Free Markets, Free People


The Kangaroo is Still Hopping

Today was one of those days when a couple of trends came together that should be making us think seiously about changing our current fiscal and monetary policies.

The first thing I was was this debt chart from John B Taylor that shows how our current policy will effect the national debt.

Projected national nebt as a percentage of GDP

Projected national nebt as a percentage of GDP

This what you call your unsustainable debt path.

Then, there was this:

Since the crisis began, the Fed has pumped more than $800 billon into the banking system, kept the federal funds rate near zero and purchased so many Treasurys and mortgage-backed debt that the amount of assets on its balance sheets has now swollen to $2.14 trillion.

“If you think the Federal Reserve had it tough devising a strategy to rescue the U.S. economy from of the worst recession in 70 years, just wait,” wrote Bernard Baumohl, chief global economist, at the Economic Outlook Group. “We think it is going to be hellishly more complicated this time to come up with a plan that encourages growth and keeps inflation expectations well anchored.”

All of which leads directly to this:

Chinese central bank governor Zhou Xiaochuan, who supervises more than two trillion dollars worth of dollar reserves, the world’s largest, raised the stakes by calling for a new reserve currency in place of the dollar.

He wanted the new reserve unit to be based on the SDR, a “special drawing right” created by the International Monetary Fund, drawing immediate support from Russia, Brazil and several other nations.

“These countries realize that they would suffer losses if inflation eroded the value of the dollar securities they own,” said Richard Cooper, a professor of international economics at Harvard University.

Here’s the problem.  Because we are on an unsustainable debt path, we will eventually accrue more debt than we can possibly repay.  There are many people who think that–since our debt, coupled with Social Security and Medicare obligations currently outstanding, are greater than the entire capital stock of the United States–we’re there already.  We ill be unable to pay the debt, so our choices are to repudiate it outright, or to destroy the value of the currency and inflate it away, both of which amount to essentially the same thing.  In doing so, the government will destroy the life savings of everyone in the country, save those that are in hard assets

The Chinese, whatever else they may be, are not stupid.  they know this, and they want a new worldwide reserve currency now, before everyone realizes that the dollar is in very serious danger of becoming worthless.  They don’t want to be stuck holding dollars when that happens–although their holdings in bonds will probably have to be written off.

I’ve written previously that China moved their gold reserves into the BoC a few months ago.  Some international trade deals are already being denominated in gold, tool.  It looks very much like the dollar’s days as the world reserve currency are numbered.  In fact, the dollar’s days may very well be numbered.

Federal Reserve Monetary Base. Click to enlarge.

Federal Reserve Monetary Base. Click to enlarge.

And we’ve let it happen.  Over the past 80 years, we’ve sat by and watched as the Fed–whose primary mission was supposed to be the stability fo the currency–has presided over a tenfold reduction in the dollar’s value.  For the last 30 years, we’ve watched as the debt has mushroomed–yes, even during Bill Clinton’s presidency–and we’ve refused to either cut spending or to raise taxes to a level commensurate with our increased spending.  In short, we’ve looted the system, and the looting is nearly complete now.

And now, with all the trumpetings of a coming economic recovery, the Fed has to try and figure out how to re-call the more than doubling of the monetary base we’ve engaged in in the past year without completely crashing the economy.  Failure to do so, of course, means serious inflation–which will further degrade the value of the dollar.

Hop.  Hop.  Hop.

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20 Responses to The Kangaroo is Still Hopping

  • I wonder just how bad my predictions for this year (toward the bottom of this comments section) will have turned out to be.

    On the bright side, almost all of my student loans are at fixed rates!

  • glad I bought some gold when it was below 1000. But I still need to buy some more.

  • Oh, gee, thanks: this is JUST what I needed to read with my first cup of coffee for the day.

    :-(

    This is the result of YEARS of short-sighted policies by democrats AND Republicans, all of whom somehow got the goofy idea that “some (arbitrary, undefined) level of deficit is a good thing” and that “economic growth” will somehow MAGICALLY provide tomorrow the revenue to pay for today’s profligate spending.

    If these projections are even half right, the country is in serious trouble down the road, and it’s a question of how bad it’s going to hurt to try to fix the problem. Imagine telling millions of retirees that, “Gee, sorry: Social Security and Medicare are out of money, so effective immediately, no checks for you!” Imagine telling millions of workers that, “Gee, sorry: we’re broke and need to sieze your 401k and other retirement funds to keep the government operating.”

    And those fools in Washington, led by TAO, are planning to stack even MORE debt and MORE future obligations on us.

    Wonderful. Just wonderful.

    • Imagine telling millions of retirees that, “Gee, sorry: Social Security and Medicare are out of money, so effective immediately, no checks for you!” Imagine telling millions of workers that, “Gee, sorry: we’re broke and need to sieze your 401k and other retirement funds to keep the government operating.”

      Based on existing patterns, this isn’t what will happen. Instead, the government will simply print more money, and then tell everyone “don’t worry, you’ll get your checks, everyone rejoice!” And they’ll just omit that little part about how your check won’t buy you a stick of gum, much less pay the rent or buy groceries.

      This is how they deal with the problem– basically by doing anything except deal with it. Any time anyone brings up the problem of the unavoidable insolvency of SS/Medicare, they’re shouted down and accused of trying to harm the elderly, and now no one wants to broach the issue. So we will simply wait until the roof caves in, and then hand out band-aids to people with gushing wounds and tell them “don’t worry, we’re on it!

  • And the Democrats sayeth, “We can spendeth more money, because, after all, it ain’t our money.”

    The Democrats want to get you on both ends now. They want to tax you to the hilt from the moment you are born (that is, if you are born, which the Democrats say should never be protected), and, when you get to be too old and affirm, they can summon one of their Death Panels™ to send you off to Never-Never Land.

    The new Democrat motto: Don’t be born, just pay us if you are, and then just die already.

  • Alright Dale, you have my attention. So what do I do? Buy gold? Buy rice? Buy guns? I am paying down my personal debt as quickly as possible and piling money in diversified mutual funds. But what else should I do? In your analogy…I see the kangaroo. I don’t pretend to know how to turn the car to prevent hitting it. I will be happy to just jump from the vehicle and take my chances walking. So, any suggestions?

  • By the way, this is why I am convinced the US is in serious decline as a world power, and that the right and the left both are going to have to rethink their priorities. We can’t afford an interventionist foreign policy and wars in the Mideast, we can’t afford the growth of entitlement programs. We can only afford health care if it is rationed and saves money. All that is politically unpopular to all sides, but it’s reality. The economy, not the military, is the source of our power. If it slides, we slide.

    • By the way, this is why I am convinced the US is in serious decline as a world power. I’ll take any evidence I can find to slam America, and this is great stuff because even you dense righties can’t deny it.

      The right and the left both are going to have to rethink their priorities. And the fact that all the social programs that got us in this mess were formulated and promoted by the left is just beside the point, so you just stop bringing that up and let me rant about the military for a while.

      We can’t afford an interventionist foreign policy and wars in the Mideast. We should just stop all that overseas stuff, and if that means we lose a trillion or two in an attack every few years, well, just budget that into the mix. Please, please, please, can’t you thick righties just give in to the idea that we don’t really need a big military because the world is dominated by wise pacifists like me who think war is just icky, and so there really are not any threats out there, certainly none that require us to actually take military action anywhere. I mean, if you want to have some symbolic force that never really gets used, well I guess I can go along with that as long as it doesn’t cost too much, but you guys are just going to have to adjust to a world where the US is not a super power and we prostrate ourselves in supplication before China and Russia and others. I can’t wait, but that does not mean that I’m an anti-American coward, so stop saying that!

      We also can’t afford the growth of entitlement programs. So, naturally, that means we need to create a huge new one for healthcare. Of course, this time we’ll do it differently. All those other programs had to pretend to be for everyone’s good, but this time, we’ll do one that’s simply about having wise leftists control people’s lives. We can only afford health care if it is rationed and saves money, and so we have an ironclad case for lording over all the rest of you. All that is politically unpopular to all sides, but it’s reality. Well, actually it’s not that unpopular among we wise leftists in the faculty lounge because we realize that the nomenklatura will always manage to slip in ahead of the rest when we really need to, but that’s just because we need to stay healthy so we can make decisions for the rest of us and continue our critical mission of indoctrinating, uh, educating our youth about why even though their healthcare is rationed, and we live in a police state to fight continuous terrorist attacks, it’s really best for everybody.

      The economy, not the military, is the source of our power. If it slides, we slide. So finally, we wise leftists discovered the answer to destroying your silly right-based, free market, racist, powerful America, which was to destroy the economy. It took us a while, but we got there.

    • I admit that there are times when I’d wish that a US President would stand up and state that we were changing our foreign policy and recalling all troops and shutting down any installations and bringing the whole thing back home, that from then on our defense spending would be limited to protecting our borders, thus realizing enormous savings.

      It’ll never happen, and for good reason. But still, I’d love to see the look on the faces of all of those people around the world who complained about US intervention and imperialism. Even the ones who would initially cheer the policy would suddenly feel faint when their governments explain that they must either ratchet up spending to a monumental degree to make up the loss, with the understanding that this huge outlay wouldn’t even provide the same level of protection.

      Then we could imply that we were also cutting off all aid payments in order to build a missile shield for ourselves. Then we could entertain ourselves by watching the faces of all of those people who complained about how the US was either (A)too miserly or (B)too nosy, once they realized that hundreds of billions of dollars of annual help were about to go =poof=.

      Yeah, it’ll never happen, and the end result would (IMO) hurt us as much or worse than it would anyone else. But just to see the look on all of those faces when they realized just how much they depend on US money and US military might. It would almost be worth it.

    • By the way, this is why I am convinced the US is in serious decline as a world power, and that the right and the left both are going to have to rethink their priorities. We can’t afford an interventionist foreign policy and wars in the Mideast, we can’t afford the growth of entitlement programs. We can only afford health care if it is rationed and saves money. All that is politically unpopular to all sides, but it’s reality. The economy, not the military, is the source of our power. If it slides, we slide.

      Decline as a world power? That doesn’t make any sense. We are the preeminent power because of geographic, social, political, and military reasons, in addition to economic reasons. I think our military and economic strength will still overshadow any other nation for the foreseeable future. Our economic failures translate to similar failures for the EU, China, and Japan, as they were foolish enough to make their economies interdependent on ours.

      When you say “we can only afford health care”, of course, you are referring to the government. But the government cannot afford health care, full stop. The health care “reform” proposals pushed by the left are just the extension of more entitlements (and a first step towards further entitlements still). Health care would be more affordable for individuals — not government which has no place in it in the first place — in general if existing regulations were loosened (interstate portability, ease licensure, tort reform, decouple insurance from employment, etc).

      Doesn’t matter in the long run, though, as when we default on the debt, destroy the dollar through inflation, or are no longer considered credit-worthy by our creditors, we will be forced to severely reduce government spending. That isn’t going to be a fun process, though, but it is the course we are charting. I can’t see a Jacksonian movement taking power in time to prevent it from happening.

      • The world has changed, J. China is emerging as not only a growing power with influence in Asia and Europe, but we rely on them to finance our debt. Especially as major interstate war becomes less likely, the US simply isn’t as important in the world stage as it used to be. It is not the dominant power. That’s OK, as long as we understand the changing circumstances and adapt, recognizing that cooperative efforts (such as the diplomatic work to develop a response to Iran) are needed to be effective, not unilateralism (like the disastrous Iraq war policy).

        I do not believe de-regulation would fix the problem. You may have faith in markets to solve things like that, I see no evidence to expect that to be true.

        • And you think, what, that the Chinese buy our debt as a personal favor to the United States? The Chinese buy American dollars–which their central bank mostly stockpiles–in order to artificially depress the value of the renminbi as their economy expands. Their economy is inextricably interconnected with ours. If the Chinese sold off their reserve of dollars, it would collapse their economy, end their growth, and/or topple their regime, in addition to destabilizing the dollar. And, by the way, the Chinese possess all of 7% of our national debt (as of July 2009). All foreign creditors combined own 30% at the most, with the rest being owed to the government itself or Americans. (I agree national debt is bad as a general rule, especially due to the massive inflation dangers, but the foreign control of US debt is greatly exaggerated).

          The US economy is still three times the size of China’s in terms of GDP. China does not have a true blue-water navy or a modern air force. Our military expenditures are nine times that of China (sixteen times that of Russia, and more than twice that of the entire EU combined). The Chinese know they cannot challenge the United States militarily. If they could, Taiwan would not be a “rogue province”. You say that the Chinese have increasing influence in Asia (true) and Europe (possible), but they clearly do not have more influence than the United States, other than perhaps their immediate neighbors who they can intimidate through military threat.

          So, why do you think interstate war is unlikely? Why do you think international trade is virtually free and unfettered? It is largely because of the military supremacy of the United States. The United States is the dominant power. You say it isn’t, but otherwise there would have to be a superior power(s). So, which nation(s) is it then?

          I know you like flogging the “America as an empire” drum like most university professors, but it is a fallacious application of the term. There has been no true American empire since the independence of the Philippines in 1946 (in fact, it would have happened earlier if not for World War II). We have military bases around the world, but discounting Iraq, there are less than 170,000 troops abroad–all at the behest of the host nations. 85,000 of those are in Europe and 60,000 are in Korea and Japan. For the most part, I’m all for their withdrawal (especially from South Korea), but that is no “empire”. At most you could call it the modern day limes, but those of the entire West, not of an American Empire. In fact, I think there would be a hue and cry from the Europeans, Koreans, or Japanese over a US withdrawal–because they would be forced to ramp up their military spending to provide for their own defense.

          Nevertheless, the United States does not claim suzerainty over, nor plunder the wealth of, any of the nations in which its military forces are deployed. If you wish to apply the term “empire” to that, it is clearly a deviation from the word’s historical definition.

          • Even most conservative scholars recognize the US has a neo-imperial foreign policy, that’s not even controversial in foreign policy circles. And world wide it’s recognized that the US military is no longer feared, or even considered relevant by most actors. It could hit Iran or North Korea, but in general, it’s more a waste of our money.

            And China is not as dependent on us as you think. They’ve been undergoing a double diversification, both to the rest of Asia and Europe, and internally, so that the Chinese consumer can enjoy the fruits of their labor. They have the capacity to bring utter chaos to our economy, and increasingly they are positioning themselves in a way that makes that threat credible — they’d be hurt, but could survive. The fantasy that somehow all this dependence on China isn’t a problem because they need us is simply false. It may have been true ten, perhaps even five, years ago, but now it isn’t.

            Oh, and China and Taiwan are increasingly linked economically. Expect a peaceful unification within a few decades, as China changes and allows Taiwan considerable autonomy. The world is so different than it was in the Cold War, your view of the role of the US is anachronistic. You’re describing what was, not what is.

          • Erb: “Even most conservative scholars recognize the US has a neo-imperial foreign policy, that’s not even controversial in foreign policy circles.”

            That’s nonsense. Very few serious foreign policy people throw that kind of language around. First, because it’s not true. It’s an abuse of terminology and it inaccurately portrays the U.S. role in the world.

            You don’t know your own field, Scott.

          • The world is so different than it was in the Cold War, your view of the role of the US is anachronistic. You’re describing what was, not what is.

            Now that’s funny, because whereas I used empirical facts and figures, you used only your own opinions without support.

          • It is a common Erbism – appeal to authority – his. And we know what that’s worth.

  • I think this (via Dale) said it best:

    It needs to be said that under certain circumstances easily now imaginable, many Western citizens would argue, strongly and vocally, that those idiot foreigners who are now lending money to Western governments should in due course be told: sorry sunshine, you ain’t ever going to get it back. Our governments are bankrupt. Why the hell should we and our descendants in perpetuity be paying tribute to you? You knew that the money to pay you back would have to be stolen from us. You assumed we’d just cough up indefinitely. Well, we damn well won’t. You are now a definite part of our problem, and telling you to take a hike is going to be part of our solution. Our thieving class is now “borrowing” money from your thieving class like there is no tomorrow, and we are not responsible for the actions of either gang. A plague on both your houses.

    We want you foreign thieves to stop lending to our thieves, now. And the best way for us to convince you that you should indeed stop lending, is to tell you that you are extremely liable never to see most of your money back.

    Which has the added virtue of probably, approximately, being true, already.

    • If it gets bad enough, default will be the only option. Of course, that also means the world economic system collapses, and the US will be a shadow of the world power it once was. But that’s history, “no empire rises that sooner or later won’t fall” (quoting Al Stewart there).

      • Of course, Scott, there is no “empire,” so it cannot fall. But to your credit you’re not alone in not knowing the meaning of “empire.”

        There are American security guaranties in Europe and Asia that are dirt cheap for the benefits they’ve reaped. America’s role as status quo superpower and guarantor of strategic peace is the security framework that facilitates the global economy. It has nothing to do with empire.

        Does the EU, Russia, China, India, any of the Southeast Asian countries, Australia, any South American or African countries consider themselves nation-states inside an American empire?

        No, of course not. It’s just the lousy stupid use of language in the service of burned out, antiquated, stale, canned, rotten KGB Cold War propaganda that leads people to say stuff like that. It’s just “blame the Americans” for college sophomores and foreign service rejects.

        The costs that are bankrupting America are the internal costs of American socialism.

        They are the costs of the Social Security Ponzi scheme and the reckless thing known as Medicare, for the largest pieces of the bankruptcy pie.

        That’s the “empire” that is destined to fall.

        But haven’t you been clamoring to add to that with ObamaCare?

  • Its not possible to earn nothing and spend everything, forever, so this thing WILL crash eventually inspite of all the creative manipulation and stonewalling.
    ————-
    So the only thing to talk about now is what are YOU going to do between now and the crash and then what are you going to do AFTER the crash.
    ————-
    Its not about us and them, its about you.
    ————-
    When you start thinking from an individual perspective all of the smoke and mirrors become less of a distraction.

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