Monty Pelerin's World

Economic, Financial and Political Analysis

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Let’s Have A Depression Now

The United States is more than four years into its form of economic purgatory. The government pronounced the recession over in June of 2009. That announcement does not conform with reality or even subsequent government suspect data. Even the Administration-friendly New York Times knows better:

Between June 2009, when the recession officially ended, and June 2011, inflation-adjusted median household income fell 6.7 percent, to $49,909, according to a study by two former Census Bureau officials. During the recession — from December 2007 to June 2009 — household income fell 3.2 percent.

To believe the recession ended requires a bizarro interpretation of economics where bad is actually good and good is actually bad.

21st Century politics sees no need for truth. When government believes itself to be responsible for the economy and convinces the people of that, it has put itself into a box. In a world where government claims credit for good things, bad things ultimately become their responsibility as well. Recessions are bad things which government should not have allowed to happen or should fix quickly.

The reality is that government does not create wealth or economic abundance. (They can create poverty, however.) When recessions occur, they threaten the myth of all powerful government. The first reaction of government is to do something regardless of whether something makes sense or not. The second phase is to declare the problem solved (in this case, claim the recession ended).

This kind of politics is dangerous on two counts. First, government risks what little credibility it has left (which I might say is not necessarily a bad thing). Second, it causes government to pursue policies which reinforce its lies. It is these policies which created the current economic crisis in the first place.

The country’s economic problems began decades ago. In trying to cover them up with economic interventions (stimuli), government actions prevented the economy from correcting the imbalances that caused slow growth. From a political standpoint, economic policies encouraged institutions and people to use debt to live beyond their means. The massive debt buildup in both the economy and the government hid the underlying problems and allowed them to grow ever larger and more malignant out of sight.

After decades of such interventions, the economy no longer is able to function efficiently. In order to remedy the problems, massive liquidations of debt and misallocated assets are necessary. There is no other way to achieve an economic cleansing. It may be possible to continue this economic charade with additional interventions, but there is a limit to how far it can be continued. Japan has achieved zombie existence for over two decades by refusing to face up to the imbalances in their economy. Our government has chosen the same course of “extend and pretend.” There is no hope for a recovery until something like another Great Depression liquidates the built-up imbalances.

No politician wants to be in office when that event occurs. Thus, they make matters worse for the country by continuing to spend money we don’t have to prop up an economy that cannot and should not be saved. Their goal is not to repair the economy but to ensure the most favorable terms for their own re-election. As a result they continue to savage the future of the country in order to protect their own present.

People will eventually regain control of their government. They always do. Unfortunately the process of history is slow and sometimes ugly. Multiple generations around the world have never known freedom. China and the Soviet Union are two examples that are just now transitioning toward freedom. Are we to enter some institutional dark ages where our grandchildren and their grandchildren do not experience freedom? It is possible because all governments prefer more power for themselves and less liberty for their citizens.

The required change is so great as to be analogous to an addict trying to break his habit. Most addicts have to hit rock-bottom before reality intrudes. In the case of the US, we are going to hit rock-bottom when the economy collapses. That is likely to be within the next ten years and could be at the front end of that estimate. This world-changing event may (at least temporarily) drive a stake through the heart of big, oppressive welfare-state governments.

There is no guarantee that government will shrink when this happens. Civil unrest is a likely outcome. Statists may attempt to use the crisis to further expand government. Martial law and other restraints are likely. Hitler used a similar situation to rise to power. Parts of the Constitution were emasculated under New Deal policies that “had to be done” to pull us out of the Depression. Of course, we never got out of the Depression until after the end of WWII.

Economic pain and suffering will be great. Yet the economic calamity is unavoidable. It was pre-ordained by years of government interventions. Mathematical and economic laws will not be avoided. As stated by Ludwig von Mises:

There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.

We are coming off the biggest boom in the history of the world. If Mises was correct, and I believe he was, then Keynes was wrong (and I believe he was). Thus far all the Keynesian dollars expended have had little effect other than to make this country poorer. We are set up to have a Depression greater than the one in the 1930s.

A Depression is not a good thing. Yet in this case, it may be the one event that can prevent a chapter in future history books entitled “The Demise of the Great American Empire.” Unless citizens and politicians return to their senses, we will be both impoverished and living under tyranny.

A reaction opposite that of the 1930s is a hopeful outcome. Despite the recent election, government is increasingly seen to be the problem. It is no longer viewed reliable, trustworthy or as a solution. Freedom is deeply ingrained in the American culture and most of us recognize how much we have already lost. The resurgence of books such as “The Road to Serfdom,” “Atlas Shrugged” and others similar indicate the public is interested. Historically low poll numbers for all politicians and the rise of the Tea Party movement are further indicators. The economic trauma may provide the catalyst to return to the founders’ concept of government.

Totalitarianism needs the military. More than any other segment of society, the military respects and supports the Constitution. If push comes to shove, they are likely to defend the Constitution rather than the government.

Government has reduced itself to little more than an insolvent zombie, staggering around awaiting the coup de grace that will end its misery. The coming economic collapse is that executioner. When collapse happens, efforts to increase government are will occur. They must be resisted strongly. The love of freedom and the experience with big government should overcome decades-long madness. No matter how things evolve, in the history books of the far future, there can be no better title to describe our current situation than “The Myth of Government.”

If we must have a Depression, let it begin today. It will be hard and dangerous, but it may be the last chance to get our country back. When it happens, we must all think and behave like Founding Fathers. To paraphrase Rahm Emanuel, this crisis will be too important to waste.

The “greatest generation” handed us a gift and we fumbled it away by allowing government to run wild. We cannot turn this mess over to future generations. We must take our country back and remedy the problems.

The Debt Ceiling Debate — Another Washington Farce

Another debt ceiling drama is upon us. Despite the political buzz and the media hype, the event is inconsequential to the country and its economic future.

A heated debate between the two political parties will occur. Both will claim to be against deficits. Both will emphasize the need to keep the government running (why!?). Both will talk about spending cuts. Other than their desire to keep the government running, nothing else they say or claim will mean much. The entire exercise is a show for the citizens and nothing more.

In my lifetime, I don’t believe there has ever been a legitimate spending cut to any program. Government always grows. Budgets are no longer balanced. Indeed, for the past few years, they were not even prepared. Both parties want the spending to continue. And it will, regardless of claims about reaching a deal that will stop it.

The debt ceiling, unfortunately, will be raised again. The outcome is as sure as the sun coming up tomorrow. The profligates in Washington will add trillions more in the limit to their personal credit card. And they will spend it all and face the next debt ceiling “crisis.”

Within weeks of the deal, it will be forgotten and on its to abrogation. The political class will continue its vote-buying schemes and the country will be pushed that much closer to economic collapse.

There is nothing new here. It has been repeated about fifty or so times before. It will occur again. The notion that something that is renewed again and again can only be referred to as a “limit” inside the beltway. This political farce and Orwellian political speak typifies the seriousness and sincerity of modern day politics.

An agreement will be reached, as always, just in the nick of time. Hopes of the government closing by the small minority that realize what is going on will be dashed again at the last moment. Profligacy will be continued until the new debt limit is threatened and the circus will come back to town to repeat its show.

Eventually the debt limit charade will end, but it will not be a an ending negotiated by politicians. It will be the collapse of financial markets and the economy that brings it about. Until then, the scam of deficit financing, debt limits and money printing will continue.

On February 1, 2011 these comments appeared in response to the last debt limit crisis. The comments are still relevant, only the numbers have changed.

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The upcoming battle over raising the debt limit is a microcosm of the fraud that government has become.

This Kabuki act is performed every time Federal debt approaches its legal limit. The stage play is always the same:

  • Politicians admit that spending is unsustainable and speak about cuts, only in generalities and never specifics.
  • The party in power always argues how important it is to increase the debt ceiling.
  • he party out of power argues how doing so is irresponsible.
  • The demagogues in power then warn about world-ending damage if the debt limit is not raised.

After this drama plays out, politicians reluctantly (that is their marketing term, not mine) raise the debt ceiling. This political act is then mothballed until the new debt limit is approached. By that time, the protagonists may have changed positions. For example, President Obama in 2006 voted against raising the limit stating:

The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. … Increasing America’s debt weakens us domestically and internationally. Leadership means that ‘the buck stops here. Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better. [Quotes available here.]

Why his reversal? Simple, George Bush was president then. Today Obama and his Administration argue that not raising the debt ceiling would be “irresponsible” and “catastrophic.”

Both political parties are filled with scoundrels for whom politics is merely a game with few rules. These unprincipled parasites are concerned only with furthering their political careers. Concern for the public is important only to the extent that it furthers political interests. Good policies don’t matter, only good politics. Harmful policies are good politics if the public perceives them as beneficial.

Cuts are not politically viable in our democratic welfare state. Generations have been conditioned to “gimme” politics. As a result, no politician can run and win on a platform of “vote for me and this is what I will take away from you.” That is why cuts never come and spending rises inexorably. That is why the debt limit will be raised again (and again and again) until the dollar and economy collapse.

President Obama’s State of the Union message was typical of the nonsense that passes for leadership. Depending upon your viewpoint, he either insulted the intelligence of the people of the country (difficult but not impossible) or exposed his own intelligence. The speech was gibberish, promising a freeze on discretionary funding while advocating new programs.

Our fiscal situation is desperate. The deficit this year is estimated to be $1.5 TRILLION, the largest in history. No one believes the out-year budget estimates that show the deficit being reduced, albeit not by much. The country likely will not last long enough to determine how absurd these out-year projects were.

Mr. Obama’s proposed freeze covers about 17% of government spending. It is meaningless, especially when the other 83% of government spending expands like a California wildfire. To better understand, assume Mr. Obama is an individual making $50,000 per year and spending $75,000, the approximate relationship between government revenues and expenditures.

Mr. Obama is tapped out in the sense that he is unable to borrow money. His only solution is to lower his spending to his income, or preferably below his income. Instead of recognizing this situation, Mr. Obama focuses on approximately $15,000 of his spending problem. Even here, he doesn’t intend to cut but to continue spending at this excessive level. The other $60,000 of spending he plans to increase.

Any individual who believed he could sustain a personal financial problem with such a plan would be adjudged delusional. Just as it would be for an individual, Mr. Obama’s belief is delusional, and disastrous, for the country.

The debt ceiling is a key to stopping the political insanity. It can prevent a collapse of the dollar and the economy. It must be used to enforce restraint on the cowards in Washington. It is a less desirable solution than a limit on government spending but it is a stopgap measure. Any limit represents an improvement over the feckless pretend negotiations that politicians engage in.

A freeze in the debt limit puts responsibility for out-of-control spending squarely on the backs of the political hacks. It is no different than putting a teenager on an allowance, other than the fact that most teenagers have more sense and self-control than most politicians. The message sent by adopting such a measure is simple and unequivocal: “Here is your money. That’s it!. Spend it wisely. Screw up and you will be voted out of office. Good luck!”

Robert Murphy makes the best case for not raising the debt ceiling:

Perhaps the strongest argument for not raising the debt ceiling is that the United States is bound to default — whether explicitly by reneging on payments, or implicitly by massive inflation — at some point anyway in the next decade or two. The government’s own projections show the debt quickly rising to alarming levels under certain assumptions, and none of their models deals with the possibility of a continued depression and a collapsing dollar.

As others have noted, a firm debt ceiling would be a “balanced-budget amendment with teeth.” Politicians notoriously cannot recommend particular budget cuts for fear of alienating powerful interest groups. But if the newly elected budget “hawks” really wanted to impress us, they could refuse to raise the debt ceiling. Then they and their colleagues would have no choice but to start slashing.

A vote on increasing the debt ceiling represents a litmus test as to whether a politician is serious. Any vote for an increase should target that politician for defeat in the next election. That is the message the public must send to their representatives.

Because politicians are without cojones, we must play on their cowardice. The fear of losing office is the only motivation to which they will respond. It is a way to end reckless spending. It is the only quick and effective way to prevent the economic and political collapse that is headed at us.

Big spending apologists will say, with some validity, that you cannot just cap government spending without advance warning. From a practical standpoint, that is correct. Wouldn’t it be revealing for them to have to respond to this question: “Just how much warning or lead time do you require?” The squirming and hypocrisy watching these parasites trying to answer that question would be nearly priceless and just an ancillary benefit of the proposal.

A simple solution to the lead time objection is to provide some. We run about $100 billion per month in borrowing. Have one more acceptable vote for raising the debt limit. Raise it by $300 billion. That provides three months time to lower spending rates to revenue rates.

The lack of seriousness in Washington is apparent with gimmicks such as the “blue-ribbon commission” appointed by Obama to suggest solutions. Does anyone other than me remember the Bowles–Simpson Commission? They came up with a series of recommendations, not enough in my opinion, but superior to doing nothing or continuing to increase spending (Obama’s solution). Several suggestions were reasonable as beginning steps. This Commission and its recommendations have been shoved down the memory hole of history so that Washington does not have to deal with specifics. It is nothing more than another example of the Washington charade.

We need immediate action in order to avoid economic and political collapse. The only way to get that is by freezing the debt ceiling. That should be done now! A more comprehensive approach can be developed after the hemorrhaging has stopped.

 

Slouching To Armageddon

Brace yourselves for continuing headlines like these from yesterday’s DrudgeReport:

Chinese Yuan Hits Record High Against US Dollar…

Starving Horses Serious Problem As Hay Prices Continue To Skyrocket…

Stocks continue post-election drop…

Faber: Prepare for Massive Market Meltdown…

Wealthy Dump Assets…

Budget deficit rises to $120 billion in October…
…jumps 22%

SECESSION MOVEMENT EXPLODES

This economy is not improving; it is dying. Economies die slowly. We are now five years into this economic malaise with no recovery either in sight or even possible given current policies.

The deterioration in the economy and living standards will continue to decline. There will be no recovery; there will be a complete and utter collapse of the economy and society as we know it.

USA Dominates The Rest of World — In Debt

The US continues to decline economically relative to some parts of the world, most notably those in Asia. Yet we still lead in many areas. Unfortunately being number one is some categories is not a good thing.

The level of debt is one of these areas. Our debt burden leads the world. The first chart below shows that three years ago we led in terms of per capita debt. We nosed out the Eurozone basket cases, our biggest competitors for this questionable title.

Given the problems these European countries have had since, one might reasonably expect that they would surpass us. Not so! We, not they, are the true profligates. The second chart shows our widening lead and dominance. The nearest competitors have fallen way behind as we surged. Even the “mighty” Greece cannot keep pace with our additions of new debt.

Trillion dollar deficits per year increased our debt per person about $3,000 per person per year. Four more years of Obama deficits will leave each person’s share of the debt at $70,000.

That means a family of four would owe $280,000, of which they are totally unaware. This debt is in addition to whatever credit card, auto, mortgage, etc. debt they owe.

These numbers do not take into account the unfunded liabilities associated with Social Security and Medicare. That’s where the numbers get especially ugly.

The One-Hour Meltdown

A collapse is coming. When it occurs, it will be sudden and instantaneous, much like a light switch being flipped. Most people writing about the effects of an economic and financial collapse focus on the big picture, describing the devastation that will be incurred at a macro level to the economy. Sovereign debt, private debt, financial systems, law and order etc. dominate such discussions.

Many have difficulty translating such a top-down approach to their own individual circumstances. The macro events are in a sense abstractions to which they do not relate. Ultimately they know a dismal big picture will mean dismal personal circumstances but do not comprehend exactly what that may mean.

 Robert Wayne Atkins approaches the event in a unique fashion. Instead of focusing on the macro events, he views what is about to occur from the individual’s perspective. He does so by explaining what things will “feel” like in the first hour. Here is an excerpt from his long and recommended article as to how individuals will know the feces has hit the fan:

The One-Hour Meltdown

However, my personal opinion is that once the meltdown begins then in less than one-hour it will quickly escalate far beyond anyone’s ability to control or manage it on a worldwide basis. The five basic assumptions that cause me to believe in my “one-hour meltdown theory” are as follows:

  1. Banks: The financial institutions around the world cannot withstand a full-scale worldwide bank run. Therefore, they have already made plans to immediately shut down the instant they are told to do so. Within minutes, all across the globe, all the ATM machines will be offline, all credit card and debit card verification transactions will be halted, and all banks will have their vaults locked and their doors locked and their building emptied of all personnel, except perhaps for some special security guards. All high-level bank executives will immediately disappear to a wide variety of remote safe unknown locations. All telephone call inquiries to any of the financial institutions will be automatically answered by a computer with a pre-recorded message similar to the following: “Our system is currently experiencing an extremely high call volume and therefore we are unable to answer your call at this time. Please try again later when our call volume returns to normal.”
  2. Governments: The vast majority of our government leaders all over the world are relatively intelligent individuals. They completely understand the ramifications of a “bank holiday” in our computer controlled financial economy. Therefore, all government offices will also be immediately shut down, and they will empty their buildings and lock their doors. Any transaction in progress, including any trials in progress, will be immediately halted and postponed until some future date. All high-level government officials, including all judges and tax officials, will immediately disappear to a wide variety of remote safe unknown locations.
  3. Retail Businesses: Since they will be unable to process even simple transactions, all retail establishments, both large and small, will immediately lock their doors to prevent anyone else from entering. If possible, they will complete any transactions for customers already inside their building if those customers have enough cash to pay for their purchases. Any customers wishing to pay by check or credit card or debit card will be told that the verification system is down and their transaction can’t be completed. All customers will then be immediately escorted to the doors and the doors will be briefly opened and then immediately locked after they exit. In addition, in a manner similar to what happened during the World Trade Center meltdown, each store’s management may demand that their employees remain at their stations until further notice or they will lose their jobs for leaving without management’s permission. But most of the more intelligent employees will leave at the same time as the store’s last few remaining customers. The store’s special security guards may or may not remain behind in order to protect the store with their lives. Since most of these special security guards are not paid exceptionally well, a large number of them may decide that they should return home and protect their own families instead.
  4. Criminals: Anyone and everyone who has any criminal tendencies and who has been patiently waiting for this to happen will immediately see it as a once-in-a-lifetime opportunity to improve their financial situation. More than likely the vast majority of these criminals have already made very detailed plans that includes exactly which businesses they are going to rob first, second, third, and so on. Any business with a reasonable level of cash-on-hand will be very high on every criminal’s list. Every jewelry store and pawn shop that has any type of silver or gold jewelry, or precious stones (diamonds, rubies, emeralds, etc.), will be very high on everyone’s list. The warfare that breaks out at these establishments between competing criminals will not be pleasant.
  5. Normal People: Normal average people will begin looting. Grocery stores will be broken into and they will be completely emptied from wall-to-wall, including the rear storage area, in less than one-hour. Stores that have firearms, ammunition, appliances, clothing, shoes, or anything else needed by the average citizen will be emptied in less than one-hour. In skirmishes over the few remaining resources, normal average people will begin killing one another inside the stores, and in the parking lots outside the stores, and on the streets as these fully loaded vehicles try to escape with their loot.

The above events will all happen simultaneously during the first one-hour of the meltdown. After that first hour has passed, things will really begin to get nasty. Everyone will quickly realize there are not are not enough law enforcement personnel to protect everyone and everything. Although the military will probably be ordered to protect specific high priority establishments and resources, there will simply not be enough military personnel to protect individual civilians or businesses.

You may read his entire article here.

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