If The Future’s So Bright How Come I Don’t Need Shades?
the foundations of the economy. It went mostly to bailouts and window dressing. Yet even with all the mortgage assistance programs that were sponsored in 2009, foreclosure notices for last year hit an all time high.
The stimulus programs, as they have been crafted, are drugs, not medicine. They make us feel good for a while… but that high will wear off, and the reality of how much debt we are accumulating as a nation will set in.
The amount of money that must be borrowed to sustain the level of spending grows each day. Additionally, 1/3 of the national debt is coming due within a year and must be refinanced in the same marketplace that new debt is financed (the treasury market). There are no signs that this massive borrowing will diminsh. Conversely, the amount of money available to sustain the borrowing is finite. Moreover, the willingness of lenders to continue to buy our debt is finite. More and more, the belief that America can pay off its debt with anything of value wanes away.
When the money available to lend to the U.S. dries up…. or when lenders demand more for their money… interest rates will rise. Substantially.
When interest rates rise, the economy will suffer. The low cost of money is what’s keeping the wheels greased, and when the price of money goes up things will change dramatically. We will have a credit crisis far greater than the one of 2008/2009. Mortgage defaults will rise. Additional deleveraging of the vast amount of derivatives still in existence will commence. Consumers will borrow even less. Unemployment will rise further. Interest rates on the national debt will rise, ultimately making interest payments (the interest, not the principal) the largest item in the budget. There is some basic math in play here that can’t be circumvented, regardless of government spending. Yes, California did get pulled back from the abyss, but with tax revenues dropping sharply and an entrenched legislature unwilling to seriously curtail spending, the state will most certainly fall into a void once again. As will other states.
Last year corporations were able to survive by dramatically cutting costs. This is why although corporate revenue is generally down, earnings are holding up. The human costs in mass layoffs was high, but at least theses companies now have a better chance of surviving…and then later thriving and growing their payrolls. Our governmental institutions on the other hand have done the opposite. They have increased spending, are in the process of raising taxes, and the Federal government actually grew its employment rolls last year.
This is why I suggest the word depression fits the economy better than recession. The structural adjustments required to fix the economy will take some years to effect. The disruptions from a damaged US credit rating and a continued unwinding of public and private debts that cannot be paid back will not dissipate overnight.
The tug of war between inflation and deflation continues in 2010 and its outcome is still indeterminate. Prices across the board could rise substantially in the next year or two, fueled by the massive amounts of government inspired money that has been poured into the economy. In that case, those who turned their dollars into gold and silver will likely be glad they did. Conversely, prices may fall substantially in the same timeframe, as mortgage and sovereign defaults grow, credit markets tighten further, unemployment rises, and another round of deleveraging occurs. It is still my point of view that unless and until serious price inflation takes hold, cash (cash in hand and perhaps in short term treasuries, not in banks) is still a wise thing to have. If we deflate, there will be great bargains to be had for those holding cash. If we hyper-inflate, cash should be turned in to hard assets. Precious metals –real money– remain a great safe haven in uncertain times because they are not only a good store of value, the purchasing power of gold and silver may well rise during either inflation or deflation.
In any case, a move toward self-sufficiency is a move towards a more secure future. A quote that bears sharing from a book I am reading by author Harry Dent seems appropriate here; “You can’t change the winds… you can only reset your sails”.
James Macfarlane is a published author in the tech arena. The last few years he has been writing on the economy and on his own consciousness raising experiences.