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.
Wait till 2011.
At this point I’m not sure what a Republican victory would bring. The GOP is still in an internal battle for control between the conservative core base and the “big tent” establishment (McCain, Steele, Graham). If the GOP wins the House in 2010 and is controlled by the big tent wing, it will fail by attempting to govern through compromise.
Governing through compromise is the road to disaster. It means the Republicans will acquiesce to the President’s agenda and therefore be blamed for its failure. Better for the Democrats to win and be accountable than for the Republicans to be willing partners in the failure.
There might be a chance if the limited government conservatives wrest power in the GOP from the big tent wing. Even if the Dems retain power in the Senate in 2010, a scrappy and vocal limited government conservative GOP house majority can apply a brake on the President’s policies. The Constitution gives the power of to raise revenue to the House as well as the power of impeachment.
Why do you think the Democrat-Marxists passed expensive Healthcare legislation?...to help usher in the new Government by collapsing the old system. Bye, bye USA, nice to have known you. Welcome USSA, Obama and Marxists take over with new ruling elite! Communist Manifesto and Fascism trumps former U.S. Constitution, and you guys thought there would be an election in 2010!
Keynesian economics NEVER works, nor has it EVER worked. Pouring massive amounts of public supported funds into more public works, designed to make government much bigger, government hiring laid off private sector workers, to create an even larger taxpayer funded liability, is in itself a guaranteed failure.
The only alternative is for government to take over private industry and force everyone to work for the government. Most all of America is now working in an 85% service based economy, in contrast to the World War 2 era, over 85% of the population worked in a production based economy and the average debt/asset ratio then, was only a small fraction of what it is today.
In addition to that, in the ‘30’s most people lived in rural areas, could grow and produce their own food and there was not a massive credit based society to deal with.
This coming new depression will set all the records.
There are few indicators of how well we are doing as a country better than the health of our trucking companies and the fleet of owner/operators. When times are good you see rest areas and truck stops full, no room for another truck. Travel right now and there’s lots of room for trucks on break.
If I had to choose a single indicator as to the health of our economy it would be the trucking industry. I can’t think of another thing that so closely follows the ups and downs of how well Americans are doing from day to day, month to month.
I am preparing, for the worst, and will not heistate to blow away any intruder trying to get tap into my supplies.
I have plenty of land to bury the bodies.
Our elected officials don't care about debt, just their ROYAL retirement and benefit package
To paraphrase one of my favorite freepers: “Shoot; shovel; and shut up.” :-)
Is Breeding-
Dopes in Chains
Can someone prove to me that's not part of the plan? Soros & Obama; the Clower & Piven Strategy....
Maybe so, but we've got a long way to go 'til we get there! It will be a very difficult 10 months until then.
Mostly, it's creeping me out.
yep, our society punishes responsible people and rewards the irresponsible. That’s the basic jist of their “stimulus”: “don’t pay your debts off, take your money and gamble it at the giant wall street casino. Oh, you wanted to invest conservatively in money markets and CDs? no no no, sorry, we’re gonna eff that up for you too by creating so much money that a money market won’t even pay interest anymore so now you don’t really have a choice but to gamble irresponsibly with the rest of America. happy speculating prole”.
That’s got a very nice ring to it!
“I don’t think I want the fascists in charge when it collapses. Remember FDR?”
Without a doubt when this thing comes down it will make the last two years look like some of our better days. The point in my musing, exploration of the possibilities is all, is that Democrap leadership now is predicated upon their promise of a “new direction” in the face of what they convinced everyone was Republican failure to the point of the financial system collapse. They are expected to make things better not worse, although many economists are saying that it is a near impossibility even if they had the right strategy, which they don’t. FDR gained power much the same way because Republicans were in power when the dodo hit the fan.
I was just imagining the real and tangible gains conservatism could make if the political situation of the Great Depression and the Great Recession were reversed especially when over 2/3 of the debt problems have to do with entitlements, things of the New Deal, the Great Society, and all the rest of the socialist garb. I can just hear modern Liberalism being eulogized for decades and deservedly so.
Put what money you have into tangible assets (food, precious metals, etc). This will give you a better chance at surviving the coming collapse better than those who put all their faith in green wrapping paper.
"The possibility of losing our form of government is a real risk under any of the alternatives. So is civil unrest and strife."
Some say there is no bloodless way back from here.
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