Posted on 12/31/2009 11:37:11 PM PST by 2ndDivisionVet
The year 2010 is likely to be the pivotal year where pundits stop referring to the recession and begin openly talking about a depression.
Our economic problem is rather simple to describe: There is too much debt relative to income and/or wealth. Below is a single graph that depicts the condition of our economy. It shows total debt of the U.S. as a percentage of GDP from 1870 forward. The debt figure includes all private and public debt. It does not include liabilities associated with unfunded government mandates like Social Security and Medicare. (Note: according to the U.S. trustees of these funds, the present value of the liabilities is about $106 trillion. Including them would boost the ratio below to nearly 1,000%.)
(CHART AT LINK)
The amount of debt relative to GDP is staggering from a historical perspective. Several points are worth making about the graph:
The long-term "norm" for the ratio appears to be around 150%. The red lines band the "norm" at 130% and 170%, respectively.
Other than the two boom periods that commenced in the 1920s and the 1980s, the ratio never exceeded the upper band.
Each cross resulted in enormous credit-driven booms. The first ended in the Great Depression. The second will produce a similar if not bigger bust (we are merely at the beginning of this event).
The credit expansion that led to the Great Depression was not nearly as overextended as the current expansion. Peak credit occurred after the Depression began. Government spending and the shrinkage in GDP continued to drive the ratio up early in the Depression. Since this graph was published, today's ratio has grown to near 380%, about double the level when the U.S. entered the Depression.
While it appears as though current private borrowing may have peaked, funding enormous government deficits continues to drive the ratio up, as does GDP shrinkage. No economic theory rationalizes a proper "norm," yet intuitively, we know that such a number exists. Debt must not exceed some percentage of income, or else it cannot be serviced. Equivalent conceptual ratios for individuals and businesses have been used by the banking industry as lending criteria for more than a century. For various reasons, banks neglected these guidelines over the past couple of decades, contributing greatly to the credit bubble.
The government has decided that the cure for too much debt is more debt. This solution cannot work, especially when credit is already so overextended. Income and wealth cannot support present debt levels. Credit will adjust back to the mean, regardless of what the government attempts. Whether this is via orderly payment or via default, the reduction in debt is inevitable.
Ludwig von Mises addressed the limits of credit in The Theory of Money and Credit, originally published in 1912. As he expressed in later work:
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.
In 2009, it was not possible to finance U.S. capital requirements through conventional markets. Only via the Fed's explicit (and surreptitious) Quantitative Easing was the government able to fund its 2009 deficits. Discussing 2009, Zerohedge stated:
There was a huge credit and liquidity crunch, and then there was Quantitative Easing. The last is the Fed's equivalent of band-aiding a zombied and ponzied corpse, better known as the US economy. It worked for a while, but now the zombie is about to go back into critical, followed by comatose, and lastly, undead (and 401(k)-depleting) condition.
Zerohedge estimated that demand (financing) for U.S. fixed-income securities must increase elevenfold in order to fund capital needs in 2010. Continued shrinkage in foreign participation in U.S. fixed-income markets makes that increase impossible.
There are only three possibilities with respect to meeting 2010 funding needs:
The Fed continues its QE beyond their planned cessation in March 2010.
The Fed raises interest rates to levels that would attract the capital necessary to fund government operations via conventional credit markets.
No Fed action is taken. That would cause the government to default on some of its obligations.
None of these alternatives is attractive. The unpalatable choices arise from prior Fed and governmental policies. To avoid recessions over the past fifty years, the government abused and then finally exhausted all reasonable options. After years of mismanagement, the government is in a quandary of its own making from which there is no escape.
All alternatives will be very painful, and none offer the possibility of a traditional recovery. No matter what alternative is chosen, the country cannot avoid a depression. At this point, "do no further harm" should guide policy.
Of the three alternatives, what is best economically is worst politically. This natural conflict between good economics and good politics is not unusual. Economically, the country would be harmed least by implementing alternative 2. From a political standpoint, alternatives 2 and 3 are probably unacceptable. Thus, it is likely that alternative 1 will be tried (again!). It is precisely the continual overuse of this alternative that has led to the current sad state.
Alternative 1 cannot work. It will not avoid a depression. Worse, it will likely result in hyperinflation. Thus, we likely end up with the worst of all worlds. With hyperinflation, money will cease to be a medium of exchange. Markets will cease to work, except on a barter basis. The middle class will be wiped out. Their savings will become worthless along with the dollar. The end will be as Mises warned so many years ago.
The possibility of losing our form of government is a real risk under any of the alternatives. So is civil unrest and strife. All are probably more likely under alternative 1 because of the corrosive effects of high inflation combined with a depression.
Beware the turn of the calendar. Things are going to get interesting, and probably very quickly.
Maybe, but November will be sweet!
Well this is cheery.
The US Government does not care about debt.
“There is too much debt relative to income and/or wealth”
I wrote a letter to Sen. Voinovich about this. In the letter I suggested that going further into debt as a nation would only exacerbate the problem of having an economy that was stalled because of too much public and private debt. I explained that “giving” money to bankers so that they may lend it to Americans who are already encumbered by too much debt is like trying to save a drowning man by tossing him a cinder block. I then went on to suggest a better course of action: provide economic incentives to Americans to get out of debt i.e. allow them to draw from an IRA penalty free if they use the money to pay off qualified debts (cars, houses, credit cards) and then go so far as to offer tax breaks to Americans who pay off their debts. Alas, the government felt it was better to provide incentives to Americans to go further into debt. Voinovich never even wrote me back.
Bookmarked
How's it werkin' fer U????
What irritates me the most about all of this? I’ve always tried to live within my means and take care of my family. We’ve always tried to avoid debt. When I took a mortgage, I scrimped and saved to pay it off in less than half the normal loan period. Some people told me I was a fool to do so. They said it was better to invest the money and make a greater return. I, on the other hand, believe debt is something that should always be paid down first.
I’m not bragging here. In fact, I continue to penalize my own family by behaving responsibly. There are no government handouts waiting for me, but I’m given the “privilege” of paying for everyone else who hasn’t tried to hold up their end in this shared thing Mark Levin likes to call the civil society.
So, it irritates me that I will likely lose everything I have tried to build over decades of work. When hyperinflation or depression or both hit, those who have tried to do what is right will be taken right along with those who have spent decades with their hands out for more and more debt, whether through government wealth redistribution or excessive private debt.
If and when the takers start rioting (when they can’t get things handed to them any longer), we’ll all be caught up in the mess together. Worse, we could very well see the end of what so many brave patriots sacrificed to create for us!
I put my faith in God that He’ll take care of me and mine, but it doesn’t make it any easier to see this nation torn apart by increasingly immoral citizens. The only thing that mitigates that somewhat in my mind is the knowledge that there are other God-fearing and/or moral FReepers/conservatives left. There are still people who believe in liberty but more importantly, have the self-discipline to behave morally and restrain themselves for the betterment of all of us.
Liberty cannot survive without morality!
I think this article says something about it being too late to fix it. The debt we have is what we’ve already spent... water under the bridge and its just a matter of time before the chickens come home to roost. In that case whatever happens in November will not matter.
This is just some musing, but perhaps it might be better if Democraps win. Just like they set up the whole CRA thing and messed around with Fannie and Freddie, etc and managed to leave Republicans holding the bag when the whole thing came down in flames, it might be better when the debt chickens come home to roost that they are at the helm and take the full brunt of it after spending hand over fist, dabbling in fascism and all the rest of their progressiveness. It might just be the way to wake the rest of America up and defeat Liberalism once and for all.
bump
Hmmmm - some pretty steep sections of the curve occur during the years of two “conservative” Republican Presidents (Reagan, 81-89, and Bush 2, 01-09).
Well hell, then let's pass some "Health Care Reform"
This administration is all about marching us to a socialist state, it is a coup with out firing a shot. We have to do all we can to stop them.
Happy Obama New Year - More misery.
2 trucking companies just went out of business.
Because people are buying less, fewer things are being shipped.
The whole “recovery” lie is nothing but a sham.
One of the largest trucking company YRC. Yellow-Roadway is on the verge itself.
Things are going to get really bad. Meanwhile the politicians and media will be touting “recovery” and “stimulus II”
I don’t think I want the fascists in charge when it collapses. Remember FDR?
Considering the trends in immigration and voter registration, I can't think of any "good" election outcome other than the Republicans winning and trying to block Obama's final two years. Whatever they do, I don't think it's going to help him, whereas Obama's continuing to march to the left won't be hindered by Democrat wins--if Dodd and Frank aren't feeling any heat NOW over their criminal acts, a renewal of their party's control will merely encourage them to do worse.
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