If The Future’s So Bright How Come I Don’t Need Shades?
than on the next round of bailouts. It’s either that –print money out of thin air– or borrow the funds from overseas. Neither strategy will work. The bond market, which is the mechanism for financing Federal debt, is stretched to the limit, and is in fact hanging by two scant threads. Thread #1 is the world’s willingness to finance our debt…and thread #2 is the world’s ability to finance our debt. Both are in jeopardy. The world-wide economic downturn hitting all developed countries provides less and less money for the purchase of American debt. Our debt load is so high the world may at any time cancel our credit card on the basis that America is a bad risk. We simply can’t grow our economy fast enough to pay our bills. Federal debt is massive and must periodically be refinanced. Moreover, an unrelenting stream of trillions in new debt now must be financed on an ongoing basis (see this Congressional Budget Office report). Think of the Federal deficit as the ‘Blob’ from that old Steve McQueen movie. It just won’t stop growing. And, there is NO sign of this trend reversing. This is the public debt bubble. To make matters worse, Federal tax revenues are down a staggering 34%. For the first time ever, the Federal government paid out more than it took in for the month of April. From the perspective of our creditors, the we’re-scared-you-won’t-repay-the-money-we-lend-you-with-anything-of-value syndrome is strongly in play here.
Conversely, if the Feds fire up the printing press and issue get-out-of-debt-free cards for all the too-big-to-fail institutions going down in the next round of de-leveraging, such action will be perceived as highly inflationary (whether it actually is or not). Here again, the world may lose faith in the dollar. In which case I am reminded that, just as the junk yard dealer Watto in StarWars/The Phantom Menace wanted something more ‘real’ than Republic Credits for his spaceship parts, so too the world may begin asking for something that holds its value better than $$.
What is being described now is the bond market bubble. The ultimate trust barometer, the bond market, the engine that finances the public debt bubble, and whose interest rates are based on trustworthiness of repayment, will simply crash at some point as the confidence in the dollar collapses and bond holders run for the exits (Warren Buffet and other financial luminaries have called the bond market the biggest bubble of all). A collapse of the bond market equates to a massive spike in interest rates (higher rates must be offered to entice people to buy what bonds can be sold) and a possible freeze-up of the credit markets (credit/trust bubble deflates), which will in turn accelerate the decline in the economy and further throttle tax revenues.
Break Out the Storm Shutters… We Are In a Depression.
Even after hearing all the above there are some who might ask, “Can’t we do as in past recessions and simply spend our way out of this downturn?” Uh… we’ve been doing that for more than a decade. It’s why we’re in this jam. We have “stimulated” the economy for so long now, additional stimuli at this point would actually do more harm than good. It’s analogous to adults who have ingested sugar for so many years they develop something called glucose intolerance, wherein the body fails to properly regulate blood sugar regardless of how much insulin is released.
We are now locked in a cycle of reduced consumer spending, which begets the production of fewer products/services, which in turn begets layoffs, which themselves beget defaults on loans and further reductions in consumer spending. This cycle will not end in the foreseeable future. There is to much excess yet to work off. When you collect all the facts and do the math it all adds up to one thing; we are by no means out of the woods yet.
Ok, Ok… We’re Stuck in a Depression. Now What?
Right. Now what. The future gets hazy here because there are a number of ways things might unfold as the last of these remaining bubbles pop. In general I think it’s fair to say that uncertainty and volatility will continue to be major players in our not-so-distant future. The trends are in place, and as more bubbles collapse, uncertainty and volatility will be exacerbated. Many people will become anxious, as the decades of relative stability we have experienced in this country continues to dissipate. Some will become desperate, as the social safety nets continue to shrink. And… desperate people tend to do desperate things.
The way to best handle whatever comes is simply to prepare as best you can. We prepare ourselves psychologically by not being surprised when surprising events occur. If you are calm, people around you will tend to remain calm. The smart family today is thinking more along the lines of self sufficiency than has