Saturday, November 8, 2008
We've written a check our asses can't cash
Our government and its master, the for-profit Federal Reserve, have now written checks that they can't cover. It is important to understand this and believe it in order to know and plan for what comes next. We as a nation are broke, deep in debt, and have just started a wicked recession. Over the past few decades, we have outsourced most of our productive capacity abroad and the last financial cycle in this country was based on selling over-inflated assets to each other. This is also known as "paper shuffling" or a "Ponzi scheme."
We have guaranteed bank deposits and money markets, given large loans to other countries, created an alphabet soup of "lending facilities" for private corporations that caused the mess we are in, nationalized the mortgage industry, and bailed out multiple corporations. Do I need to mention that all of this has happened within the last 6 months? By the way, we also sent Joe sixpack a check to shut him up.
The last positive business cycle in this country from 2003-2007 was based on the Wall Street Wizards of Finance and "Flip that House." If you take away real estate, finance and the insurance schemes used to protect these two endeavors, you are left with a fairly weak economic base relative to our history as a country. In an attempt to "muddle through" this severe and neccessary recession and kick the proverbial can down the road to the next generation, the powers that be have set us on a course for another Great Depression.
Do not believe those who tell you we are smarter this time or that policy mistakes related to not enough government intervention in the 1930s were the problem last time and that it "won't happen again." Actually, the opposite is true. This time it will be worse. Much worse. The reason: government intervention is just as aggressive (if not more so) than last time and the preceding bubble that has started to (and is going to continue to) burst is even bigger.
We are exponentially expanding the debt we owe to the world and our citizens at a time when we can least afford it. We have baby boomers wanting to retire and start collecting Social Security and Medicare benefits, but we don't have the money to make good on these promises. Taxes are now going to decline rapidly due to decreasing incomes and corporate profits. In turn our deficits will rise. Yet, we are bailing out banks, insurance companies and the auto industry. We are sending "stimulus" checks to people despite the fact that we don't have the money. We are spending billions on war with tiny third world countries who have never harmed us and are STILL talking about that "dangerous" Iran and expanding the "War on Terror."
People who think government can fix the mess we are now in, which has only just begun, don't truly understand the two most important things: goverment gets its money from the people it governs and government helped cause the problem. Our government is accumulating debt that is owed by we the people. We the people can't afford to pay it back. History shows that when that happens, the paper promises of the government in question are eventually revealed for what they are: hollow and worthless.
Also, the problem that led to this financial crisis was not lack of regulation, the problem is that the government isn't allowing those who deserve to fail or go to jail to do so. If Wall Street firms, banks, insurance companies and auto companies need government subsidies to exist, then they are bankrupt and non-viable business models and should cease to exist. Trust me, new and more efficient entrepreneurs and businesses will figure out a new way to provide these services if people want them. This is how free markets work (does anyone remember?).
Our government needs to reduce spending rapidly and aggressively to stave off a currency crisis in the near future, but instead they are aggressively spending even more money they don't have. How is this rational? Think of someone who maxes out one credit card, rolls the debt over to a new card, then maxes out the new card and starts the cycle over. Do you think that person can continue such a scheme perpetually? In fact, many Americans have done this exact same thing until just recently when the banks tightened lending standards. Our government led the way in teaching its citizens how to run a financial scam but failed to teach them how to recognize one in advance.
But what happens to our country when the interest payments on our debt are greater than the amount of money our country takes in via taxation? How long can we go on by borrowing the money needed to make the interest payments on our debts while at the same time increasing our debt load even more? Other central banks of the world continue to allow our debt to get further and further out of control by agreeing to purchase our bonds, but how long can this last? Do you think China, Japan and the oil producing nations of the world will be there to bail us out once their own economies get deeper into the current turmoil?
The United States is fast approaching the point in time where its economy and currency will no longer be respected or have the confidence of the world. The large majority of Americans are totally unprepared for this slow-motion event that has already started. Once the true crisis stage occurs in a year or two, which may entail an overnight 50% or more devaluation of our money, most Americans will say that there was "no way to see it coming," yet it now essentially seems inevitable and obvious.
The good news is that the deflationary shit storm going on right now will keep our currency valuable for at least another year, so there is time to use the current strength of the currency to move into tangible goods that are not subject to debasement by a government pen. Gold is the best of the bunch in this regard and the final dip into the $650/oz or so range will present an enormous long-term opportunity for those who are prepared. I would recommend physical gold, not paper substitutes.
As a glimpse into what other things are likely to happen in an attempt to "fix" the crisis, see this link:
If you think it can't or won't happen once this crisis gets bad, you are in the exact state of mind your government needs you to be so that it can catch you by surprise. Our government has become a big, mean, hungry, out of control beast and anyone who has managed to save a little money is in its sights. Ask the people who live in Argentina.