he says:
The US congress is currently debating the future of our nation (not any more...they just killed us all). Not the nature or quality of our future, but the very future (or not) of America. The corporate stock of the US, the greenback, is balanced on the edge of a knife, and with it the US itself. We are facing something much like Germany experienced in the 20’s... or what modern economists like to call a “currency crisis”. Read about Argentina or the Weimar Republic of Germany to get a sense of what lies down this road.
It is a choice. Let the dopey wall street magicians take the beating they so richly deserve, perhaps destroying up to a quadrillion dollars of notional wealth in the process. Or, socialize the losses by destroying the currency and bailing them out. The latter, of course, will destroy your savings and mine, and will wipe out the financial prospects for our kids, and theirs, and theirs...
What they are trying to do is hold together the financial system itself, and a few ex-Goldman Sachs employees have convinced them that for $700 billion, it can be done. First rule: double any number the gov’t quotes to you and me. Second rule: Quadruple or quintuple the number if it is a taxpayer bailout!
So, what can we expect from a $3.5 trillion bailout, paid for by you and me? Here is my guess:
- The national debt, at $9.6 trillion (on-budget that is...) before the Fannie and Freddy debacle, will likely ballon to roughly $15 trillion once those losses are realized. Another $3.5 trillion some time next week will put us $18.5 trillion in the hole. So far, so good.
- This number, as huge as it is, does not include “off-budget” items. The current administration is especially fond of the off-budget spending gimmick. Afghanistan? Off-budget. Iraq? Off budget. Katrina? Off budget. You get the picture... A hundred billion here, a hundred billion there, pretty soon we’re talking about real money! A low-ball estimate of $10 trillion of additional debt, since 2001, has been accrued in your name and mine, “off-budget”.
- Current estimates of the future social security and medicaid liabilities in the coming decade are staggering. How does $4 trillion a year, every year for the next 10 sound? That is in excess of all “revenue” paid into the system. So, in the next decade, the first squirt of baby-boom retirements will tack an additional $40 trillion (minimum) of debt onto the balance sheet.
- Ok. $70 trillion of DEBT, assuming all goes well, by the end of the next decade. This number is not a figment of my imagination. David Walker, former comptroller of the US (GAO) agrees. So what?
Unfortunately we’ve gotten used to big scary numbers from our government. But there are consequences to this kind of debt. It was a huge pile of war debt that drove the Weimar republic to the printing presses in the 20’s. When governments can’t pay their debts, they print extra money... to pay their debts. Cool, huh?
But the first phase of the great global de-leveraging is asset price deflation. People will sell things of dubious value... particularly stocks and bonds, but commercial and residential real estate will get hammered too. This will have the effect of boosting the value of the dollar (when you sell a stock, it is redeemed for dollars). The recent surge in the value of the dollar is evidence of this... but it will not continue. It can’t continue.
Soon, smart foreign central banks, investors, and sovereign wealth funds will dump the dollar. Would you hold a dollar that you knew was getting printed into existence by the trillions? Probably not. You’d spend it now, while it still holds some value. And that is precisely what is about to happen. The tidal wave of dollars will wash into this country, into every stock exchange in the world, looking for something of real value to buy. Real things. Oil, Natural Gas, Food, Minerals.... and prices will react, by shooting skywards. The Dow will explode... but your purchasing power will go away at the same time.
This chain reaction is called Hyper-Inflation. Prices move up fast, daily, hourly. Paychecks are issued twice a day. Meals are paid for in advance, because the price will rise significantly during the meal. Eventually, the largest denomination bill ($100) will be worth more as functional toilet paper.
So, as the debt grows out of control (...and the current debt is uncontainable. If the US gov’t confiscated every last dollar of wages, a 100% tax rate, it still could not pay off the debt) it is important to realize that those bills will come due. The US will pay. And in doing so, the treasury and federal reserve will print every last dollar required for the job.
But, to this congress, this outcome is better than watching their friends on Wall Street take a loss, miss a Christmas bonus, or God forbid... reap what they have sown. This is not the first bail-out, and it won’t be the last.
Our nation has been taken hostage by international banks, just as Thomas Jefferson warned it would, if we were ever so foolish as to relinquish control of the currency to private interests. So we did, and so it has. God help us all.
8 comments:
Jeff,
Another eye-opening post. Throw me an email with a list of recommended books you are reading or have read, on any subjects.
Thanks
Jeff,
It sounds from your blog that the U.S. economic system risks resembling that of Zimbabwe. It is ironic that our financial system that we frequently touted across the world as the one to follow, is now crumbling. However, I'm curious, others would argue that America really did not exemplify a free-market system. That although we talked about it as if it were, in reality, it was a shared semi-socialist, financial system. What do you think?
I think you are right Bern. While we have marketed ourselves around the world as a free market capitalist playground, the reality is that we are, and always have been a quasi socialist economy. Private profits, socialized losses. Plus, the federal govt (you and me) has always picked up the tab for R&D and infrastructure in so many fields. Govt contracts can distort a market in so many ways... that's why lobbyists get paid so much money, and every smart business in the country contributes to the political parties.
Example: The 401k system. Brokerages and employers lobby congress to shift retirement risks onto individual employees. The shift generates a huge surge in trading activity on the street, massive fees, and a huge pool of money (a money herd) that is easy to manipulate. Not to mention the cash savings realized by employers ditching fixed benefit pension plans.
Now the retirement losses are in excess of 2 trillion. Individuals trapped in 401ks will not be retiring as planned, if at all. I'm sure we'll be saving the social security system in the same way... haha.
“Gentlemen, I have had men watching you for a long time, and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I intend to rout you out, and by the eternal God, I will rout you out.”
ANDREW JACKSON, SPEAKING TO INTERNATIONAL BANKERS IN 1832.
Thought this quote was appropriate here. Good ol' War Horse Jackson.
On this topic, a few interesting books:
Crashproof by Peter Schiff
Empire of Debt by Bonner and Wiggins
Financial Armageddon by Michael Panzer
The Long Emergency by James H Kuntsler
and, for a treatment of how the world really works:
Confessions of an Economic Hitman by John Perkins
Just a few, but all very good! They came out before the ball started rolling on this crisis, and all have been prescient. Enjoy.
“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and the corporations which grow up around them will deprive the people of all property until their children wake up homeless on the continent their father conquered.”
-Thomas Jefferson
This was the one I was referring to in my post...
And I almost forgot, the textbook on human behavior...
Manias, Panics and Crashes by Charles Kindleberger
Some very appropriate comments and quotes. You know, it's easy to wax apocalyptical. The pontiff himself was wagging his finger at us noting that our greed had finally caught up. In truth, I have been wondering myself whether mass chaos will begin erupting in the streets in the near future.
For so long, we held in high esteem those things that seemed to guarantee our future, afraid of envisioning a world where anything but money and property prevailed. Don't get me wrong, I'm not proposing we go back to the bartering system, but I wonder if we need to start reevaluating how we value things. I wonder where do we go from here? Is it to hold in contempt anything corporate? Or do we start investing in other things, like people and the environment? Of late, many spiritualists have noted that the world is due to undergo a paradigm shift. Has it begun or is this a just an ebb in the perpetual cycle of human reasoning?
And since we are all throwing up quotes, I have to add one! It's from a song called The Tide Falls Away by Dar Williams.
And the old woman just stares at her hands
So many heroes have crumbled to sand
All those cathedrals were merely by men
It all becomes clear as
The tide falls away
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