Posted on 04/10/2010 6:17:30 AM PDT by Rutles4Ever
The sovereign debt crisis has crossed a threshold. It’s no longer about economics. It’s about math and a complex system whose dynamics tell us there is little time to avoid catastrophe and almost no exit. Going forward, elections and policies will matter less as the debt plague takes hold and dictates hard outcomes.
It is the case that real debt cannot be repaid through any feasible combination of growth and taxes. We will soon arrive at the point where it cannot be rolled over. Debt includes contingent liabilities as well as bonds. In the U.S., this means social security, healthcare and housing obligations estimated at over $60 trillion. That does not include unfunded pension obligations of the states whose plans use fanciful 8% growth assumptions to limit contributions. Pension debt grows exponentially; a toxic brew of increased benefits, contribution shortfalls and anemic performance.
Even what we call money is debt. Paper money is a contract between citizen and government. As with any contract, it pays to read the fine print. Embossed on each U.S. bill is the phrase “Federal Reserve Note.” Give the Fed credit for full disclosure; these notes are liabilities. If the Fed’s mortgage assets were marked-to-market the Fed itself would be insolvent. In short, it’s all debt. Wealth is illusory if it involves a claim payable in dollars which are but a claim on an insolvent central bank backed only by its ability to print more debt. The situation is worse in the UK, Europe and Japan. The global financial system is a rope of sand.
If this system is illusory, how has it prospered over centuries? The answer is that for many years governments ran surpluses and at times had no debt at all. Growth was robust providing support to the tax base. Governments had the trust of bond markets to rollover maturing obligations. With some fits and starts, tangible wealth creation outpaced debt creation. And until recently paper money was backed by gold at fixed rates of exchange. Today all four legs of the table – surpluses, growth, trust and gold are gone or damaged.
There is no prospect for surpluses; nations hit the brink of disorder at the mere mention of 3% deficit-to-GDP ratios. Growth prospects are likewise dim given current policy. Obama grew spending on a feed-the-beast theory that forces taxes to rise to match spending. If Obama does not get his way, deficits will be ruinous. If he does get his way, taxes will stifle growth. You cannot tax your way to solvency in a world of low growth and compound interest.
As for market trust, go ask the Greeks. Each bond buyer has a critical threshold where he will not buy another bond. Picture bond buyers as theatre patrons. The image of someone yelling “fire” and patrons rushing out in a panic is familiar. More intriguing is the case in which just a few patrons rush out for no apparent reason. Do those remaining follow suit or stay seated? It depends on their individual thresholds. If high enough, everyone remains seated. But if some thresholds are low, those patrons leave too triggering other thresholds and so on until a cascade of exits empties the theatre.
In markets, the array of individual thresholds is immensely complex. The scale, interdependence and adaptability of market participants today are greater than ever. It would take very little to trigger a wholesale revulsion with sovereign debt.
What about gold? The view is that systems on a gold standard system cannot increase money supply as needed; of course, that’s the whole idea. Increasing money beyond the modest levels at which gold supply grows is the Keynesian remedy. But empirical evidence shows the so-called Keynesian multiplier is fractional and therefore a wealth destroyer. Another attack on gold is that there’s not enough of it to support money supply; but of course there’s always enough gold; it’s just a question of price.
The U.S. has never truly gone off the gold standard. The U.S. gold hoard today has a dollar value equal to about 20% of U.S. M1 money supply – a respectable ratio even in the heyday of the fractional gold standard. A gold price of $5,500 per ounce would comfortably support a broader U.S. money supply on a one-to-one ratio and maintain confidence in the dollar and U.S. sovereign debt.
Is there an exit? One path involves hyperinflation to destroy the real value of debt followed by redenomination and a new paper money game. The other path involves a gold backed currency at a non-deflationary price. This is a choice between denial and frank talk. Sound money leads to sound growth and the creation of real, not illusory, wealth.
James G. Rickards is a director of Omnis, Inc. and former general counsel of Long-Term Capital Management. Follow him at twitter.com/JamesGRickards.
Who will not fight hoo hoo.
Who?
Yes, and the people of Detroit are among the nation’s most easily fooled.
This all omits the solution, the old reliable solution taught for eons in Being King 101. When the debt gets too big, inflate the money. The power of compound inflation is remarkable.
By the rule of 72, at a rate of 7% inflation, today’s debt is gone in 10 years. At 10% in 7 years, at 12% in 6 years.
If gold is the benchmark at a controlled rate of 10% inflation, the gold price will be $2200 by 2017, or $2,200 by 2016 at 12%
The catch is control. At 20% gold will be at $2,200 in 2013.
They planners have a predetermined tolerable planned rate. That is secret and will not be revealed
......“Another attack on gold is that there’s not enough of it to support money supply; but of course there’s always enough gold; it’s just a question of price......
That is the crux of the matter and bears repeating.
“Another attack on gold is that there’s not enough of it to support money supply; but of course there’s always enough gold; it’s just a question of price.
“Another attack on gold is that there’s not enough of it to support money supply; but of course there’s always enough gold; it’s just a question of price.
“Another attack on gold is that there’s not enough of it to support money supply; but of course there’s always enough gold; it’s just a question of price.
But you will run out of stuff like wood and you need to exchange something for something to get new stuff, unless you want to live as something just above subsistence farmer or a hunter-gatherer lifestyle. Gold is useful as a medium of exchange for a wide variety of reasons.
“US dollars” assumes that there exists a political entity called “The United States of America” that effectively backs up the value of said dollar. There is no reason to believe that will always be the case. For example, why isn’t there much trade in things like CSA dollars? How much trade today is done in things like French Francs?
So someday the checkout at Krogers will have a little scale measuring gold dust according to the current rate? Yeah, maybe.
The HUGE problem of the gold standard is: There is only so much gold. It's like a six year old child only has a certain amount of blood. And will never get any more regardless of how much they grow. Economies would die instantly on the gold standard. It would, however, prevent inflation - and there certainly will never be a "gold bubble".
Do remember that it was a FEDERAL CRIME for Americans to own gold. Obama would do that in a heartbeat. Already plans for it, I'd bet. Has precedent, after all...Take it away at the point of a gun. Get caught with it and go to jail. Resistance is futile. CommieMedia show trials and all. Sounds like a plan.
Will that always exist? No, but then neither will mankind...
It is hard to say when, if ever, it will happen.
Hopefully it will never happen, but as we know, with Obummer all (dumb) things are possible.
They have been itching to do it for years. The deficit is just the excuse they need in order to justify it.
It will probably be one of those things that they tuck inside a much bigger bill... like they did with the student loan industry takeover stuffed inside the health care bill.
All I can say is talk to a professional about it. If that professional is not aware that this has been proposed and is being given serious consideration, then they need to bring themselves up to speed on it very quickly.
Good for you that you have savings! I wish you the best in being able to protect and preserve it. :)
Exactly who are you responding to here? I'm not exactly sure where you gathered that from my previous remarks. Just pointing out that a loss of confidence in the dollar or simply a collapse of the political entity backing it is not off the table. If you study history, huge debt burdens relative to productivity have killed powerful empires in the past and will continue to do so in the future. We are not exempt from the laws of history.
Something is very odd about these graphs. If they are right the PIIGS have the best prospects!!
Seriously. Did you post that with a straight face? Capitalism doesn't punish people who create jobs by taxing them into insolvency. You must think it's 1986.
A capitalist system half owned by the central government is defined as something else. As someone who works on Wall Street, I can assure you that venture capitalism is on life support. Without seeders, the circuit comes to an abrupt halt at 1600 Pennsylvania Avenue.
The buying and selling of private real estate has gone out of private banks and into the federal government. You think Geithner/Obama are going to let the commercial real estate market go up and smoke, too? Hell no. They're going to own that, too. If the private sector can't even buy and sell real estate without government permission (i.e., selling back the mortgage securities, which, by the way, no one wants to buy back), it's impossible to call this trash heap capitalism.
There are 4 “B”s to adequate preparation. Beans, Bullets, Bandaids and Bullion. If you are missing any of these then contemplate if you are truly prepared for the upheaval that is coming.
It isn't going to. You'll be worm food, then worm leavings, for centuries, first.
Well, you can always burn paper. Even wear it, I suppose.
Eating it would be problematic.
Well the United States will disappear at some point. Probably not tomorrow, but your psychotic jingoism aside, unsustainable public debt has never boded well for the political stability of any nation in history. But I’m guessing you think the director of the CBO is anti-American idiot for pointing out the unsustainability of our current debt situation.
Would these be the same Gen X and Gen Y who voted en mass for The One???
I'm not sure this is true. The world is teetering on the brink of massive default because the bond houses sold this crap to every government on Earth. If one borrows, its brilliant. If everyone borrows it's not... Look at California, many other states, Greece, etc... all in way above sustainable cash flow levels. All threatening to default and all a burden to future growth. Too much debt is NOT a justified government expenditure any more than drinking 10 bottles of a good 1986 Cabernet in any one sitting is a good idea. There is TOO MUCH debt in the system and it is possible to destroy the system with too much debt. Watch Greece and others who have defaulted...
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