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.
Easy to understand this man’s reasoning
The only other thing it could conceivably be useful for would be waterfowl shot. It's half again denser than lead, soft, and totally inert. You could kill geese with 2.75" shells.
Not really. The US has long been a believer in having bases everywhere. But the price of this immense network has become unsustainable.
According to the Defense Department’s annual “Base Structure Report” for fiscal year 2003, which itemizes foreign and domestic U.S. military real estate, the Pentagon currently owns or rents 702 overseas bases in about 130 countries and HAS another 6,000 bases in the United States and its territories.
The military high command deploys to our overseas bases some 253,288 uniformed personnel, plus an equal number of dependents and Department of Defense civilian officials, and employs an additional 44,446 locally hired foreigners. The Pentagon claims that these bases contain 44,870 barracks, hangars, hospitals, and other buildings, which it owns, and that it leases 4,844 more.
These numbers, although staggeringly large, do not begin to cover all the actual bases we occupy globally. The 2003 Base Status Report fails to mention, for instance, any garrisons in Kosovo — even though it is the site of the huge Camp Bondsteel, built in 1999 and maintained ever since by Kellogg, Brown & Root.
The Report similarly omits bases in Afghanistan, Iraq, Israel, Kuwait, Kyrgyzstan, Qatar, and Uzbekistan, although the U.S. military has established colossal base structures throughout the so-called arc of instability in the two-and-a-half years since 9/11.
For Okinawa, the southernmost island of Japan, which has been an American military colony for the past 58 years, the report deceptively lists only one Marine base, Camp Butler, when in fact Okinawa “hosts” ten Marine Corps bases, including Marine Corps Air Station Futenma occupying 1,186 acres in the center of that modest-sized island’s second largest city. (Manhattan’s Central Park, by contrast, is only 843 acres.)
The Pentagon similarly fails to note all of the $5-billion-worth of military and espionage installations in Britain, which have long been conveniently disguised as Royal Air Force bases. If there were an honest count, the actual size of our military installations would probably top 1,000 different bases in other people’s countries, but no one — possibly not even the Pentagon — knows the exact number for sure, although it has been distinctly on the rise in recent years.
"Ron Paul is right"?
Which is why I continue to buy SLV and "junk silver", just old good-condition US coins from back when they were 90% silver; and so forth. I've always kinda liked the white metal better than gold, anyway.
No, Krogers doesn’t have to accept dollars for their merchandise. That is a misunderstanding of legal tender laws. It may benefit Krogers of course, but that’s another issue.
The peoples wanted pah. Obama promise ‘em pah fum his stash. Ah likes pah too. Wheay’s MAH pah?
One day, the cartridge may become the coin of the realm.
Not entirely. But as with the military base closings in the US some years ago, and the gradual withdrawl of bases from Germany, the US needs to reach agreements with lots of countries to turn many of our bases back to local control, only keeping contingencies for them to be reoccupied as needed in the future.
In other cases, bases are kept for very unimportant reasons, and could be closed down with ease.
But unlike Ron Paul’s isolationism, I will grant that there are some critical mission bases that the US needs for strategic purposes.
One I am truly surprised we got rid of was Subic Bay in the Philippines, because there are only a few deep water ports in the Pacific able to support our fleet. The only two complete ports are at Bremerton and San Diego. But Subic Bay was pretty close.
We also need Diego Garcia, Pusan, possibly Okinawa and other Japan bases, but the Japanese are losing favor with those over the years, and a couple dozen more bases hither and yon.
It is a major project to shut down bases, and also expensive, so we shouldn’t delay in getting started. The bottom line is that the Pentagon needs those cost savings as soon as possible, because things are not going to get any easier in the future.
All of my friends have gone for their ccw and have bought ar15 s this year.
Gold only has value because people think it valuable... just like paper money. Gold does nothing to help a person survive, or for that matter... help anyone do anything.
It’s just a symbol that people value. Just like in a drought, that symbol is water... or in a famine, food.
“You don’t eat the gold anymore than you would eat a $5 bill. It’s what the gold will BUY.”
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So, if I want some “change” back from a bar of gold when I buy a loaf of bread, seems silver would be better than gold.
I thought I heard the Democrat welfare staters in Detroit say that Ubama was going to give them free money “from his stash”? Ubama can make everything good by using money from his stash. There’s no need to worry.
When do you think this will happen?
With amnesty, cap and trade on the agenda for this year, do you think it will be 2010? 2011? or after 2012?
I have wanted to move the 401K, but my husband has been working for the same company since college. In fact, we have been told we can’t touch it at all. And hubby is uncomfortable with the loan idea. I would very much like to try to protect it.
The premise is a wholesale rejection of sovereign debt. If that premise comes true a five-fold increase in safety havens would be nothing.
Yay! My girlfriend has been away this weekend, so I've been lonely.
Remember when AR Bill spoke of surpluses for as the eye could see. And the American people were believers! They actually thought too they would collect a “peace dividend”.
The $1 today was 3.6 cents in 1914.
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