Tipping Point Ahead or Behind Us

This excellent article from American Thinker outlines our problems and where we are inevitably headed. It points out the inadequacies of political class’ response as we hurtle toward the abyss.

The only point I would disagree with Mr. Allen is whether the tipping point is ahead of us or behind us. I believe we passed it, if not mathematically, at least politically. There is neither political nor understanding on the part of the political dolts in charge of the country.

Mr. Allen discusses this in context of the Republican political establishment. What courage it tolk to raise the spending cut target to $100 billion, as if this trivial figure will matter. Rand Paul has proposed $500 billion in spending cuts, but he is looked at as a wingnut. Unfortunately Mr. Paul’s number is not enough either.

A Tipping Point Is Nearing

By Jeff T. Allen

We are facing a tipping point.  There will soon be a crisis affecting US citizens beyond any experienced since the Great Depression.  And it may happen within the year.  This past week three awful developments put a dagger into the hope for a growth-led recovery, which held promise of possibly averting a debt and currency implosion crushing the American economy.
The first was a little-noticed, but tragic, series of events in the newly elected House of Representatives.  The speaker, Mr. Boehner, had given the task of fashioning the majority’s spending cut agenda to Representative Paul Ryan (R-Wisconsin), a rising conservative star representing the vocal wing of fiscal conservatives in the House. Promising to cut $100 billion of government spending, Mr. Boehner spoke before the elections of the urgency to produce immediately when Republicans took control.
Out of a $3.8 trillion government spending agenda, the wonkish Mr. Ryan, considered by many to be the best hope for fiscal conservatives, revealed proposed cuts of a whopping $74 billion.  After some tense meetings, (referred to as a “revolt” by some media) newly elected conservative congressmen convinced the leadership to commit to unspecified cuts of an additional $26 billion. The actual “cuts” from any such legislation will, of course, be less once the appropriate political log rolling and deal-making are done- let’s call it $50 billion (while the deficit grows by $26 billion during the week it takes to discuss it). So go the hopes for serious spending restraint from our newly elected wave of rabid, anti-big government Republicans. They may deliver cuts 1.3% of total spending that is itself approximately 90% greater than collected taxes.  Let’s mark this spending reduction effort as an epic fail, at a time when epic success is almost required for survival.
The second awful development to occur last week was the employment report from the Labor Department, describing employment conditions in the U.S. economy in January, 2011.  The report was packed with statistics, all pointing to anemic growth with a modest pickup in manufacturingemployment.  The little-noticed (not by the bond market) aspect of the report was the “benchmark” revisions, an attempt to get the total picture more accurate each year than simply adding up all the monthly change numbers.  This year’s benchmark revisions showed two alarming things: a decline from previously reported employment in December 2010 of nearly 500,000 jobs, and a reduction in the workforce of a similar amount.
Coupled with insistence from the Federal Reserve Chairman Ben Bernanke that the Fed intended to continue “quantitative easing” (a euphemism for monetizing the bonded debt of the federal government), the employment data caused bond holders to assume there will be no end to the red ink.  Ten-year U.S. bonds lost a full percent of their value, declining a total of 18% since Bernanke announced the acceleration of Fed policy in August 2010. The yield on these bonds has increased from an ultra-low 2.4% in August to 3.65% today, as the Fed repeatedly describes inflation in the U.S. as too low.
In context, a 3.7% yield does not appear high by historical standards. In our current predicament, however, it is heading toward Armageddon.  If interest rates on our debt rise by 1% it means our interest payments rise by more than $100 billion dollars annually (not including the interest payments owed to the Social Security Trust Fund–see below).  As global liquidity and deficit spending have accelerated, food and commodity prices have skyrocketed, sending many prices up 25-50% worldwide since August.  In some countries (Tunisia and Egypt among them) rice prices and cooking oil have doubled.  Copper is up 40% in that time.  If global inflation expectations take hold with tenacity, as they have many times in past periods of “easy money” by our Fed and Congress, interest rates may easily rise to 5-6%, an event which will blow an additional $300-500 billion hole in a budget already beyond sanity.  Can our creditors give the U.S. a nod on $2 trillion of new debt each year without any plan to fix it? Remember, there is plenty of past experience with U.S. debt yielding 7-8%, a potential expenditure on our current debt of nearly 100% of tax receipts to pay interest alone should yields go there.
The third development of the last week which received much less press than the Egyptian crisis is the “new normal” in Social Security.  The CBO released a report disclosing that the net cash flow for theSocial Security trust fund — excluding interest received from the book entry bonds it holds in U.S. debt — will be negative $56 billion in 2011, and for every year hence even more so.  This is the trainwreck that was supposed to happen in 2020. It is upon us now.  Any limp action by conservatives to bring this program into solvency can be expected only to slow the raging river of red ink this behemoth program (along with its twin Godzilla, Medicare) spills on U.S. citizens. With no political will to fix them, these “entitlements” will obligate Americans to borrow more and more money from China–to honor promises we simply refuse to admit we can’t keep.
So why do these developments argue for a crisis of Great Depression proportions? Because they speak unequivocally of our pathway to insolvency, and the potential of currency failure via hyperinflation, despite the hopes of conservatives and market participants to see a halt of such direction.  Housing prices, the foundation of so much of private citizen debt loads, are destined for stagnation — not inflation — as the supply of homes is far greater than the demand — 11% of the nation’s homes stand empty today.  When the world begins to recognize that there is no fix for America’s borrowings, a fast and brutal exodus from our currency and bonds can send us a shock in mere weeks or months.
Unlike the Great Depression, however, we will enter such a shock in a weakened state, with few producers among us and record mountains of debt.  More cataclysmic is the specter of inadequate food, as less than 4% of us farm, and those that do may cease to be as productive or may not accept devalued currency as payment, should the tipping point be crossed. Corn and wheat prices in the U.S. have nearly doubled in less than 12 months, using our rapidly evaporating currency as the medium of exchange.
The time for action has passed, which may only become apparent as the “aid” of easy money becomes seen as the harm that it is. May we all be spared the worst, but I offer no such prayers for those responsible.  The harm that comes will be swifter, and more severe, than most of them thought possible.

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1 Comment

  1. I agree. It is an excellent article and it shows that the coming hyperinflation is basically a fait accompli. I read that the Weimar hyperinflation happened after they balanced their budget. A balanced budget could do nothing to rectify the previous years of monetization and money printing. In America, the money has been created as you showed in your previous post on M2. But we can’t see it, because it hasn’t been printed. We don’t carry it in wheel barrows (Weimar) or in bills denominated in the 100s of trillions, but in debit cards, electronic transfers, and lines in balance sheets of banks, individuals, and companies. There is no visual stimuli suggestive of money creation, just the creeping increase in commodities and services. That’s why I suggested a few months ago that we stop saying that money is being “printed” and come up with a new expression for this virtual creation of electronic money out of nothing, not even paper itself: http://righteousinvestor.com/2010/12/14/printing-money-is-a-worn-out-metaphor-reflections-on-what-is-real/

    The problem is that it will take people in our time much longer to figure out that hyperinflation of the currency has taken place–than it did in historical examples of hyperinflation like Weimar and Zimbabwe– because of the lack of visual stimuli, and this means that many millions will be taken by utter surprise.

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