Free Markets, Free People


Tipping Point

I can’t say with any certainty what this forebodes, but this is a staggering amount of debt to pile onto any country, especially within just a few months (my emphasis):

The U.S. government and the Federal Reserve have spent, lent or guaranteed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s.

New pledges from the Fed, the Treasury Department and the Federal Deposit Insurance Corp. include $1 trillion for the Public-Private Investment Program, designed to help investors buy distressed loans and other assets from U.S. banks. The money works out to $42,105 for every man, woman and child in the U.S. and 14 times the $899.8 billion of currency in circulation. The nation’s gross domestic product was $14.2 trillion in 2008.

The really scary thing is, the government is not even close to being done spending money. Yet we’ve already committed about 90% of GDP. Where is all that money going to come from?

As we’ve said before, there’s only a few options: (1) taxes; (2) borrowing; and (3) printing press.

Taxes will only raise so much, even when the government starts raising rates on lower income quintiles, and certainly not enough to keep up with the ballooning debt-service payments.

Borrowing just isn’t going to happen because there isn’t anybody else who either wants to or is capable of lending us more money. To wit, here’s some of Peter Murphy’s analysis on our borrowing problems:

The biggest buyers of US Government (and Agency) debt, for the past several years, have been China, Japan, and the Oil States.

However, the supply of loanable funds among these entities from which the US can borrow is drying up.

China’s current-account surplus, the source of the funds for its Treasury purchases, has dropped precipitously as the global economy has contracted over the past several months.

china_tanda_200901

Japan, another major buyer of Treasuries over recent years, is now posting trade deficits for the first time since the early 1970′s. This current account deficit, combined with a significant fiscal shortfall and planned issuance of $33 Trillion Yen ($340 Billion USD) in government debt this year, means that Japan will be, in effect, competing with the US for funds, rather than lending to us.

japancurrentaccount_0903j

And, the oil-exporters are in no shape to be buying anything right now, as oil prices have collapsed since last summers $147/barrel peak. Russia is busy selling foreign exchange to prop up its currency.

russiatanda

Brad Sester of the Council of Foreign Relations reports that foreign demand for long-term treasuries has faded, and notes, ominously, that “global reserves aren’t growing”.

Accordingly, borrowing does not look like an option. Which leaves really just one choice.

Printing money in a down economy, which will have to be done, increases inflation and saps purchasing power (potentially leading to hyper-inflation). We may be able to pay off our debts this way, but we’ll wipe out the wealth of the nation doing so. Think post-Franco-Prussian War where France drove its economy into the ground in order to pay off about 22% of its yearly GDP in war reparations to Germany … over three years. That strife led to the Paris Commune uprisings among other things. Or worse, consider post-WWI Germany, with inflation rising so fast that workers had to be paid twice a day and cart around wheelbarrows full of money just to buy a loaf of bread.

Is that what we’re headed for? I sure hope not, but the signs aren’t very encouraging if history is any guide. It is true that a much more dynamic and nimble economy exists today as compared to the late 19th and early 20th centuries. But the world tendency right now seems to be to shackle that economy, making it much less dynamic and nimble. The end result must be less wealth produced, and less money to pay these debts. In short, our government is currently cashing checks that our economy can’t pay.

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22 Responses to Tipping Point

  • I will say it again (boy do I sound like a broken record): The Clown™ and His Clownettes™ are doing things each passing day that will make them one-termers.

    When The Clown™ has to impose massive tax increases just to make up for his profligate spending spree, the revolt against him will be massive.

    • What scares me is that he WON’T be a one-termer.  We know that FDR prolonged the Depression, yet he is revered, especially on the left.  Jimmy Carter is perhaps the worst president in recent memory, yet he got 41% of the popular vote in 1980.

      You must remember: half of the population has below-average intelligence.  Many of the rest have had their minds polluted with a lifetime of liberal claptrap, dinned into their heads every day in school and by MiniTru.  It won’t take much for TAO’s teleprompter, aided by MiniTru, to convince a lot of people that he’s doing the best that he can, that problems aren’t really his fault, that things are soooo much better than they were under Bush (snarl!), that his wife is a total fashion trend-setter just like Jackie (this will influence many witless females), etc, etc.  We all know how the propaganda game is played; it will basically be the ’08 campaign set on a four year loop.  Just a couple of days ago, I saw a MiniTru poll that demonstrated (categorically, comrades!) that a solid majority of the American people blame corporate bigshots for our economic woes, not TAO.  Look for lots of this kind of thing.

      And don’t even get me started about the role ACORN and union thugs will play in future elections, not to mention the potential for fraud if / when the White House controls the census.

      So, while we can hope that he’ll be a one-termer, I’m not betting on it.

      I don’t think we will recognize our country in four years.

  • This is Leadership – once all you righties get it, we’ll all be better off.  I mean – look what Bush did!

    End sarcasm -

  • There is a reason why The Clown™ is fugging everything up that he touches: HE IS A ROOKIE.

    Read Thomas Sowell’s latest, and see how he lays out the case that this is what happens when you elect unqualified politicians to the presidency:

    http://www.ibdeditorials.com/IBDArticles.aspx?id=323304310642442

  • I’m not sure I’m ready to accept that this is all rookie screwups. At some point, we need to ask if these are not rather intentional actions, intnded to cripple our economy.

    Consider it this way: Can any of you imagine a more effective means of fouling this country and it prosperity, than what Obama has already done? I tell you true.. I can’t…

  • Pelosi, Reid, et al. are not rookies, and they are right there spending as much as they can. It isn’t lack of experience, it is lack of knowledge and not understanding the real world. That and pure, blind ideology.

  • Hyperinflation is bad (especially for elected politicians) and might yet be avoided by other means.

    Tax – the US might open up new tax revenue streams by legalizing/taxing any currently proscribed vices – drugs, prostitution, organ-harvesting or internet gambling.  Or even invent a new market (for instance a market based on air) and tax that. 

    And there probably are a couple of other options available, albeit of a whackier variety:

    4. Tribute - coerce foreign countries to loan or give money.  This requires is a highly effective military and a known propensity to invade weaker countries, so is pretty much only ever available to world power type states.  (Tribute is a slightly dirty word, so probably the sale of weapons at highly inflated prices or bonds at greatly discounted rates would have to suffice.) 

    5. Cut Spending.  Likely the Fed will run out of ink and Canada will be invaded on trumped up cannabis tax evasion grounds before the US government would ever consider spending cuts, however it is an option and eventually even far out whackiness might be palatable. 

    • You’re right, Angus, those are other options.  Unfortunately, I think that the tax and tribute options (which, interestingly enough, are pretty much the same thing) are doomed because, as the saying goes, you can’t get blood from a stone.  As the worldwide economy continues to dwindle, there isn’t really any wealth to tax with forcing even faster downward spiraling.

      As for Spending, you’ve nailed it: it’s a “wacky” idea because its just ain’t gonna happen.

  • I have to agree. These are not rookie screw ups.

    look at what the leftists believe: Naomi Klein’s Shock doctrine tells us that they believe crises are used to advance an agenda. Except they claim it is used by the right. In fact every leftist since Marx and Lenin has understood that crises are an excellent opportunity to grow power. 

    And don’t forget they went to colleges that told them that the New Deal worked.

  • OK Erb, You’re on.  Come out of the woodwork and defend Obama now.  Come on out and talk about his leadership now.  Come on, Erb – man up!

  • The Fed is spending more money than the congress, all of it in Secret. Please ask your rep to support H.R. 1207, a bill to allow the GAO to AUDIT the Federal Reserve.

    H.R. 1207:  Federal Reserve Transparency Act of 2009
    To amend title 31, United States Code, to reform the manner in which the Board of Governors of the Federal Reserve System is audited by the Comptroller General of the United States and the manner in which such audits are reported, and for other purposes.
    Sponsor: Rep Paul, Ron [TX-14] (introduced 2/26/2009)      Cosponsors (50)
    Latest Major Action: 2/26/2009 Referred to House committee. Status: Referred to the House Committee on Financial Services.

  • Just think of all the money we saved by giving Queen Elizabeth II an IPOD for a gift on his first state visit to the United Kingdom.

    They can create a new knighthood, no doubt – Knight of the Royal Ipod.

    Knight of the Royal Ipod – allowing those who hold the position to upload or download from the Royal Ipod worn by Her Majesty, and responsible for checking the battery.
    They’re knighted with the cable from the headset, tapped once on each shoulder.

    We certainly DO have a classy President.  I’m so proud of their flawless social sense and grace.
    I DO hope we’ve fired whoever was responsible for telling these clowns how to interact with foreign dignitaries, because it’s obvious they’re being left twiddling their thumbs.

  • Dr. T – I screwed up and inadvertanly deleted your reply instead of approving it.  Please resubmit.  Sorry.

  • You know, this is silly. I mean that. It’s okay conceptually, but empirically it’s bankrupt.

    Here’s a list of debt/GDP ratios by country:

    http://en.wikipedia.org/wiki/List_of_countries_by_public_debt

    Pay attention to Japan. Their debt/GDP ratio is 300 percent worse than ours. And at the end of Barack Obama’s End of the World Spending plan, it will still be twice as bad as ours. Japan isn’t hyperinflating.

    Advanced, rich first world-economies can, and do, live with high Debt-GDP ratios. I’m actually not thrilled about it myself, but this website is a hive of deliberate alarmism created precisely by carefully avoiding contrary evidence, such as the above.

    Not to mention the fact that take away the stimulus and bailout, bring in a general economic collapse, and Debt/GDP ratios *also* skyrocket, because the GDP shrinks.

    Now, if you ran some numbers there, and demonstrated that that effect wasn’t worse… you’d have the beginnings of a serious argument.

    But you’re not there. If you think America is headed for hyperinflation, I’m ready to make a large wager on that with you. Seriously. Get in touch.

  • glasnost;
    I do not see any direct relationship between Debt/GDP ratio and inflation. Rather, inflation is caused by an increase in the money supply greater than the increase in real wealth. I’m betting on inflation.

  • Okay, I’m an economic neophyte so I probably don’t know what I’m saying but it seems to me that some level of inflation is required by a free economy to offset the worst kind of borrow-borrow to buy-buy attitude that sort of got us in this mess. Our intentionally keeping inflation low was great for awhile but just pushed off some of the issues until they got really bad.

    I’m not saying I want inflation now but perhaps keeping it super-duper low for so long is something we should be looking at.

  • Inflation is bad. Deflation is bad. Stable value of the currency is good.

    In an enlightened state with an enlightened economic policy, the money supply will be regulated in such a way as to promote  the goals of economic justice, freedom, stability, and growth. Unfortunately, we do not live in a very enlightened state. Enlightened states are rare and ephemeral. We had an enlightened state two hundred years ago, but it went away somehow. 

    Since we do not live in an especially enlightened state,  our money supply will tend to be regulated by our elected officials to promote goals that are considerably less admirable than those previously stated; like increasing  the prosperity of the friends of the current administration, for example. Or increasing the government’s control of the economy. Or impoverishing political opponents, or getting re-elected, etc.

    Politicians, of whatever ideological stripe, will always be tempted to use the authority of the government for their own benefit. Especially when the ensuing detrimental effects are not immediately clear to the electorate. 

    It may be instructive to look at the history of the Roman empire, which gradually debased the value of its currency, to a ridiculous extent,  over the course of several hundred years. This debasement coincided with the decline and fall of the Roman empire, and implies a conspicuous inability on the part of the Roman rulers to confront reality, with a concomitant conspicuous ability to deny it.

    If you think that this constitutes an element of  a good argument for the gold standard, or some other standard that will resist the attempts of the government to subvert it, I would agree.

    • Some interesting stuff there, Thales.  I’ve been thinking largely along the same lines.  However, I’m just not convinced that a pure gold standard is the answer, nor even a nominal one like we had after 1913.  It’s simply too inflexible, and throughout history every commodity-based standard eventually morphs into a mixed system with fiduciary currency and fractional reserves. 

      As for an actual, pure gold/silver/copper/whatever standard, I have grave doubts that it would ever work as well as it is hoped (it never has before).  Too many resources have to be devoted to creation/discovery of the currency, and eventually people get tired of digging it up in South Africa only to bury it again in some bank (or Fort Knox) where they then use certificates (fiduciary currency) against the deposits to pay for everything. 

      That being said, I do agree that something closer to the gold standard we had after the mid-1800′s until the early twentieth century may be preferable to what we have now, but even that isn’t really good enough. 

      I’ve been thinking and talking to Dale about this stuff a lot lately, and I’ll probably have something to post that’s directly on point.  So keep an eye out and let me know your thoughts when I do post.

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