations that would fail without them. Thus, more and more dollars are chasing the same (or, in some cases, a reduced) quantity of goods and services - so the price of the latter goes up. Take a look at the growth of the US money supply.
This expansion of the money supply is known as
'quantitative easing' or 'QE'. It no longer refers to 'printing money' as such: most of it is no longer printed at all - it's simply created on a central bank's computers, as digital entries in a database or spreadsheet. Here's a brief video explanation of QE from the
Bank of England (BoE), that nation's equivalent to the Fed.
The BoE's explanation sounds very positive, but it leaves out many negative aspects of QE. For example:
- If interest rates are kept low, yes, loans are cheaper: but those who save money earn less interest on their savings. That means they have less incentive to save - and those who rely on interest income (e.g. retired persons) find they have less money on which to live.
- The 'assets' that the BoE (and the Fed) buy with their QE funds are, in many cases, so-called 'toxic assets' such as securitized mortgages, etc. There's little or no market for those 'assets' at present; so by buying them, a central bank is essentially saving private investors (i.e. banks and investment houses) from any losses inherent in them, by making the nation as a whole responsible for those losses instead.
- QE funds essentially allow a government to live beyond its means (i.e. its income from taxation and other revenue sources) by borrowing money to fund its expenditure. In that sense, they can be seen as encouraging ongoing fiscal irresponsibility. Sooner or later, the bonds issued by governments, and purchased by central banks with QE funds, will have to be repaid. Where will the money come from to do so - particularly when the cumulative debt issued by governments amounts to such vast sums?
It's important to note that
virtually all central banks in the industrialized world are engaging in QE to a greater or lesser extent. The worldwide inflationary pressures this has created - and continues to create - are frightening. Take a look at these charts,
courtesy of James Bianco at The Big Picture. (Note: 'ECB' refers to the
European Central Bank.)
You'll find much more information about worldwide QE and its implications in
Mr. Bianco's article. He concludes:
Prior to the 2008 financial crisis, the eight central bank balance sheets were less than 15% the size of world stock markets and falling. In the immediate aftermath of Lehman Brothers’ failure, these eight central bank balance sheets swelled to 37% the capitalization of the world stock market. But keep in mind that the late 2008/early 2009 peak was due to collapsing stock market values combined with balance sheet expansion via "lender of last resort" loans.
Recently, the eight central bank balance sheets have spiked back to 33% of world stock market capitalization. This has come about not by lender of last resort loans, but rather by QE expansion (buying bonds with "printed money") even faster than world stock markets are rising.
. . .
Massive central bank involvement in the markets risks returning us to a de facto centrally planned economy. Those S&P 500 companies all have the same chairman; it is Ben Bernanke because his policies are affecting everybody. That is what makes money management so difficult. Correlations will ebb and flow; they always do. But what makes them go away? This will only happen when governments and central banks go away.
But if they go away, then does that not mean things get ugly? Maybe they do get ugly, but it also means that we sort out the excesses in the market. We reward the people that do the right thing and we punish the people that do the wrong thing. And we have an adjustment process that may be ugly, but then we have a period of long expansion.
Central banks are ruling markets to a degree this generation has not seen. Collectively they are printing money to a degree never seen in human history.
. . .
The tipping point between balance sheet expansion being bullish for risk assets versus bearish is impossible to know. Given the growth rate of central bank balance sheets around the world over the past few years, we might not have to wait too long to find out.
There's
more at the link. Bold print is my emphasis.
Highly recommended reading.
QE may be happening all over the world, but we need to return our attention to the USA. We've seen the problems inherent in QE - but right now, there's no alternative to it, as long as our government continues spending money it doesn't have. Here's a
graphic representation of projected US government expenditure in 2011, a total of $3,818,000,000,000, or $3.818 trillion.
The larger pile on the left represents $2,173,000,000,000, or 2.173 trillion dollars - the amount the US government 'earned' in tax receipts, customs duties, etc. The smaller pile on the right represents $1,645,000,000,000, or $1.645 trillion - the amount the US government had to borrow to make up the difference between its income and its expenditure. (You can read - and see - more about the graphic
here. Highly recommended reading.)
Why all this borrowing? It's simple - and a vicious circle.
- The US government panders to its populace by providing all sorts of 'freebies' (commonly known as 'entitlement programs'). The cost of these programs is the reason why government expenditure so greatly exceeds its income.
- The US government can't cut back its entitlement programs without causing those who currently benefit from them to turn against the politicians who voted to cut them. Therefore, they aren't going to be cut unless and until there's no alternative. Politicians don't want to risk their own jobs and salaries by telling the truth to their electorate.
- Because entitlement programs can't (or won't) be cut, the US government will continue to have to borrow almost half of every dollar it spends.
- There isn't enough money in the entire world to continue to fund US government expenditure at its present levels in the medium to long term. Already, investors such as the Chinese government have cut back their purchases of US securities, as they fear for the safety and future value of their investment. Europe has enough economic troubles of its own that they can't afford to buy US securities anyway.
- Therefore, the only source of money to buy the bonds the US government must issue to borrow money is the Fed. Its QE program is basically 'printing money' (fiat currency with no underlying value whatsoever) to buy other pieces of paper called 'government bonds'. The exchange of one for the other represents nothing more or less than a book-keeping transaction, with no assets of any value supporting it. It's a financial house of cards. It's as if I said, "I'm going to write a check to myself tomorrow morning, drawn on my own account; I'll deposit it into that same account; and the balance in that account will magically increase to reflect the 'deposit', over and above what I already had in it." It's financially nonsensical . . . but that's what the Fed is doing, right now.
Let Bill Whittle explain this vicious circle more clearly.
As mentioned earlier, all those newly-created dollars, generated to fund US government expenditure, are chasing the same amount of goods and services in the economy. The result is that prices are rising - and rising much more, and much faster, than official statistics would have us believe. That inflation is eating into the value of the savings of all those who put aside or invested money for their retirement. It's diminishing the value of cash holdings, whether individual or corporate. There are few, if any, inflation-beating investments available that don't carry with them a significantly higher element of risk than that offered by an inflation-vulnerable savings account.
The inevitable result of all this borrowing, and the accumulated national debt, must lead to two things. The first is that US government debt will grow too high, and foreign investors in US government securities will realize this: so they'll stop buying the securities, leading to the US government being unable to fund its spending. As
Peter Schiff points out,
this makes the collapse of the US dollar almost inevitable.
It's hard to pinpoint exactly when the dollar will collapse, but it will take a miracle to avoid that outcome in the near term. It really depends on when the creditors of the United States realize that they are not going to get their principal returned to them in real terms, but rather in grossly devalued dollars. We have already seen the average duration of U.S. Treasury debt drop below that of Greece. No one wants to buy a 30-year bond with negative real interest rates as far as the eye can see.
Such a collapse will force a halt to most entitlement programs overnight, plunging much of the US population into dire poverty, and crippling the economy.
The other inevitable result, as Mr. Schiff observes, is that inflation will eat into the buying power of the US dollar. This will destroy the value of savings, and cripple the economy through currency volatility; but it'll have the side effect of wiping out much (if not all) of the deficit by reducing the value of the dollars in which it's denominated. If we owe $15 trillion in 2012 dollars, where one dollar is worth (say) half a loaf of bread, we can pay it off in 2022 dollars, which will be worth only one
slice of bread - if that!
The only way to stop these consequences is to cut back US government spending,
right now, to a level commensurate with its income. However,
that isn't going to happen: because the electorate, deprived of its entitlement programs, would immediately vote out of office any and all Congressional representatives, Senators and the President who passed such legislation. Therefore, we're going to go on inching towards the edge of the
economic cliff until we completely lose our footing and fall over it.
All the Presidential campaigning that will plague us over the next year is
completely and utterly irrelevant if it doesn't take this economic reality into account . . . but it won't. It
can't, because none of the likely candidates, from either party, dares to face up to economic reality. They know they would never be elected if they did. As far as the Presidential election is concerned, we are truly screwed.
Our only recourse is to seek out, nominate and elect Congressional representatives and Senators who understand economic reality, and who will have the courage to work towards policies that acknowledge and address that reality. I don't care what party they're from. If they're honest people, who will do what's right, I'll support them. They'll have to understand that if they do the right thing, they'll see the electorate turn against them: but
they have to have the moral courage to do it anyway.That's our task in the coming year. It may not be enough to get us out of this mess . . . but
it's the only hope we have. Peter
