The problem is the national debt. All the other arguments aside, the national debt is at least 50% larger than it was 4 years ago. And showing no signs of shrinking.
That means that the Fed cannot afford to raise interest rates. Pretty much forever. Why? Because the US wouldn’t be able to pay the interest on the debt at higher rates. Put simply, if the effective coupon on T-Bills went to 4% (historically still very low), the US would be Greece, because the interest on the debt would be so large a chunk of GDP it would have to either default, or print money like it was Zimbabwe (not that it already isn’t doing that) just to pay the interest, assuming that it wasn’t continuing to create more debt every second.
And that’s just the on-balance sheet debt. Forget all the off-balance sheet stuff, like unfunded liabilities (you know, like Social Security and Medicare and hosts of other stuff the government just likes to keep off the sheet, a la Enron, because otherwise it is obvious that it is already completely bankrupt). Those are orders of magnitude larger.
NEWS: New interview on craft, writing, and why I wish I was a bear. Worth reading.
One friend of mine said, “Yeah, but the US can grow its way out of that!” Really? That’s nice. Assuming for a moment that one bought the notion that a country that these days manufactures very little, and has 70% of its GDP as “consumer spending” (that’s people buying things, mostly on credit – see the above paragraph on accumulating unsustainable debt), and largely only creates reality TV shows, Rap music, financial instruments, and sells burgers to each other – can somehow literally go parabolic on its GDP (how? Maybe cheap energy – the media’s latest BS siren song), what is the first thing that happens when growth occurs?
Answer: interest rates go up. A higher rate is required to entice investors, because they can get better returns in other investments in booming growth times. So now we have all this hypothesized growth, but rates have to go up, at which point the US still can’t afford to service its debt at higher rates.
This is what happens when fiscal irresponsibility becomes institutionalized, and pecuniary interests are allowed to loot the economy, aided by the central bank and the Treasury. Plain and simple, all the money that is stolen has to come from somewhere – either current revenues, or future revenues. Obviously based on the ballooning debt, it’s largely future revenues that have been used (now that most of the value has been leached from the middle class). At a price. And when that price increases, either the Fed has to print massive amounts of money, a la Weimar Germany, and watch inflation shoot to the moon (which devalues the savings of the entire country – each dollar becomes worth less with more of them out there), so it can pay the higher rates with dollars worth less, or it has to hike taxes by massive (and I do mean massive) amounts, which would instantly chill any growth (in addition to reducing tax revenues a la the Laffer curve).
It’s an ugly, bad scenario. So the Fed has to keep interest rates at near zero. Forever. We are now Japan, where the banks have taken the country hostage and it is being operated for their benefit, as well as for a few pharma companies and military/industrial conglomerates.
Some argue that’s a pessimistic view. I call it reality. I see no way out of it for the U.S. We are watching the slow motion conversion of the U.S. into Britain as we speak – the former colonial ruler of the world, whose currency was the world’s reserve currency up until the dollar became the reserve currency in 1948.
Some might ask why 1948 is important. The answer is, that’s when the U.S. agreed to keep the dollar on the gold standard in exchange for becoming the world’s reserve currency. The U.S. agreed to do so because any reserve currency has to be a safe store of value, and for 2000 years gold has been money. It was in 1948 as well. In order for a reserve currency to be of value for trade, its value has to be stable, because otherwise it is useless – you can’t make contracts or agree to purchases if the currency’s value is changing every day. So a stable currency was required, and the dollar was it.
In 1971, Nixon took the U.S. off the gold standard, arguing that it wasn’t applicable anymore. The reason it wasn’t applicable was because the government wanted to spend recklessly and print money backed by nothing but its promise. The world bristled – as an example, OPEC was created by oil producers because they correctly argued that they had a commodity that was actually worth something, and they were now being asked to exchange it for pieces of paper backed by promises, rather than pieces of paper backed by gold – anyone who knows the history of every paper currency in history knows that they have all degraded and faded to obscurity, which is why gold has been treated as money for 2000 years. Gold is always gold. A Continental (the last US currency that got flushed before the dollar) is just a piece of paper.
Concurrent with this new wisdom in 1971, the government and Wall Street started advancing the ludicrous proposition that gold was essentially valueless – that it didn’t pay rent, it took up space, etc. This was the first time in 2000 years anyone had advanced the notion that it was better to own pieces of paper rather than an asset. Be that as it may, as Lenin knew, if you repeated a lie often enough, it became truth. Now the wisdom of even otherwise bright people is that gold has no integral value and is only worth what someone is willing to pay for it (as are all assets of every kind – duh!), thus is not a store for value. Even though only a cursory study of history would expose that as stupidity of the worst sort – for 2000 years gold was money, but now it isn’t…because we say so! Forgetting of course that the dollar was backed by gold as a condition of being the reserve currency precisely because gold is money, and paper is just paper.
Which brings us to where we are. There is no way to grow our way out of the debt problem without defaulting on our debt interest. No way to do it. If with posited growth, it would spike rates, which would cause a default. If with higher taxes, there would be less to tax because a disastrous recession would slip into depression (which is what I believe the next step is).
So the Fed must keep zero effective interest in place for as long as I can foresee. Which means the future will be dim indeed, because eventually the inflation that everyone sees every day, and the official statistics deliberately exclude from its calculations, will also cause rates to rise – so I suppose one could say that it’s hard to envision a future where the U.S. doesn’t default on its obligations.
The only savior so far has been China. Because of high real inflation in China (6-8%) and low savings interest available to Chinese citizens (and effectively no other way to save for them other than property ownership) of around 1.5%, you have a real world savings interest rate of the difference of the savings rate paid (1.5%) and real inflation (6-8%) – which is a long way of saying that the banks can invest in US paper at 2% real return, and pocket the 8.5% difference between the 1.5% in Yuan they pay, and the 2% + 8% – 1.5% paid to savers, as expressed in dollars. But as China’s growth slows (less people are buying crap in a recession) that inflation rate drops, and suddenly the kleptocracy that steals roughly 8.5% of the nation’s savings every year to support its lifestyle can only steal 4%, or 2%, at which point U.S. paper at 2% looks like a bad deal to them.
That’s what is happening.
I believe that the Fed is making trillions and trillions of loans to U.S. and foreign banks at 0% interest (fact, as shown by the limited Fed audit this year) in exchange for their pledge to invest those loans in U.S. paper at 2%, creating an apparent demand for it – outright theft from the taxpayer, as the banks are being given that 2% on tens of trillions of dollars as pure profit for them (and they are all for-profit banks), paid by the taxpayer – which is a looting mechanism that’s invisible but is wildly destructive, as seen by the recent data showing the middle class’ net worth has dropped to where it was in 1982. Which of course leaves out that it is being measured in dollars – $75K today being treated by the government statisticians as equivalent to $75K in 1982 dollars, when gold was $350 an ounce instead of $1600 an ounce, and a car cost $7K instead of $20K, and a house cost $60K instead of $150K, etc. etc. In real economic terms, the average middle class person has seen their net worth drop to effective buying levels of more like the 1960s. Another way of saying that is that three generations of accumulated wealth have been erased in the last four years.
Think about that.
All the wealth from the advent of things like the personal computer, and cell phones, and CDs, and moon flights – all of that is gone. Or rather, has been redistributed to the powerful financial interests that have done so well while the country is struggling.
The reason I’m writing this blog is because I had to learn a lot about all of this in the writing of my next novel, Silver Justice, which discusses the reasons for the 2008 financial crisis as a backdrop for a serial killer story. The more I learned, the more appalled I became. I’m sure these views will be unpopular with many who don’t want to acknowledge the hard facts – people who confuse stupidity with patriotism.
The wealth of a nation has been confiscated. If you are reading this, probably from you. And it is likely to continue being bad, or get worse, regardless of who gets elected, because the folks who stole three generations of wealth own both parties and all the systems. They should. They’re the only ones with the money.
On a brighter note, I’ll return to happy blogs addressing lighter topics soon. But I had to get this out of my system. Call it a smudging or exorcism, if you like. If this resonates with you, please SumbleUpon and otherwise share it using the buttons below. Thanks.