'There is no means of avoiding the final collapse
Dionysus
HEAD: 2010 Will Be Worse
By Monty Pelerin
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 [NOT SHOWN IN THIS FORMAT].
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%.)
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.
************
Remember the Chinese curse, "May you live in interesting times."
SOME COMMENTS FROM THE SITE
Another must read. Me thinks Mr Pelerin is an optimist. Prepare for the
worst, hope for the best.
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Just this evening I heard another media tool talking about how the signs
(increase in the Dow, etc.) were pointing to 2010 being better than 2009 ...
RECOVERY IS RIGHT AROUND THE CORNER he said.
I wonder ... is he ignorant or just another toady for the liberal agenda in
the lamestream media?
Government meddling gave us the Great Depression 80 years ago. It won't be
any different this time.
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Why does that look so much like a global temperature map for the same
period?
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The "Greater Depression" that we are already in will become more and more
serious as 2010 unfolds. We can look for our currency to become WORTHLESS as
the government monetizes our debt and devalues the dollar across the board.
Obama may or may not speak to the American people as did "Jimmuh Cahtuh" and
tell us the good times are over! If the HOG THIEVES in congress get their
way, our standard of living will regress considerable. There is no NO CHANGE
and NO HOPE if the hog thieves in congress continue the same failed policies
of past liberal presidents and congresses.
In Rush Limbaugh's home district, a REAL WAR HERO, Lt Colonel Allen West is
running for Congress.
Allen West, sacrificed his Army career (by allegedly violating the "rights"
of some Islamic thug in Iraq), TO SAVE THE LIVES OF AMERICAN SOLDIERS in his
battalion! He is a conservative and will work to dismantle the Liberal
agenda imposed on us! We all must support the CONSERVATIVE Americans who can
and will defeat Liberal Socialists and return America to her rightful
owners...The American People. IF WE FAIL TO DO THIS, WE ARE TOAST!
By failing to throw out the HOG THIEVES in congress, 2011 will be even worse
than 2010!
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At the risk of making a bold statement of the obvious when George W Bush was
President a 5% rate of unemployment was twice as bad as Obama's 10% rate.
**********************
"Barack Obama seems determined to repeat every disastrous mistake of the
1930s, at home and abroad." --Thomas Sowell
�Two things are infinite: the universe and human stupidity; and I�m not sure
about the universe.� --Albert Einstein
No surrender!
Dionysus
zzpat
> FROM THE AMERICAN THINKER
>
> HEAD: 2010 Will Be Worse
> By Monty Pelerin
>
> 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 [NOT SHOWN IN THIS FORMAT].
>
Let's destroy this nonsense right away. The massive debt we now have
began with Reagan. Under Reagan our debt as a % of GDP went from 32.5%
to 51.0%. By any standard it was during the Reagan years that the
seeds of this disaster began. Even this article and its graph point to
that explosion of debt after conservatives gained power (liberals
controlled the congress for the previous 40 years).
Under Clinton (the president conservatives hated) our debt shrank from
66.3% to 57.8% after peaking at 66.9% in 1994 (before the tax
increases could make a real difference).
So now it's time to ask one question. When was the last time a
republican supported (or asked for) a tax increase to pay for what he
said he supported? If you say never, you know the problem. It's not
just the GOP, it's conservatism.
Put another way, a child of a conservative knows he has to have a dime
to buy a piece of candy but his parents think everything the
government does is free so they want their taxes cut.
Children are smarter than the smartest republican and/or conservative
and that is the whole story.
Vote for conservatives if you hate America. They've already dumped
trillions of dollars of unpaid taxes on us (the debt) and they won't
be satisfied until they bankrupt the entire country and destroy our
way of live. Conservatives hate America...that's why Reagan was too
cowardly to pay for what he spent.