More thoughts on deflation and currency collapse--
The currency collapse itself is not really the problem for most of the population. Suppose for a moment that we could be done with the currency collapse instantaneously, but without the economy being destroyed. Dollars, whether they are dollars you have saved or dollars that you owe, suddenly cease to exist. Instead, paychecks magically begin arriving in the new currency, and we all switch over to the new money for all transactions.
This wipes out savings, but it also wipes out debts. It's like pressing a giant reset button, and most Americans would choose to push that button. Not the wealthy Americans, not the top of the middle class-- but most of us. Even middle class Americans with sizeable 401k accounts might push the button, since not having to make mortgage, car loan, student loan, and credit card payments would free up so much income that they could easily catch up as far as retirement.
We would certainly have to adopt, and immediately, a real safety net for the elderly. But with all US sovereign debt wiped out we would be more able to do this than we are now. Furthermore, if the new currency were backed by gold and/or silver, this would prevent the relentless inflation which has eroded Social Security payments year after year. (Yes, SS payments are supposed to increase with inflation, but then, the government lies its ass off about inflation, so it doesn't quite work that way.)
Without debts, government or private, we could resume real growth. If other nations were wary of doing business with us due to the recent currency change, all the better, as that might revitalize domestic production.
People lament hyperinflation because it "wipes out the assets of the middle class," but really, how many Americans have more assets than debts? And whatever assets they do have may be relatively inaccessible, e.g. tied up in the house they live in, the paid-off car they drive, or in retirement accounts they are decades away from tapping.
Again, most of us would gladly push reset. Or-- we would in this magical world I've just described. In real life the death of a currency takes a while and gets seriously messy. It brings the real economy to a screeching halt. The question is not "how do we save the dollar?" when it cannot be saved. The question should be how we transition as rapidly as possible to a gold- or silver-backed new currency, once the dollar finally begins to fall apart. The longer it takes, the more production is lost, and the more we all suffer.
Friday, December 18, 2009
Wednesday, December 16, 2009
7 causes of deflation during a currency collapse
I've been pondering the deflation (in real / gold terms) which occurs during currency collapse and I can find 7 reasons for it, so far:
1) Continuation of existing deflation. Currency failures tend to occur in the midst of terrible economies. After all, if there is more and more paper and less and less production, a loss of confidence in that paper is just a matter of time. Or, as I've heard it said recently: "Deflation is the midwife of hyperinflation." If you had an unhealthy economy before, it is not going to be reinvigorated by a failing currency.
2) Disruption of business due to price instability. Businesses fail to take into account escalating price inflation and wind up bankrupt. Businesses close, jobs are lost, and production declines.
3) Money supply is shrinking in real terms. There's a point of no return, a sort of event horizon, beyond which prices increase faster than the rate of money printing. Say the government is printing so fast that the money supply will increase 20-fold this year. If you are past the point of no return (characterized by sky-high money velocity), then prices will go up more than 20-fold, perhaps more like 30- or 50-fold. Which means that in terms of "stuff," or gold, there is less total money in circulation. (Note that a decrease in the supply of money is the Austrian definition of deflation.)
4) Price controls destroy production. Governments always attempt to demonize merchants and pass laws capping prices, which causes factories and farms to simply shut down, because it would cost more to produce their goods than they would ever get back.
5) Capital is destroyed. Businesses and many wealthy families have their savings wiped out, meaning there is less capital to invest in means of production.
6) Capital goes on strike. Even when capital is preserved by being moved off-shore or into gold, silver, antiques, landed estates, etc, this capital is not available to industry. Gold has sometimes been called "capital on strike," since the rich move into gold when economic conditions are dire or chaotic, as there are no viable investments. The elites are merely interested in wealth preservation, not in traditional forms of investment, which no longer make any sense. Thus, any remaining capital is sunk into unproductive stores of value and production suffers.
7) Fatalism sets in. There are fascinating descriptions of the psychology of Germans in the Weimar era, and of other times and places which have gone through hyperinflation. Saving and planning for the future have failed as savings are wiped out, and chaos now reigns, so people stop planning. Society begins breaking down: crime increases, moral or behavioral standards go out the window, and people live in the moment. When this happens on a societal scale I can only assume it hampers production.
What happens to prices in nominal terms doesn't matter, not once middle class savings have been destroyed and pensions have been made worthless. By that point, a price or a wage or the total money supply as measured in the currency are all irrelevant. What matters is how many minutes of labor are required to buy X units of "stuff," and there you will find that more and more labor is required to buy less and less stuff. And to the man and woman on the street that's all that matters.
1) Continuation of existing deflation. Currency failures tend to occur in the midst of terrible economies. After all, if there is more and more paper and less and less production, a loss of confidence in that paper is just a matter of time. Or, as I've heard it said recently: "Deflation is the midwife of hyperinflation." If you had an unhealthy economy before, it is not going to be reinvigorated by a failing currency.
2) Disruption of business due to price instability. Businesses fail to take into account escalating price inflation and wind up bankrupt. Businesses close, jobs are lost, and production declines.
3) Money supply is shrinking in real terms. There's a point of no return, a sort of event horizon, beyond which prices increase faster than the rate of money printing. Say the government is printing so fast that the money supply will increase 20-fold this year. If you are past the point of no return (characterized by sky-high money velocity), then prices will go up more than 20-fold, perhaps more like 30- or 50-fold. Which means that in terms of "stuff," or gold, there is less total money in circulation. (Note that a decrease in the supply of money is the Austrian definition of deflation.)
4) Price controls destroy production. Governments always attempt to demonize merchants and pass laws capping prices, which causes factories and farms to simply shut down, because it would cost more to produce their goods than they would ever get back.
5) Capital is destroyed. Businesses and many wealthy families have their savings wiped out, meaning there is less capital to invest in means of production.
6) Capital goes on strike. Even when capital is preserved by being moved off-shore or into gold, silver, antiques, landed estates, etc, this capital is not available to industry. Gold has sometimes been called "capital on strike," since the rich move into gold when economic conditions are dire or chaotic, as there are no viable investments. The elites are merely interested in wealth preservation, not in traditional forms of investment, which no longer make any sense. Thus, any remaining capital is sunk into unproductive stores of value and production suffers.
7) Fatalism sets in. There are fascinating descriptions of the psychology of Germans in the Weimar era, and of other times and places which have gone through hyperinflation. Saving and planning for the future have failed as savings are wiped out, and chaos now reigns, so people stop planning. Society begins breaking down: crime increases, moral or behavioral standards go out the window, and people live in the moment. When this happens on a societal scale I can only assume it hampers production.
What happens to prices in nominal terms doesn't matter, not once middle class savings have been destroyed and pensions have been made worthless. By that point, a price or a wage or the total money supply as measured in the currency are all irrelevant. What matters is how many minutes of labor are required to buy X units of "stuff," and there you will find that more and more labor is required to buy less and less stuff. And to the man and woman on the street that's all that matters.
Tuesday, December 15, 2009
The second wave
Heard of the sub-prime crisis? Meet the Option ARM crisis:
The chart (stolen from a Casey Research article) shows how many mortgages re-set to a new payment, usually higher. With the sub-prime fiasco, people often had low initial interest rates, a lot like the teaser rate on a new credit card. Once the interest rate reset to a higher level, the payment increased and people defaulted in droves.
Option ARMs are even worse, since they allow people to (for example) pay only the interest and none of the principal for the first X years. Or, in some cases, people paid even less than that, and the total amount of the loan was actually growing over time because they weren't even keeping up with the interest. Many of these folks will be doubly screwed when the "teaser" period expires and they have to begin making normal payments. Not only will they be typical principal + interest payments, but the interest will be calculated at a higher rate. Defaults galore!
Also, prime mortgages are defaulting these days due to job losses, which was not the case when the sub-prime debacle began.
We have a long way to fall in housing, even now. If you own a house on a fixed-rate mortgage and the payments are manageable, congratulations, you'll be paying off the mortgage early when the dollar hyperinflates. If you don't own a house, congratulations, housing should be dirt cheap in a few more years. And, because we are approaching the long-awaited stock market crash (yes, I was very early and have learned the hard way just how long the market can stay irrational)... well, gold and silver will get knocked down a peg as well. Which is to say, they'll be on sale! For cheap! And the precious metals are a safer way to accumulate savings than by depending on the dollar-- whose fate, as with every other fiat currency, is sealed.
The chart (stolen from a Casey Research article) shows how many mortgages re-set to a new payment, usually higher. With the sub-prime fiasco, people often had low initial interest rates, a lot like the teaser rate on a new credit card. Once the interest rate reset to a higher level, the payment increased and people defaulted in droves.Option ARMs are even worse, since they allow people to (for example) pay only the interest and none of the principal for the first X years. Or, in some cases, people paid even less than that, and the total amount of the loan was actually growing over time because they weren't even keeping up with the interest. Many of these folks will be doubly screwed when the "teaser" period expires and they have to begin making normal payments. Not only will they be typical principal + interest payments, but the interest will be calculated at a higher rate. Defaults galore!
Also, prime mortgages are defaulting these days due to job losses, which was not the case when the sub-prime debacle began.
We have a long way to fall in housing, even now. If you own a house on a fixed-rate mortgage and the payments are manageable, congratulations, you'll be paying off the mortgage early when the dollar hyperinflates. If you don't own a house, congratulations, housing should be dirt cheap in a few more years. And, because we are approaching the long-awaited stock market crash (yes, I was very early and have learned the hard way just how long the market can stay irrational)... well, gold and silver will get knocked down a peg as well. Which is to say, they'll be on sale! For cheap! And the precious metals are a safer way to accumulate savings than by depending on the dollar-- whose fate, as with every other fiat currency, is sealed.
Wednesday, December 9, 2009
Collapsing tax revenues
The suits can go on CNBC and C-SPAN and tell whatever lies they want, finagle the unemployment numbers or claim ridiculous corporate earnings figures. But in the end we can see what is happening by looking at tax revenues. The government manages to get a cut of virtually all economic activity, so if their "cut" is shrinking rapidly then you know the GDP is too. Never mind what lunatic estimates they pull out of their hat. Follow the money, look at the taxes.
Zero Hedge informs us, in Collapse in Tax Withholdings Refutes Improvements in Either Unemployment or Corporate Profitability, that withholdings from employees' wages were down almost 8% last month as compared with the same month a year ago. These are the Social Security and Medicare withholdings, mostly SS. And the SS tax applies only to the first $107,000 a person earns per year. So if the rich bankers have lesser bonuses this year (ha! not likely!) it wouldn't show up in this (much). This is mostly the middle and working class who are seeing a decline in total wages.
Furthermore, corporations must withhold a portion of their earnings to be paid in taxes, and these withholdings are down (get this) 64% compared to last year. Holy cow!! Remind me why the stock market has rallied massively since March?
Moreover, Mish has been watching state tax revenues fall. State and county sales tax revenues in New York were down over 8 percent. In Georgia they were down 16%; in Texas, 12.5%. Iowa's tax revenues missed their government's predictions by over 7%, while in California they missed by over 5%. Revenues in Kentucky were down almost 10% and in Indiana they were off 14%. You get the idea.
Many states have laws saying they must balance the budget. With plunging revenues this must mean they lay off workers. Incidentally, education was one of the only job sectors to show growth in the last B(L)S employment report. If that was ever true -- which is doubtful -- it certainly is not a sustainable trend, since state and local taxes pay teacher's salaries.
In Illinois some state colleges are not receiving promised payments from the state government:
In New Jersey, payrolls are also in jeopardy:
Zero Hedge summarizes it this way:
On the plus side, lottery and liquor sale revenues are up.
Zero Hedge informs us, in Collapse in Tax Withholdings Refutes Improvements in Either Unemployment or Corporate Profitability, that withholdings from employees' wages were down almost 8% last month as compared with the same month a year ago. These are the Social Security and Medicare withholdings, mostly SS. And the SS tax applies only to the first $107,000 a person earns per year. So if the rich bankers have lesser bonuses this year (ha! not likely!) it wouldn't show up in this (much). This is mostly the middle and working class who are seeing a decline in total wages.
Furthermore, corporations must withhold a portion of their earnings to be paid in taxes, and these withholdings are down (get this) 64% compared to last year. Holy cow!! Remind me why the stock market has rallied massively since March?
Moreover, Mish has been watching state tax revenues fall. State and county sales tax revenues in New York were down over 8 percent. In Georgia they were down 16%; in Texas, 12.5%. Iowa's tax revenues missed their government's predictions by over 7%, while in California they missed by over 5%. Revenues in Kentucky were down almost 10% and in Indiana they were off 14%. You get the idea.
Many states have laws saying they must balance the budget. With plunging revenues this must mean they lay off workers. Incidentally, education was one of the only job sectors to show growth in the last B(L)S employment report. If that was ever true -- which is doubtful -- it certainly is not a sustainable trend, since state and local taxes pay teacher's salaries.
In Illinois some state colleges are not receiving promised payments from the state government:
"We have run our entire system for nearly a half a year with no payments from the state," Poshard said. But if the state doesn't kick in with its payments -- which comprise approximately 60 percent of university budgets -- the university will run out of money to make its payroll by December.
In New Jersey, payrolls are also in jeopardy:
"Things are probably worse than most people believe," state Sen. Mike Doherty told me the other day. "It’s questionable if we’ll even be able to meet payroll in a few weeks."
Zero Hedge summarizes it this way:
Hopefully the administration by now has realized that unless it wants uprisings (either metaphoric or literal ones) it has to tackle the state situation. As today's Census Bureau update points out... total state revenues dropped by 16% to $1.678 trillion, even as total expenses increased by 6.2% to $1.736 trillion.
On the plus side, lottery and liquor sale revenues are up.
Monday, December 7, 2009
Interview on hyperinflation
If you follow economics at all, you're probably familiar with the Shadow Stats website, where economist John Williams presents the real (or closer to real) econ data. Basically he just calculates things the way we used to calculate them, before successive administrations started finagling the numbers. Williams is widely trusted and respected.
In an interview this past weekend on King World News he laid out, in his usual calm way, his estimate that the United States could face hyperinflation within 1 to 3 years:
Back in the summer of 2008 Williams issued a now-famous Special Report on Hyperinflation where he predicted it would set in between 2010 and 2018. So he's revised the timeline in the belief that dollar collapse will come sooner than he previously thought, due to the Fed's massive money printing in the past year. The interview is excellent and worth downloading.
To clarify, since hyperinflation has no agreed-upon, set definition, Williams' definition is when the largest circulating bill becomes more functional as toilet paper than as currency. This would be the $100 bill in our case... made worthless. Sometime in the 2010-2012 period.
And this, I should mention, agrees with reports from Lindsey Williams. Put on your tinfoil hat for a minute and lend me your ear. Williams is a minister who happened to spend quality time with a few elites in the early 70s, while working on Alaskan oil pipelines. (Yes, it's weird-- they hired him as a chaplain for their employees.) And he's being used by one of these very elite guys (think Bilderberg) to pass along leaked information. Back in spring 2008 Williams' source told him that oil -- then well above $100 / barrel and headed ultimately for almost $150 -- would crash to below $50 within a year. Williams went on radio to pass this along, and I had a very clear response to this, which was: "Bullshit!" But since Williams was right on that (and apparently on a number of past predictions), I feel I should listen to him with half an ear. His source recently told him that the dollar collapse timeline had been delayed by the elites because they were given so many trillions of dollars by the Fed and US government -- more trillions, apparently, than they had hoped for in their wildest dreams -- and it was taking them some time to convert all that paper into things of real value. So, instead of the dollar being in its death spiral already, it has been held up to give the uber-rich time to exit their dollar positions. This will not last much longer, however, as Williams' source said the dollar would be toast within 2 years. Take it for whatever it's worth-- it's just interesting that the timeline is similar.
Safest way to think about it is that 2010 is the last year of the dollar. For those of you with no money or assets, well hey, you won't have any wealth to evaporate the way middle class 401k's will. And those student loans? Ha! You'll be paying them off with pocket change. If you have very little to spare, concentrate on food... stockpiling it or moving closer to it. I wouldn't want to live in Phoenix, that's all I'm sayin'.
In an interview this past weekend on King World News he laid out, in his usual calm way, his estimate that the United States could face hyperinflation within 1 to 3 years:
In this interview John discusses looming hyperinflation, staggering unemployment, the reality of the US economy, the Fed’s inability to stimulate the economy, consumer’s inability to spend, the coming collapse of the US Dollar, how listeners need to prepare themselves for this crisis, the Fed’s debasement of the Dollar, an intensifying great depression, disappearance of cash as we know it and more.
Back in the summer of 2008 Williams issued a now-famous Special Report on Hyperinflation where he predicted it would set in between 2010 and 2018. So he's revised the timeline in the belief that dollar collapse will come sooner than he previously thought, due to the Fed's massive money printing in the past year. The interview is excellent and worth downloading.
To clarify, since hyperinflation has no agreed-upon, set definition, Williams' definition is when the largest circulating bill becomes more functional as toilet paper than as currency. This would be the $100 bill in our case... made worthless. Sometime in the 2010-2012 period.
And this, I should mention, agrees with reports from Lindsey Williams. Put on your tinfoil hat for a minute and lend me your ear. Williams is a minister who happened to spend quality time with a few elites in the early 70s, while working on Alaskan oil pipelines. (Yes, it's weird-- they hired him as a chaplain for their employees.) And he's being used by one of these very elite guys (think Bilderberg) to pass along leaked information. Back in spring 2008 Williams' source told him that oil -- then well above $100 / barrel and headed ultimately for almost $150 -- would crash to below $50 within a year. Williams went on radio to pass this along, and I had a very clear response to this, which was: "Bullshit!" But since Williams was right on that (and apparently on a number of past predictions), I feel I should listen to him with half an ear. His source recently told him that the dollar collapse timeline had been delayed by the elites because they were given so many trillions of dollars by the Fed and US government -- more trillions, apparently, than they had hoped for in their wildest dreams -- and it was taking them some time to convert all that paper into things of real value. So, instead of the dollar being in its death spiral already, it has been held up to give the uber-rich time to exit their dollar positions. This will not last much longer, however, as Williams' source said the dollar would be toast within 2 years. Take it for whatever it's worth-- it's just interesting that the timeline is similar.
Safest way to think about it is that 2010 is the last year of the dollar. For those of you with no money or assets, well hey, you won't have any wealth to evaporate the way middle class 401k's will. And those student loans? Ha! You'll be paying them off with pocket change. If you have very little to spare, concentrate on food... stockpiling it or moving closer to it. I wouldn't want to live in Phoenix, that's all I'm sayin'.
Thursday, December 3, 2009
No jobs, no recovery
In an interview I heard today, the excellent Catherine Austin Fitts talked about how she knew many years ago, as did others, that GATT and NAFTA would permanently eliminate millions of American jobs, resulting in high "structural" (not fixable) unemployment. Her fears, obviously, have been confirmed. Manufacturing and other means of production have been gutted.
Mish reported yesterday that 24 states are having to borrow money to meet unemployment benefits payments. North Carolina has so far borrowed an amount equal to 21% of its annual budget.
States will be further hit when the health care legislation passes, as Medicaid costs (paid by states) will increase, without commensurate increases in federal aid. And at least 10 states are already in very serious trouble:
State and local governments have total budget shortfalls of around half a trillion dollars for this fiscal year. And states and local governments cannot print their own money, which means they'll have to beg for aid from the feds. Yet even if the feds come through with major bailouts, states will still be forced to cut expenses dramatically. Goldman traders may not have to give up their bonuses, but you can bet your local school will be giving up its teacher's aides. Have you ever seen the IMF come in to give "aid" to an impoverished nation? It demands as much austerity as it thinks the people can stand without it causing a revolution. And if there's anything useful in the country, any natural resources, those are sold off to somebody else. That's the Washington model for you. So if California needs to be bailed out, so be it, but there will be as many kids in a classroom as they can physically pack in. The homeless shelters will close, the potholes will never be filled, and the forest fires can consume as many homes or hamlets as may be. Everything will be cut to the bone, including payrolls.
In a long and detailed post, Mish made some predictions for the unemployment rate over the next several years. His conclusion is enough to make you weep.
His "generous assumptions" will not be met, of course; the reality will be worse than that. We'll have this level of unemployment for another decade, in other words. At least this level. Next year is sure to be higher.
When people can no longer borrow, they must be able to earn money if we're to have a functioning economy. Without jobs the deflation will worsen, because the Free Money Fiesta over at the Federal Reserve does not include you and me. It doesn't even matter what happens to the dollar. Inflation or no inflation, we will still have deflation in real terms. Weimar Germany had absolutely terrible deflation when measured in real terms (i.e. if you convert all sales into gold gram equivalents)-- they had more than a 90% fall in gold-denominated GDP. In fact, the currency failure (hyperinflation) was a huge factor in causing the disruption and collapse of commerce. If the dollar collapses it will only exacerbate the real life economic slowdown that we normally think of as "deflationary."
It isn't as if nobody has any ideas about how to ameliorate this economic disaster we're headed into. Webster Tarpley has suggested a 1% tax on financial transactions (known as the Tobin Tax, which also means death to Goldman Sachs' beloved high-frequency trading). He's also suggested 0% interest loans to production and manufacturing, and real stimulus along the lines of the Tennessee Valley Authority, including high-speed rail lines, local public transportation, and nuclear power. Bob Chapman has suggested using tariffs to force a revitalization of domestic production. Catherine Austin Fitts advocates local business and local banking, or in other words, decentralized production.
Basically we need to reverse globalization and start making things where we live. What we produce translates into our communal wealth; production is wealth. I suppose the elites on Wall Street don't care for this idea since they themselves produce nothing at all.
Mish reported yesterday that 24 states are having to borrow money to meet unemployment benefits payments. North Carolina has so far borrowed an amount equal to 21% of its annual budget.
It gets worse. The debt is still rising. The problem is that with about 500,000 people out of work, the state has more unemployment claims than it can pay. So it has been borrowing from the federal government since February, sometimes as much as $20 million a day.
States will be further hit when the health care legislation passes, as Medicaid costs (paid by states) will increase, without commensurate increases in federal aid. And at least 10 states are already in very serious trouble:
A study released Wednesday warned that at least nine other big states [besides California] are also barreling toward economic disaster, raising the likelihood of higher taxes, more government layoffs and deep cuts in services.
The report by the Pew Center on the States found that Arizona, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin are also at grave risk....
The 10 states account for more than one-third of the nation's population and economic output, according to the report.
State and local governments have total budget shortfalls of around half a trillion dollars for this fiscal year. And states and local governments cannot print their own money, which means they'll have to beg for aid from the feds. Yet even if the feds come through with major bailouts, states will still be forced to cut expenses dramatically. Goldman traders may not have to give up their bonuses, but you can bet your local school will be giving up its teacher's aides. Have you ever seen the IMF come in to give "aid" to an impoverished nation? It demands as much austerity as it thinks the people can stand without it causing a revolution. And if there's anything useful in the country, any natural resources, those are sold off to somebody else. That's the Washington model for you. So if California needs to be bailed out, so be it, but there will be as many kids in a classroom as they can physically pack in. The homeless shelters will close, the potholes will never be filled, and the forest fires can consume as many homes or hamlets as may be. Everything will be cut to the bone, including payrolls.
In a long and detailed post, Mish made some predictions for the unemployment rate over the next several years. His conclusion is enough to make you weep.
Yet, in spite of all those generous assumptions, no double dip recession, no second recession, high rates of job growth and falling participation rates all the way through 2020, and unemployment peaking at 11.6% not 13%, the best I can do is suggest the unemployment rate will be over 10% all the way through 2015 and never dip below 8% all the way out through the end of 2020.
His "generous assumptions" will not be met, of course; the reality will be worse than that. We'll have this level of unemployment for another decade, in other words. At least this level. Next year is sure to be higher.
When people can no longer borrow, they must be able to earn money if we're to have a functioning economy. Without jobs the deflation will worsen, because the Free Money Fiesta over at the Federal Reserve does not include you and me. It doesn't even matter what happens to the dollar. Inflation or no inflation, we will still have deflation in real terms. Weimar Germany had absolutely terrible deflation when measured in real terms (i.e. if you convert all sales into gold gram equivalents)-- they had more than a 90% fall in gold-denominated GDP. In fact, the currency failure (hyperinflation) was a huge factor in causing the disruption and collapse of commerce. If the dollar collapses it will only exacerbate the real life economic slowdown that we normally think of as "deflationary."
It isn't as if nobody has any ideas about how to ameliorate this economic disaster we're headed into. Webster Tarpley has suggested a 1% tax on financial transactions (known as the Tobin Tax, which also means death to Goldman Sachs' beloved high-frequency trading). He's also suggested 0% interest loans to production and manufacturing, and real stimulus along the lines of the Tennessee Valley Authority, including high-speed rail lines, local public transportation, and nuclear power. Bob Chapman has suggested using tariffs to force a revitalization of domestic production. Catherine Austin Fitts advocates local business and local banking, or in other words, decentralized production.
Basically we need to reverse globalization and start making things where we live. What we produce translates into our communal wealth; production is wealth. I suppose the elites on Wall Street don't care for this idea since they themselves produce nothing at all.
Wednesday, December 2, 2009
We're not going back to normal
I still hear people talk about the economy or their financial situation as if this were just a recession, and everything is now headed back toward normal. Friends are opening a new business, other friends are waiting until their house returns to its old value before selling, others blithely assume that their income will be higher in a few years. (Perhaps it will be, but not in real purchasing power.)
And when I hear people talk like this, even when they are speaking directly to me, I don't say anything about my views on the US economic situation. I don't point out that one in 5 American workers can't find a job and that most of the missing jobs are gone until after the dollar collapses, a situation known euphemistically as "structural unemployment." The word "structural" here means it's built into the system. If you offshore all production and manufacturing, "structural" or permanent unemployment is what you get. No fixing that until we hyperinflate the dollar into oblivion and we are forced to produce things domestically because we can no longer afford imports.
And no point mentioning that one in 4 children relies on food stamps to get enough to eat, suggesting we are a developing nation. Or that all the campgrounds within 100 miles of Los Angeles are filled with homeless people. If it's not on television it might as well not exist.
And I don't mention that next year we will have to borrow around $1.5 trillion to make up the budget shortfall, plus we'll have to "roll over" or re-borrow another $1.9 trillion because a slew of short-term loans must be repaid, and naturally, we don't have the money. If numbers or math are involved, nobody wants to hear it. But that's $2.4 trillion we'll need to borrow next year, which is godawful. That's over $9 billion we'll expect the rest of the world to give us every single business day. And if they don't? If they refuse? Then we print the money to cover our bills, and erode our currency, and thus erode the savings and assets of the middle class. Or, if we don't print it, we must make drastic cuts in government, and that would be very painful to the American people because government expenditures make up 36% of our GDP.
Almost the entirety of the GDP is consumer spending and government spending -- which is, in fact, normal for all nations -- but the problem here is that consumers are spending borrowed money and so is the government. Only... the borrowing is gradually coming to a halt as credit dries up.
We have two choices.
The first is, we simply allow the credit and loans to disappear, we let the "liquidity" dry up, and suffer the consequences. This results in economic collapse. Forget the term "deflation," as that does not get the idea across. The economy collapses. Commerce largely evaporates. The US defaults on its sovereign debt, as do virtually all US states and municipalities as well as many corporations.
The second is, we print enough brand-new money to keep the "liquidity" flowing, but that money has a rapidly shrinking real value. I mean, you can't just print new money out of nothing and expect it to maintain the same value as the old money. The value has to shrink. Which means prices have to go up in dollar terms. If this process gets out of control (which historically is likely) then the dollar collapses until it has no value at all, until it is useful only as toilet paper or kindling. Which means commerce largely evaporates and businesses close because nobody can deal with the lack of viable currency. This is probably worse than the first scenario, but it's what the US government will attempt. Politicians always hope -- and perhaps truly believe -- that they can maneuver just a bit of inflation, enough to ease the debt burdens and keep commerce alive, but not so much that they ruin the currency.
Either route is disastrous. But even if I said all this to most of my friends and acquaintances, almost none of them would do a thing to make preparations for such miserable scenarios. It's one thing to build a bomb shelter against nuclear war; we've never had a nuclear war. Or to buy potassium iodate tablets; we've never had a dirty bomb attack. Or to buy batteries and food and water before y2k; that was similarly unprecedented. Hyperinflation, however, is not only common, it is always and without exception the fate of a fiat currency. It is not a novel catastrophe. This is a routine human experience, and it's a hell of a bad experience. During the currency crisis in Argentina, middle class men would dress in suits to go out looking for work in the mornings, but by afternoon would be seen in alleys picking through trash for something to eat. Not only has this happened in many other nations, it has happened twice in our own nation.
But Americans, I think, are addicted to a feeling of normalcy. We like to be cheerful and positive, for one thing, and so we reject gloomy predictions. But we especially like to turn on the TV or go to the mall or the movies and be bathed in the sense that all is well, the world is still functioning, and the US is still the greatest nation on Earth. And that is why nobody will have any cash when the banks announce withdrawal limits or outright closures; that is why nobody will have food when distribution begins to break down; that is why nobody will have alternative forms of money such as gold, silver, or copper coins when the paper stuff begins to go haywire.
And Americans don't care a whit about history. We seem to believe that we have achieved the permanent utopia (with slight fluctuations) of the Technology Age, and that calamity is virtually impossible. The Experts know how to keep us safe, but in the unlikely event of a crisis, The Experts will take care of us. You know, like they did for the people of New Orleans.
We're clinging to the old normal as best we can, but it simply can't last.
And when I hear people talk like this, even when they are speaking directly to me, I don't say anything about my views on the US economic situation. I don't point out that one in 5 American workers can't find a job and that most of the missing jobs are gone until after the dollar collapses, a situation known euphemistically as "structural unemployment." The word "structural" here means it's built into the system. If you offshore all production and manufacturing, "structural" or permanent unemployment is what you get. No fixing that until we hyperinflate the dollar into oblivion and we are forced to produce things domestically because we can no longer afford imports.
And no point mentioning that one in 4 children relies on food stamps to get enough to eat, suggesting we are a developing nation. Or that all the campgrounds within 100 miles of Los Angeles are filled with homeless people. If it's not on television it might as well not exist.
And I don't mention that next year we will have to borrow around $1.5 trillion to make up the budget shortfall, plus we'll have to "roll over" or re-borrow another $1.9 trillion because a slew of short-term loans must be repaid, and naturally, we don't have the money. If numbers or math are involved, nobody wants to hear it. But that's $2.4 trillion we'll need to borrow next year, which is godawful. That's over $9 billion we'll expect the rest of the world to give us every single business day. And if they don't? If they refuse? Then we print the money to cover our bills, and erode our currency, and thus erode the savings and assets of the middle class. Or, if we don't print it, we must make drastic cuts in government, and that would be very painful to the American people because government expenditures make up 36% of our GDP.
Almost the entirety of the GDP is consumer spending and government spending -- which is, in fact, normal for all nations -- but the problem here is that consumers are spending borrowed money and so is the government. Only... the borrowing is gradually coming to a halt as credit dries up.
We have two choices.
The first is, we simply allow the credit and loans to disappear, we let the "liquidity" dry up, and suffer the consequences. This results in economic collapse. Forget the term "deflation," as that does not get the idea across. The economy collapses. Commerce largely evaporates. The US defaults on its sovereign debt, as do virtually all US states and municipalities as well as many corporations.
The second is, we print enough brand-new money to keep the "liquidity" flowing, but that money has a rapidly shrinking real value. I mean, you can't just print new money out of nothing and expect it to maintain the same value as the old money. The value has to shrink. Which means prices have to go up in dollar terms. If this process gets out of control (which historically is likely) then the dollar collapses until it has no value at all, until it is useful only as toilet paper or kindling. Which means commerce largely evaporates and businesses close because nobody can deal with the lack of viable currency. This is probably worse than the first scenario, but it's what the US government will attempt. Politicians always hope -- and perhaps truly believe -- that they can maneuver just a bit of inflation, enough to ease the debt burdens and keep commerce alive, but not so much that they ruin the currency.
Either route is disastrous. But even if I said all this to most of my friends and acquaintances, almost none of them would do a thing to make preparations for such miserable scenarios. It's one thing to build a bomb shelter against nuclear war; we've never had a nuclear war. Or to buy potassium iodate tablets; we've never had a dirty bomb attack. Or to buy batteries and food and water before y2k; that was similarly unprecedented. Hyperinflation, however, is not only common, it is always and without exception the fate of a fiat currency. It is not a novel catastrophe. This is a routine human experience, and it's a hell of a bad experience. During the currency crisis in Argentina, middle class men would dress in suits to go out looking for work in the mornings, but by afternoon would be seen in alleys picking through trash for something to eat. Not only has this happened in many other nations, it has happened twice in our own nation.
But Americans, I think, are addicted to a feeling of normalcy. We like to be cheerful and positive, for one thing, and so we reject gloomy predictions. But we especially like to turn on the TV or go to the mall or the movies and be bathed in the sense that all is well, the world is still functioning, and the US is still the greatest nation on Earth. And that is why nobody will have any cash when the banks announce withdrawal limits or outright closures; that is why nobody will have food when distribution begins to break down; that is why nobody will have alternative forms of money such as gold, silver, or copper coins when the paper stuff begins to go haywire.
And Americans don't care a whit about history. We seem to believe that we have achieved the permanent utopia (with slight fluctuations) of the Technology Age, and that calamity is virtually impossible. The Experts know how to keep us safe, but in the unlikely event of a crisis, The Experts will take care of us. You know, like they did for the people of New Orleans.
We're clinging to the old normal as best we can, but it simply can't last.
Subscribe to:
Posts (Atom)