I have been out of town for almost a week and pretty much without Internet access. Hence the paucity of posts. It was a wonderful escape, however one is quickly reminded how shallow TV news coverage truly is. The lack of access to meaningful information was frustrating, especially during such an interesting week.
The debt ceiling deal (scam) was finally completed. It was pure snake-oil. As expected, it accomplished nothing more than back-slapping and self-congratulations among the political class, with the requisite pruning before television cameras of course. It provided politicians with a huge increase on their credit card limit. On Thursday of this week $239 billion of new debt was added! Prior to Obama, the largest annual deficit in history was $455 billion. That represented the borrowing required for a full year, to put matters in perspective.
There should be no celebration among the citizens of the country. Additional productive output and effort will be confiscated to support this nonsense we know as government. Knowledge of this coming ensures negative results for the economy. Businesses do not take risks in an environment that is hostile to them and becoming increasingly so. Jobs and capital will continue to flee the country to climes that are more favorable.
Markets did not fall for the political kabuki dance. They saw right through the gibberish, plunging dramatically for the week. Markets appear to have focused on the debt death spiral that Washington committed us to. Europe is no better. It approaches its own implosion stage, probably faster than the US. Neither the US nor Europe can change their roads to collapse. The opportunity to save either economy passed several years ago.
There is no way to know whether the recent collapse in financial assets is short-term or a prelude to a market collapse. Markets sense what Washington does not want you to know — we are in deep doo-doo! Government has put us here and is unable to get us out. Their only strategy is to hope there is more room on the road to accomodate more kicking the can. No politician is insightful or brave enough (save Ron Paul) to understand the unsustainable and irreversibility of our condition. Pretend and extend is the strategy. “Pretend” will continue right up to the economic apocalypse. How much “extend” is exists is the big question.
The Cato Institute summarized what happened and where the US will end up:
America is on a path to becoming a Greek-style welfare state. Thanks to the Bush-Obama spending binge, the burden of federal spending has climbed to about 25% of national economic output, up from only 18.2% of GDP when Bill Clinton left office.
Government debt is unsustainable. Adding more debt, which is all the debt ceiling agreement accomplished, is akin to pouring gasoline on a raging fire. That Washington pretends otherwise is truly disgraceful. Either politicians are the biggest fools in the world or they believe their constituents are. Regardless of which hypothesis you accept, the conclusion is simple — remove all of these mountebanks/exploiters from office.
For a discussion of the debt deal fraud, see the analysis on Zerohedge. Here is an excerpt:
The debt decision and the above mentioned dire indicators leave us with two inevitable consequences: One, our credit rating WILL be downgraded, by S&P certainly, followed by Fitch and Moody’s later on. Two, we are, without a doubt, soon to see an announcement from the Fed of a third QE. Both of these items WILL lead to the final abandonment of U.S. treasuries and the dollar by the East, and likely by OPEC, ending in stagflation. That is, if they don’t commit to a dump before hand. What we are looking at is the turning point of the final phase of total structural debasement of the U.S. economy. This is it, folks. This is where illusions are lifted, lies are revealed, assumptions are squashed, and things start to get really ugly.
Markets will churn in both directions but the long-term trend is likely down. The expectation of QE3 may cause a rally. If markets have another week like this one, expect talk of such action to commence soon. The dollar versus relatively honest currencies like the Swiss franc will continue to decline. Ben Bernanke will likely take action shortly because there is no economic recovery nor will there be one. His actions will not affect the economy but may provide a temporary respite for equities. Inflation hedges like precious metals will benefit from Big Ben.
The difficulty will come when inflation begins to bind. Bernanke’s actions already have driven food prices up in this country and the rest of the world. The Middle East turmoil was partly caused by rising food prices. where people could no longer afford to feed themselves. QE3, or whatever it is called, will further drive up costs in this country without wages keeping pace. People will become increasingly poorer in terms of purchasing power. At some point, empty stomachs will create unwanted action. “Stomach politics” is inevitable under our current course.
Unfortunately, the alternative — cut government spending dramatically — puts the country into a depression and requires reductions in welfare payments. That in itself would produce civil unrest. The problem with this solution is that it results from a deliberate political decision. Voters would be blame politicians; hence, this approach will not be undertaken.
At this point, we are on an irreversible path to destruction with no possible political or economic solution. The only question is when we hit the wall. Mark Faber, quoted by CNBC, believes the following:
“The next time we have a global economic crisis, it will be much worse than 2008. Before this happens there will be money printing and there will be war. The whole system will collapse,” he said. “That’s why I’m advising people that they have to think it through. In a total collapse you don’t want to own government bonds and cash.”
He added: “Equities—they don’t perform well, but at least you have the ownership of companies. Precious metals in that environment do relatively well. And of course, oil would do well if there was a war.”
The passage of time unfortunately will likely validate much of his beliefs.