I believe our fiscal situation is much worse than most people realize. True, the situation might be resolvable with a hard-nosed turnaround specialist in charge [Romney?] but, even here, the emphasis is on “might”! In a political context, where citizens have been conditioned to believe they are entitled to live at the expense of government (i.e other citizens because, after all, government has nothing that it first does not take from someone else), the situation is beyond hopeless. Let me address the true economic situation of the U.S. by way of an email I received from a regular reader recently.

So says Monty Pelerin’s World (www.economicnoise.com) in edited excerpts from the original article* which Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) below for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.Below is the email which reads, in part:

 Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) the article below for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Snyder goes on to say, in part:

If the government suddenly started spending only the money that it actually brought in every year, our economy would be doomed and all of this “false prosperity” would rapidly disappear… [but conversely,] if the U.S. government continues to rack up debt at this pace we are doomed. In fact, every dollar that gets borrowed makes our eventual collapse ever worse. We are heading down the exact same road that Greece has gone. Eventually the rest of the world is not going to lend us gigantic mountains of super cheap money anymore. When the flow of cheap money stops, it [will] be extremely painful…If we had addressed these problems as a nation a decade or two ago, perhaps we could have found a solution but now there is no way out under our current financial system and a devastating economic collapse is on the horizon no matter what we do.

Look at Greece. They were forced by the EU and the IMF to dramatically reduce government spending…[and] John Mauldin described the nightmarish effect that this had on the country…

As Greece began to shake and bake its way to “austerity,” the very act of cutting deficits pushed the country into recession, which lowered tax revenues and increased expenses, putting the elusive goal of a balanced budget even further off…Spain’s “draconian” cuts have [had much the same effects]…

For country after country, this is the Endgame. It is the end of the Debt Supercycle. Debt has grown to the size that it cannot be sustained. The market will not lend any more money on terms that can be afforded, and any efforts to cut spending and raise taxes will result in an even worse economy, in various degrees of recession, with falling revenues and rising costs.

The above is what happens when a country that has been spending far beyond its means is forced to dramatically cut back.

Those that are convinced that balancing the federal budget in the United States will be relatively painless should take a close look at what is happening in Greece. The Greek economy has been plunged into a 21st century “Great Depression”:

• 20% of all retail stores have already shut down,
• the unemployment rate for those under the age of 24 is 39% and
• 33% of the entire nation is living in poverty.

This is only just the beginning for Greece. Things are going to get even worse.

Unfortunately, many believe that the United States is destined to experience far worse pain than Greece is currently experiencing. Peter Schiff, for example, insists that the United States is in even worse financial shape than Europe at this point. Just check out this video….

Anyone that attempts to downplay the U.S. debt problem is making a serious mistake. Yes, we are still able to borrow trillions of dollars for next to nothing, but that is going to come to an end.

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Remember all of those “suckers” that signed up for mortgages at “teaser rates” that later got jacked up dramatically? Well, when the rates went up many of them ended up losing everything [and] we have gotten ourselves into the exact same kind of a position. All of this cheap money has enabled us to live very nicely for now, but when the cheap money ends the nightmare will begin.

Right now, our debt is growing much, much faster than our economy is. Between 2007 and 2010, U.S. GDP grew by only 4.26%, but the U.S. national debt soared by 61% during that period… but it is not just the federal government that has been living a fantasy.

The chart posted below shows the growth of total debt in America over the past several decades. Consumers, businesses and government officials have been on a debt binge that is absolutely unprecedented [but] the scary thing is that even with all of this borrowed money, our economy is still in the dumps so what in the world is it going to look like when the debt bubble totally bursts?

Even with all of this “borrowed prosperity”, anger at the government is rapidly growing. A recent Gallup poll found that “satisfaction with government” in the United States is now at an all-time record low of 29% so how angry will the American people be when all of this “borrowed prosperity” disappears?

When this whole thing comes tumbling down, a lot of people are going to blame our problems on “capitalism”. In fact, it is already happening. Just check out what the founder of the World Economic Forum, Klaus Schwab, is saying:

• We have a general morality gap.
• We are over-leveraged,
• we have neglected to invest in the future,
• we have undermined social coherence, and
• we are in danger of completely losing the confidence of future generations.
• We are in an era of profound change that urgently requires new ways of thinking instead of more business-as-usual.
• Capitalism in its current form, has no place in the world around us.

Capitalism is not the problem, however. Capitalism has produced the greatest eras of prosperity that the world has ever seen. No, the real problem is our debt-based financial system that is managed and run by the central banks of the world.

Debt-based central banking is not capitalism but, unfortunately, way too many people equate the two. [The truth of the matter is that,] theoretically, you could have capitalism without any debt whatsoever but what we have today is a financial system that has debt as the very foundation and such a system is inevitably going to fail someday.

As I have written about so many times before, the Federal Reserve is at the very heart of our economic problems here in the United States [because it] was designed to be a perpetual debt machine – and it has performed that task very well. The U.S. national debt is now more than 5000 times larger than it was when the Federal Reserve was first created.

Even though things [may] seem somewhat “stable” for the moment, there are all kinds of reasons to be concerned about the viability of our economy and our financial system in the years ahead… [In fact,] I believe a massive economic storm is coming [so] don’t let this false prosperity and this “calm before the storm” fool you.

We are living in the greatest debt bubble the world has ever seen, and no matter how it plays out there is going to be a massive amount of pain. You might want to get yourself and your family prepared for that.

*http://theeconomiccollapseblog.com/archives/if-the-u-s-government-keeps-spending-money-like-this-we-are-doomed-and-if-the-u-s-government-stops-spending-money-like-this-we-are-doomed

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Related Articles:

1. Economic System a Legal Ponzi Scheme on the Verge of Collapse!

Countries around the world, particularly in the West, are hopelessly in the red, with debt rising every day. Even worse, politicians seem paralyzed, unable — or unwilling — to do anything about it. It is a global disaster that threatens the immediate future… [Let me explain.] Words: 1132

2. 2012: More Money-printing Leading to Accelerating Inflation, Rising Interest Rates & Then U.S. Debt Crisis! Got Gold?

Evidence shows that the U.S. money supply trend is in the early stages of hyperbolic growth coupled with a similar move in the price of gold. All sign point to a further escalation of money-printing in 2012…followed by unexpected and accelerating price inflation, followed by a rise in nominal interest rates that will bring a sovereign debt crisis for the U. S. dollar with it as the cost of borrowing for the government escalates…[Let me show you the evidence.] Words: 660

3. Alf Field’s 7 “D’s” of the Developing Disaster Revisited

When the supply of something is increased sharply relative to demand, the value of that commodity will decline. If the supply continues to increase rapidly and indefinitely, then that item will become worth less and less, with the potential to finally become nearly worthless. This is the Developing Disaster facing the US Dollar and the world. This is the factor that could become the single most important criterion in investment allocation decisions and possibly even for individual financial survival…[Let me explain this further by reviewing the 7 major problems facing the U.S. (and thus the world) and how they all will lead to problem #7 - devolution.] Words: 1520

4. Alf Field: America’s Current Account Deficit Causing World’s Financial Crisis! Here’s Why

The onset of the world’s worst financial crisis in many decades is one of the most important factors (if not the most important factor) currently influencing investment decisions. The crisis has created chaos and confusion. Not many people understand how the world has arrived at this unfortunate situation. This report endeavours to identify the underlying causes of the crisis and explains why the USA current account deficit has been the main destabilising force in world finance. Words: 3806

5. Niall Ferguson: U.S. Playing “Russian Roulette” Assuming Interest Rates Will Remain Low

Countering Krugman’s argument that today’s low interest rates show that no one is worried about lending money to us and, therefore, that we should borrow and spend our way to prosperity, Ferguson argues that today’s interest rates are irrelevant. When countries get into trouble, he says, they get into trouble quickly – the way Greece and …

6. National Debt Burden per Capita-to-Income Index at 50 Year High – and Growing!

Wars and depressions largely characterize the periods of time where there have been significant run-ups in the level of the U.S. National Debt Burden per Capita [i.e. the U.S. National Debt Burden per Capita-to-income Index], with the debt taken on to support the costs of the U.S. Civil War and World War II being the most significant. Today… it is perhaps most comparable to the Great Depression. [Take a look.] Words: 326

7. These 10 Charts Illustrate America’s Disastrous Fiscal Condition – Take a Look (and Weep)!

By now nobody should have any doubts as to just how disturbing America’s fiscal debacle is. For those naive and innocent few who still think there is a Hollywood ending with a pot of gold awaiting everyone at the end of the rainbow, we present the following “10 essential fiscal charts” from the Pew Policy Institute.

8. Brace for Impact: U.S. About to Go Off a Financial Cliff!

The kind of impact [our economy is] going to have will not be like flying into the side of a mountain. It will be the kind of crash that skids over land, clipping trees and buildings until the plane ends up wingless in a smoldering heap. I just hope the fuel tanks don’t ignite when the long rough ride is over. [Let me explain.] Words: 832

9. Another Economic Collapse and Great Depression are Coming! Here’s Why

It really is hard to find the words to describe the true horror of the national debt of the U.S. The U.S. government has been on the greatest debt binge in all of human history, and a day of reckoning is coming that is going to be so painful that it is going to shock America to the core. We have lived so far above our means for so long that none of us really has any concept of what “normal” is like anymore. The United States has enjoyed the greatest party in the history of the world, but now this decades-old party is ending and the bills are coming due. Our current system is headed for an inevitable collapse. There is no way of getting around it – a horrific economic collapse is coming [and] it is going to change the world. You better get ready. [Let me explain further.] Words: 1771

Lots of iconic brands have filed for bankruptcy recently. Some blamed weak consumer demand, others pointed to rising commodity costs and pension demands. In any case, you can count on many more companies to follow suit. Here is a list of the 17 largest companies with the greatest probability of financial distress.

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) the article below for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

They go on to say, in part:

1. Caesars Entertainment - the world’s largest casino entertainment company

 

Financial distress probability: 7.28% (calculation by GovernanceMetrics International); Total assets: $28.9 billion

2. Clearwire (CLWR) – a wireless internet service provider

 

Financial distress probability: 9.54%; Total assets: $8.8 billion

3. McClatchy (MNI) - the third-largest newspaper company in the U.S.

 

Financial distress probability: 10.16%; Total assets: $3.0 billion

4. AK Steel Holding (AKS:US) – formerly Armco

 

Financial distress probability: 10.98%; Total assets: $4.58 billion

5. Republic Airway Holdings (RJET) -  an Indiana company that owns Chautauqua Airlines, Frontier Airlines, Republic Airlines and Shuttle America

 

Financial distress probability: 11.12%; Total assets: $4.2 billion

6. Tennessee Valley Authority – electricity provider to nine million people in the southeast

 

Financial distress probability: 11.82%; Total assets: $46.39 billion

7. Office Depot (ODP) – a global supplier of office products and services

 

Financial distress probability: 11.90%; Total assets: $4.2 billion

 

8. Barnes & Noble (BKS) – book retailer

 

Financial distress probability: 12.05%; Total assets: $4.1 billion

9. Standard Pacific (SPF) – a builder of single-family homes

 

Financial distress probability: 13.35%; Total assets: $2.2 billion

10. Dynegy (DYN) – a producer/retailer of electric energy, capacity and ancillary services

 

Financial distress probability: 13.93%; Total assets: $11.1 billion

11. Talbots (TLB) – womens clothing and accessories retailer

 

Financial distress probability: 14.86%; Total assets: $0.7 billion

12. KB Home (KBH) – America’s fifth-largest homebuilder 

 

Financial distress probability: 15.52%; Total assets: $2.7 billion

13. United States Postal Service – mail/package delivery 

 

Financial distress probability: 17.30%; Total assets: $23.4 billion

14. Thomas Cook Group (TCG:LN) – travel agency

 

Financial distress probability: 17.94%; Total assets: $10.43 billion

15. Air France (AF:FP) - France’s national airline

 

Financial distress probability: 18.99%; Total assets: $37.1 billion

16. Imperial Sugar (IPSU) – processor and marketer of refined sugar

 

Financial distress probability: 20.37%; Total assets: $0.5 billion

17. Dendreon (DNDN) – a biotechnology company and developer/producer/distributor of prostate cancer vaccine Provenge

 

Financial distress probability: 30.62%; Market cap: $0.9 billion

*http://www.businessinsider.com/the-next-17-big-companies-that-are-at-risk-of-bankruptcy-2012-1?op=1#ixzz1klgbz1iz

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Countries around the world, particularly in the West, are hopelessly in the red, with debt rising every day. Even worse, politicians seem paralyzed, unable — or unwilling — to do anything about it. It is a global disaster that threatens the immediate future… [Let me explain.]

So says Alexander Jung (www.spiegel.de) in edited exerpts from his original* article.

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) the article below for the sake of clarity and brevity to ensure a fast and easy read. The report’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Jung goes on to say, in part:

Economists use the term “Ponzi scheme” to describe a disastrous mechanism in which someone pays off old debt by constantly taking on new debt. The repayment of the debt — the most recent loans, plus interest — is deferred into the distant future, fueling an eternal process of debt refinancing. It’s the classic pyramid, or snowball scheme, practiced by thousands of con artists after Ponzi. The most spectacular case was that of New York financier Bernard Madoff, who was responsible for losses of about $20 billion by 2008. Snowballs are set into motion, becoming bigger and bigger as they roll along. In the worst case, they end in an avalanche that takes everything else with it.

Ponzi Schemes - Now

Western economies have not acted much differently than the fraudster Madoff. In 2011, they were virtually inundated with bad news and old sins. Almost everyone — in Europe and in the United States — has been living beyond their means, from consumers to politicians to entire countries. Governments have become servants to the markets upon which they have become dependent.

On an almost weekly basis, the reports have become more worrisome and the sums of money involved more staggering. Many are now concerned that, as 2012 begins, the snowballs will only get bigger — and roll faster:

• European banks will have to repay about €725 billion in combined debt in 2012, including €280 billion in the first quarter alone. With the private market largely off-limits to them, the banks have had to rely on the European Central Bank (ECB) to bail them out. The ECB is now lending them fresh money — as much as they want — at minimal interest rates.
• Italy has about €160 billion in debt that will mature between January and April; the total for the entire year is about €300 billion. The government in Rome is already having trouble finding buyers for its bonds.
• The ECB is creating billions essentially out of nothing. On an almost weekly basis, it is acquiring bonds that no one else would buy from Portugal, Spain and Italy and, in the process, it is turning into a reluctant financier of nations. This financial aid already amounts to €211 billion.
• The European Commission…supports the use of so-called euro bonds…which would be issued jointly by the countries in the monetary union [and] would amount to an accumulation of collective debt on top of national debts.
• There is the €440-billion euro bailout fund which the finance ministers have decided to “leverage”…because this amount is still not enough.
• And then there is the United States which only remains solvent because the Congress in Washington keeps raising the debt ceiling. The American government already owes its creditors about $15 trillion. Stay tuned for the next installment.

In other words, there are plenty of snowballs that have started rolling and getting larger with each rotation. Some aspects of the economic system in the industrialized countries resemble a gigantic Ponzi scheme. The difference is that this version is completely legal.

Living on Credit

Old debts are paid with new ones, with borrowers giving not the slightest thought to repayment. This has been going on for a long time, far too long, in fact. It was only with the eruption of the financial crisis in 2007 and the outrageously expensive bailouts of banks and economies that many people realized that the entire world is living on credit.

“Debt is rising to points that are above anything we have seen, except during major wars,” economists at the Bank for International Settlements (BIS) concluded in a recent study. “The debt problems facing advanced economies are even worse than we thought”…

Ponzi Schemes Eventually Collapse

The fact that nations are continually spending more than they take in cannot turn out well in the long run. The word “credit” comes from the Latin “credere,” which means “to believe.” The system will only function as long as lenders believe in borrowers. Once the belief in the creditworthiness of borrowers is destroyed, hardly anyone will be willing to buy their securities. When that happens, the system is finished. This is precisely what happened with Carlo Ponzi’s scheme and now entire countries are suffering suspiciously similar fates. They are no longer being taken seriously.

Greece is effectively insolvent. Italy and Spain are forced to offer higher interest rates to find buyers for their government bonds and France threatens to lose its impeccable credit rating. The debt crisis has arrived in the heart of Europe.

Meanwhile, it is also flaring up in the United States once again, with Democrats and Republicans blaming each other for the nation’s debts. Instead of taking responsibility and consolidating the budget, President Barack Obama prefers to rail against the Europeans’ approach to crisis management. They, in turn, refuse to tolerate any interference, especially from the United States, which they blame for being the source of the financial crisis in the first place. In this fashion, the Old World and the New World are tossing the blame back and forth, while confidence in politics and its ability to avert collapse is dwindling on both sides of the Atlantic.

*www.spiegel.de/international/world/0,1518,806772,00.html

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Related Articles:

 1. 2012: More Money-printing Leading to Accelerating Inflation, Rising Interest Rates & Then U.S. Debt Crisis! Got Gold?

Evidence shows that the U.S. money supply trend is in the early stages of hyperbolic growth coupled with a similar move in the price of gold. All sign point to a further escalation of money-printing in 2012…followed by unexpected and accelerating price inflation, followed by a rise in nominal interest rates that will bring a sovereign debt crisis for the U. S. dollar with it as the cost of borrowing for the government escalates…[Let me show you the evidence.] Words: 660

2. Why Negative Real Interest Rates + Stimulative Money Supply = $10,000/ozt. Gold

Question: What do you get when you mix negative real interest rates with stimulative money supply efforts by global central banks? Answer: An exceptionally potent formula for higher gold prices that could send gold to the unimaginable level of $10,000 an ounce. [Let me explain further.] Words: 1049

3. Egon von Greyerz Interview on Future QE, Hyperinflation and the Price of Gold

5. The U.S. is Headed Toward a Complete and Utter Collapse of its Financial System

 

The U.S. is headed inexorably toward a systemic failure, a complete and utter collapse of the financial system. TARP and all the other machinations have not improved the underlying insolvency of the banking system. They have, however, deferred a collapse and ensured that it will ultimately be worse. [Let me explain.] Words: 1385

 

6. There Are 2 Ways Out of Global Economic Mess – Hope for One of Them & Prepare for the Other

 

 

It all comes down to this: We have to match growth to debt. If we can’t create miracles from growth, we have to consider inflation to reduce the value of our debt. [Those are the] only two ways out of our current global economic mess – innovation and inflation. As the saying goes, we should hope for the best (more innovation) and prepare for the worst (higher inflation). [Let me explain why that is the case.] Words: 1195

 

7. Alf Field’s 7 “D’s” of the Developing Disaster Revisited

 

 

When the supply of something is increased sharply relative to demand, the value of that commodity will decline. If the supply continues to increase rapidly and indefinitely, then that item will become worth less and less, with the potential to finally become nearly worthless. This is the Developing Disaster facing the US Dollar and the world. This is the factor that could become the single most important criterion in investment allocation decisions and possibly even for individual financial survival…[Let me explain this further by reviewing the 7 major problems facing the U.S. (and thus the world) and how they all will lead to problem #7 - devolution.] Words: 1520

 

8. New Boom-bust Cycle Risks Hyperinflationary Depression and Much Higher Gold Price – Here’s Why

 

 

It is my view that the world has entered a new boom-bust cycle driven by oil prices. Oscillating oil prices – as opposed to credit cycles – will repeatedly stimulate and crash the highly levered global economy. Governments have not recognized this new cycle, and as part of a fruitless effort to retain control over deteriorating real growth and rising unemployment central banks will print more and more money, risking a hyperinflationary depression (stagflation at best). [As such,] the only respite for many investors is gold. [Let me explain.] Words: 925

 

9. Why Negative Real Interest Rates + Stimulative Money Supply = $10,000/ozt. Gold

Question: What do you get when you mix negative real interest rates with stimulative money supply efforts by global central banks? Answer: An exceptionally potent formula for higher gold prices that could send gold to the unimaginable level of $10,000 an ounce. [Let me explain further.] Words: 1049

10. Niall Ferguson: U.S. Playing “Russian Roulette” Assuming Interest Rates Will Remain Low

Countering Krugman’s argument that today’s low interest rates show that no one is worried about lending money to us and, therefore, that we should borrow and spend our way to prosperity, Ferguson argues that today’s interest rates are irrelevant. When countries get into trouble, he says, they get into trouble quickly – the way Greece and…

11. Debt Bubble: We’re in a Dangerous New Phase – Here’s Why

 

The head of the International Monetary Fund, Christine Largarde, said Friday the world economy is entering a “dangerous new phase.” Lagarde is referring to a debt bubble, the likes of which the planet has never seen before, and the possibility that it could all unravel at any moment. Uncertainty over the debt crisis in Europe is what caused the Dow to crash more than 300 points at the end of last week. What is Lagarde going to do about the debt problem? Words: 1752

 

12. Brace for Impact: U.S. About to Go Off a Financial Cliff!

 

 

The kind of impact [our economy is] going to have will not be like flying into the side of a mountain. It will be the kind of crash that skids over land, clipping trees and buildings until the plane ends up wingless in a smoldering heap. I just hope the fuel tanks don’t ignite when the long rough ride is over. [Let me explain.] Words: 832

 

13. Another Economic Collapse and Great Depression are Coming! Here’s Why

 

 

It really is hard to find the words to describe the true horror of the national debt of the U.S. The U.S. government has been on the greatest debt binge in all of human history, and a day of reckoning is coming that is going to be so painful that it is going to shock America to the core. We have lived so far above our means for so long that none of us really has any concept of what “normal” is like anymore. The United States has enjoyed the greatest party in the history of the world, but now this decades-old party is ending and the bills are coming due. Our current system is headed for an inevitable collapse. There is no way of getting around it – a horrific economic collapse is coming [and] it is going to change the world. You better get ready. [Let me explain further.] Words: 1771

 

14. America’s Future: Growing Deficit, Shrinking Economy, Imploding Dollar and Exploding Inflation

 

 

The new [debt ceiling deal] legislation will add $2.4 trillion to the $14.3 trillion national debt in a little over a year – and we don’t even start saving money until after the debt reaches $16.7 trillion! This bill doesn’t even cut the deficit. It just slows the growth of government spending to around 8% a year! So, even if Congress cuts $2.1 trillion out of the budget over the next 10 years, we will still be running annual deficits of more than $1 trillion…[That means that in addition to a deficit that will continue to grow we can look forward to a shrinking economy, an imploding U.S. dollar and exploding inflation. Some future! Let me explain.] Words: 827

 

Evidence shows that the U.S. money supply trend is in the early stages of hyperbolic growth coupled with a similar move in the price of gold. All sign point to a further escalation of money-printing in 2012…followed by unexpected and accelerating price inflation, followed by a rise in nominal interest rates that will bring a sovereign debt crisis for the U. S. dollar with it as the cost of borrowing for the government escalates…[Let me show you the evidence.]

So says Alasdair Macleod (www.goldmoney.com) in edited excerpts from his original article*.

Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) edited the article below for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

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Macleod goes on to say:

The one chart which defines the background to all the events [that will unfold] in the coming years is the Mises Institute’s True Money Supply (TMS) for the US dollar. TMS consists of cash, checking accounts and no-notice deposit accounts, as well as a few other minor cash balances. It represents the actual cash and electronic cash in the system that is instantly available for purchases of goods and services, and the chart goes back to 1959.

The Hyperbolic Course of the True Money Supply

The dotted line [in the graph above] is the exponential growth trend, in other words the maximum rate of growth that can continue for ever. This trend was valid until mid-2002…[at which time the] TMS began accelerating at a faster rate telling us that TMS growth [had] entered a hyperbolic phase when the Fed eased rates in the wake of the dot-com collapse. Put another way, TMS is already hyperinflationary.

Bear in mind that economists are now telling central banks to accelerate monetary growth even faster to offset the tendency for bank credit to contract. They see no other way to avoid a bank balance sheet implosion with all the deflationary consequences that implies. [As such,] the prospects for 2012 and thereafter are for TMS to continue its hyperbolic trend…[as it] supply funds for a government deficit completely out of control. Also bear in mind that when such a trend becomes established it becomes almost impossible to stop, since the whole debt-based economy and the banking system would collapse.

The Hyperbolic Course of the Price of Gold

The chart [below] shows gold’s established hyperbolic course…[as] put together by Armand Koolen… In Koolen’s words, the hyperbola fits in with the official gold price in the early 1900s, the revaluation to $35 in 1934, the onset of the secular bull market in 2001, the bottom in October 2008 and its approximate track since then.

His discovery is interesting. Singularity for this curve, or the point where the gold price goes to theoretical infinity, is in February 2014, only 26 months away. Unless this long-term trend is somehow broken, gold is also telling us the dollar is heading for hyperinflation.

It would be a mistake to vest magical powers in such an extraordinary discovery, but given [that] TMS itself is showing signs of going hyperbolic we must sit up and take notice… [It will prove to be virtually impossible] to stop printing money at an accelerating rate [as evidenced by the fact that when the ECB showed a reluctance to do so it threatened]… to collapse the eurozone. Will the Fed pull the trigger on the US economy or chicken out? The answer is clear.

What Does the Future Hold?

We can expect:

1.  a further escalation of money-printing in 2012…
2. followed by unexpected and accelerating price inflation
3. nominal interest rates will then rise at the market’s behest
4. bringing a sovereign debt crisis for the dollar with it as the cost of borrowing for the government escalates…

*http://www.goldmoney.com/gold-research/alasdair-macleod/money-supply-explosion-will-lead-to-accelerating-inflation.html

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Related Articles:

1. Egon von Greyerz Interview on Future QE, Hyperinflation and the Price of Gold

3. Continuing High Unemployment = More Money Printing = Higher Gold & Silver Prices

 

The Federal Reserve has a dual mandate set by Congress of maximum employment and stable prices. During Chairman Bernanke’s most recent press conference he indicated that the Federal Reserve has done a better job of maintaining price stability while falling short of fostering maximum employment. [As such,] we believe the Federal Reserve will continue to increase the monetary base and weaken the dollar as long as unemployment remains elevated. While the economy (measured by real GDP) and the unemployment rate have not benefited from a substantial increase in the monetary base, the price of gold and silver have benefited from money printing. We believe this statement is quite important for monetary policy and for investors. [Let us explain further.] Words: 388

4. The U.S. is Headed Toward a Complete and Utter Collapse of its Financial System

 

The U.S. is headed inexorably toward a systemic failure, a complete and utter collapse of the financial system. TARP and all the other machinations have not improved the underlying insolvency of the banking system. They have, however, deferred a collapse and ensured that it will ultimately be worse. [Let me explain.] Words: 1385

 

5. There Are 2 Ways Out of Global Economic Mess – Hope for One of Them & Prepare for the Other

 

 

It all comes down to this: We have to match growth to debt. If we can’t create miracles from growth, we have to consider inflation to reduce the value of our debt. [Those are the] only two ways out of our current global economic mess – innovation and inflation. As the saying goes, we should hope for the best (more innovation) and prepare for the worst (higher inflation). [Let me explain why that is the case.] Words: 1195

 

6. Alf Field’s 7 “D’s” of the Developing Disaster Revisited

 

When the supply of something is increased sharply relative to demand, the value of that commodity will decline. If the supply continues to increase rapidly and indefinitely, then that item will become worth less and less, with the potential to finally become nearly worthless. This is the Developing Disaster facing the US Dollar and the world. This is the factor that could become the single most important criterion in investment allocation decisions and possibly even for individual financial survival…[Let me explain this further by reviewing the 7 major problems facing the U.S. (and thus the world) and how they all will lead to problem #7 - devolution.] Words: 1520

 

7. New Boom-bust Cycle Risks Hyperinflationary Depression and Much Higher Gold Price – Here’s Why

 

 

It is my view that the world has entered a new boom-bust cycle driven by oil prices. Oscillating oil prices – as opposed to credit cycles – will repeatedly stimulate and crash the highly levered global economy. Governments have not recognized this new cycle, and as part of a fruitless effort to retain control over deteriorating real growth and rising unemployment central banks will print more and more money, risking a hyperinflationary depression (stagflation at best). [As such,] the only respite for many investors is gold. [Let me explain.] Words: 925

 

8. Why Negative Real Interest Rates + Stimulative Money Supply = $10,000/ozt. Gold

Question: What do you get when you mix negative real interest rates with stimulative money supply efforts by global central banks? Answer: An exceptionally potent formula for higher gold prices that could send gold to the unimaginable level of $10,000 an ounce. [Let me explain further.] Words: 1049

9. Niall Ferguson: U.S. Playing “Russian Roulette” Assuming Interest Rates Will Remain Low

Countering Krugman’s argument that today’s low interest rates show that no one is worried about lending money to us and, therefore, that we should borrow and spend our way to prosperity, Ferguson argues that today’s interest rates are irrelevant. When countries get into trouble, he says, they get into trouble quickly – the way Greece and…

10. Debt Bubble: We’re in a Dangerous New Phase – Here’s Why

 

The head of the International Monetary Fund, Christine Largarde, said Friday the world economy is entering a “dangerous new phase.” Lagarde is referring to a debt bubble, the likes of which the planet has never seen before, and the possibility that it could all unravel at any moment. Uncertainty over the debt crisis in Europe is what caused the Dow to crash more than 300 points at the end of last week. What is Lagarde going to do about the debt problem? Words: 1752

 

11. Brace for Impact: U.S. About to Go Off a Financial Cliff!

 

 

The kind of impact [our economy is] going to have will not be like flying into the side of a mountain. It will be the kind of crash that skids over land, clipping trees and buildings until the plane ends up wingless in a smoldering heap. I just hope the fuel tanks don’t ignite when the long rough ride is over. [Let me explain.] Words: 832

 

12. Another Economic Collapse and Great Depression are Coming! Here’s Why

 

 

It really is hard to find the words to describe the true horror of the national debt of the U.S. The U.S. government has been on the greatest debt binge in all of human history, and a day of reckoning is coming that is going to be so painful that it is going to shock America to the core. We have lived so far above our means for so long that none of us really has any concept of what “normal” is like anymore. The United States has enjoyed the greatest party in the history of the world, but now this decades-old party is ending and the bills are coming due. Our current system is headed for an inevitable collapse. There is no way of getting around it – a horrific economic collapse is coming [and] it is going to change the world. You better get ready. [Let me explain further.] Words: 1771

 

13. America’s Future: Growing Deficit, Shrinking Economy, Imploding Dollar and Exploding Inflation

 

 

The new [debt ceiling deal] legislation will add $2.4 trillion to the $14.3 trillion national debt in a little over a year – and we don’t even start saving money until after the debt reaches $16.7 trillion! This bill doesn’t even cut the deficit. It just slows the growth of government spending to around 8% a year! So, even if Congress cuts $2.1 trillion out of the budget over the next 10 years, we will still be running annual deficits of more than $1 trillion…[That means that in addition to a deficit that will continue to grow we can look forward to a shrinking economy, an imploding U.S. dollar and exploding inflation. Some future! Let me explain.] Words: 827

 

14. What Would USD Collapse Mean for the World?

 

I came to the conclusion several years ago that it was just a matter of time before the world realized that the relative functionality of the U.S. dollar was about to go belly up – to collapse – and that that time happened to coincide with that fateful date all the prophecies are going crazy about – 2012! Words: 881

 

15. The U.S. Dollar Crisis is About to Accelerate! Here’s Why

 

 

If the debt ceiling deal agreement is fully implemented [it is only going to exacerbate America's financial and economic woes and accelerate the demise of the U.S.] Dollar Standard which is inherently flawed and increasingly unstable. Its demise is imminent. The only question is will it be death by fire—hyperinflation—or death by ice—deflation? Fortunes will be made and lost depending on the answer to that question. [Let me explain how the collapse of the dollar could well unfold.] Words: 944

 

Question: What do you get when you mix negative real interest rates with stimulative money supply efforts by global central banks? Answer: An exceptionally potent formula for higher gold prices that could send gold to the unimaginable level of $10,000 an ounce. [Let me explain further.]

So says Frank Holmes (www.usfunds.com) in edited excerpts from his original article*.

Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has further edited ([ ]), abridged (…) and reformatted the article below for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

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 Holmes goes on to say, in part:

 Negative real interest rates and strong money supply growth are two key factors of what I refer to as the Fear Trade. Negative real interest rates occur when the inflationary rate, or CPI, is greater than the current interest rate. A quick account of the G-7 and E-7 countries [in the table below] shows that the majority have negative real interest rates.

Across the developed G-7 countries, British citizens are the worst off with real interest rates in the U.K. sitting at negative 4.5 percent. U.S investors aren’t doing much better with rates at negative 3.25 percent and the Fed has all but guaranteed rates will remain there. Only Japan has a positive real interest rate among the G-7 and that rate is barely above zero.

Conversely, the most populous nations making up the E-7 have mostly positive real interest rates. However, the grouping’s grandest economic powerhouses, China and India, have negative real interest rates sitting around negative 2 percent.

Click here to enlarge

Simply put, investors in those countries who have parked their savings in cash and low-yielding investments, such as Treasury bills and money market accounts in the U.S., are actually losing money due to inflation. That can be tough for any investor, but when you’re the central bank of a country with millions of dollars in reserves, it can be catastrophic. This is why central banks around the globe have sought protection by diversifying their foreign-exchange reserves into gold bullion this year.

VTB Capital’s Andrey Kryuchenkov told The Wall Street Journal this week that, “Central banks are diversifying, and it has intensified to a rate that nobody had expected.” Latest estimates predict global central banks will purchase between 475-500 tons of gold in 2011. This amount of capital flowing into gold has the potential to push prices up a level in 2012. John Mendelson from ISI Group sees gold prices reaching $2,200 an ounce during the first six months of 2012. While real interest rates look to remain in the red for the foreseeable future, many of these same countries are printing record amounts of “green” with accommodative monetary policies.

U.S. Global’s director of research John Derrick says central banks around the world have focused their attention on stimulating growth. Beginning with Brazil’s interest rate cut in late August through the European Central Banks (ECB) cut this week, there have been 40 easing moves by global central banks, according to ISI Group. John says this also means we will likely see more quantitative easing in 2012. The Bank of England has already started its quantitative easing, and many experts believe the ECB and the Federal Reserve will follow in its footsteps.

Bloomberg reports that global money supply (M2) is “set to increase the most on record in 2011.” The chart below shows the year-over-year change of global money supply has been gradually moving higher and higher since mid-2010.

Click here to enlarge

The reason global central banks have shifted the printing presses into overdrive is simple: they need the money. My long-time friend Frank Giustra reminded us of this new reality in an op-ed piece for the Vancouver Sun last week. Frank writes:

“The bottom line is that the money needed to bail out Europe and to fund America’s spiraling debt and future unfunded obligations is in the ten of trillions. IT DOES NOT EXIST. It has to be created by printing money in massive quantities, and despite all the rhetoric you will hear against such policies, in the end it’s the path of least resistance. Printing money is an invisible tax on savings, much easier to initiate, than, say, raising taxes or cutting back on services and entitlements.”

As central banks print money and increase supply, currencies become devalued. Whereas in the recent past, one currency may be reduced in value compared with other currencies, this time there is global competitive devaluation as excess liquidity is put into the system. Historically, this excess liquidity has made its way to riskier assets, i.e. stocks and commodities. Gold is generally a benefactor of this flight to riskier assets as many investors see it as a store of value. This chart illustrates the interconnectivity of gold and global money supply growth.

Click here to enlarge

However, [the above] image doesn’t tell the whole story. While the price of gold has followed the same upward path as money supply over the past 14 years, it hasn’t been able to keep pace with M2 growth, says the Bloomberg Precious Metal Mining Team. In fact, if the global money supply were backed by gold, gold prices would be much higher, according to Bloomberg.

The yellow line below shows how gold would be greater than $5,000 per troy ounce if just half of global money supply were backed by gold. If all of the money supply in the world were to be backed by gold, the price of one troy ounce would need to rise above $10,000. It’s unlikely, of course, that this will happen, but it serves as a useful illustration for the disappearing value of the world’s fiat currencies.

Click here to enlarge

Giustra reminds us that we have been down this path before saying, “When great nations mature and over-extend themselves, they revert to the paths of least resistance: borrow and/or print money. They all did it and they all failed; this time will be no different.”

The beneficiary of this type of event has historically been gold.

*http://www.usfunds.com/investor-resources/frank-talk/

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Related Articles:

1. Stealth Taxation in the Form of Financial Repression is Coming! Here’s Why – and How

 

Financial Repression is a form of wealth confiscation and redistribution that is in some ways as effective as taxation – but the government never directly calls it that. It never appears in the budget (directly), and while it is dependent on a comprehensive network of laws and regulations – none of those go through the legislature with a stated intention of creating Financial Repression. So while the economic net effects are similar to a huge and comprehensive set of investor taxes being used to pay down the national debt, the “taxes” are never a campaign issue because voters and investors don’t understand what is happening – they only feel the results. [In this article I lay out for you what is slowly developing and expected to escalate dramatically in the next few years.] Words: 5800

 

2. We Have Reached the End of the Road and are Staring into the Abyss! Got Gold?

 

 

With most of the world’s major economies as well as the financial system bankrupt…most people will rely on governments and central banks to save us but how can anyone possibly believe that totally incompetent and clueless politicians and central bankers could solve the problem they created in the first place… The main objective of governments is to stay in power and thus to buy votes, therefore they are incapable of taking the right decisions and the opposition, aspiring to power, is even less suitable since they will lie through their teeth and promise the earth in order to be elected. So what is the solution? Read on! Words: 2391

 

3. Alf Field’s 7 “D’s” of the Developing Disaster Revisited

 

 

When the supply of something is increased sharply relative to demand, the value of that commodity will decline. If the supply continues to increase rapidly and indefinitely, then that item will become worth less and less, with the potential to finally become nearly worthless. This is the Developing Disaster facing the US Dollar and the world. This is the factor that could become the single most important criterion in investment allocation decisions and possibly even for individual financial survival…[Let me explain this further by reviewing the 7 major problems facing the U.S. (and thus the world) and how they all will lead to problem #7 - devolution.] Words: 1520

 

4. “Financial Repression” May Soon Become Our Worst Nightmare! Here’s Why

A new financial policy initiative known by the label “Financial Repression” may soon become our worst nightmare. ‘Repression’ rhymes with ‘depression’ which could be what we have to look forward to as rampant price inflation and permanently lower living standards take hold. Get ready to be conscripted into a citizen army assembled for the greater cause of saving the nation from being swamped by a tsunami of debt. Let me explain. Words: 1585

5. Yes, the Debit Crisis Could Spread To The U.S.! Here’s Why

[Unfortunately,] for the U.S….its budget deficit is growing in spite of the fact revenues into the treasury continue to grow…Given the low level of interest rates on the Treasury’s debt it would not take much of an interest rate spike in the U.S. to negatively impact the government’s budget. [So, in reply to the unspoken question on everyone's mind, "Yes, the debit crisis could most definitely spread to the U.S." Let me explain further.] Words: 633

6. Brace for Impact: U.S. About to Go Off a Financial Cliff!

 

The kind of impact [our economy is] going to have will not be like flying into the side of a mountain. It will be the kind of crash that skids over land, clipping trees and buildings until the plane ends up wingless in a smoldering heap. I just hope the fuel tanks don’t ignite when the long rough ride is over. [Let me explain.] Words: 832

 

7. Another Economic Collapse and Great Depression are Coming! Here’s Why

 

 

It really is hard to find the words to describe the true horror of the national debt of the U.S. The U.S. government has been on the greatest debt binge in all of human history, and a day of reckoning is coming that is going to be so painful that it is going to shock America to the core. We have lived so far above our means for so long that none of us really has any concept of what “normal” is like anymore. The United States has enjoyed the greatest party in the history of the world, but now this decades-old party is ending and the bills are coming due. Our current system is headed for an inevitable collapse. There is no way of getting around it – a horrific economic collapse is coming [and] it is going to change the world. You better get ready. [Let me explain further.] Words: 1771

 

8. America’s Future: Growing Deficit, Shrinking Economy, Imploding Dollar and Exploding Inflation

 

 

The new [debt ceiling deal] legislation will add $2.4 trillion to the $14.3 trillion national debt in a little over a year – and we don’t even start saving money until after the debt reaches $16.7 trillion! This bill doesn’t even cut the deficit. It just slows the growth of government spending to around 8% a year! So, even if Congress cuts $2.1 trillion out of the budget over the next 10 years, we will still be running annual deficits of more than $1 trillion…[That means that in addition to a deficit that will continue to grow we can look forward to a shrinking economy, an imploding U.S. dollar and exploding inflation. Some future! Let me explain.] Words: 827

Financial Repression is a form of wealth confiscation and redistribution that is in some ways as effective as taxation – but the government never directly calls it that. It never appears in the budget (directly), and while it is dependent on a comprehensive network of laws and regulations – none of those go through the legislature with a stated intention of creating Financial Repression. So while the economic net effects are similar to a huge and comprehensive set of investor taxes being used to pay down the national debt, the “taxes” are never a campaign issue because voters and investors don’t understand what is happening – they only feel the results. [In this article I lay out for you what is slowly developing and expected to escalate dramatically in the next few years.]

So says Daniel Amerman (www.danielamerman.com) in edited excerpts from his original article*.

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) the article below for the sake of clarity and brevity to ensure a fast and easy read. The report’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Amerman goes on to say, in part:

“Financial Repression” is the academic term for how governments can pay down enormous debts by forcing interest rates below the rate of inflation, and then systematically confiscate the purchasing power of their citizens’ savings over time, while keeping people from being able to escape or defend themselves. It is a hidden form of investor wealth confiscation and redistribution – as effective in its own way as taxation – with a very long track record of “success”. [For another article on the subject read “Financial Repression” May Soon Become Our Worst Nightmare! Here’s Why]

 The form of wealth confiscation is inflation rather than cash payments, and while the enormous benefits which flow to the government are entirely real, the overwhelming majority of those whose wealth is being confiscated will never fully understand what is happening, as there are no checks being written, and it never appears on a tax return. This makes Financial Repression a hugely successful strategy from a governmental perspective. 

The policies of Financial Repression were used by advanced economies between 1945 and 1980 to successfully slash over 70% of the amount of government debt relative to economic output. This strategy is posted on the IMF website and is drawing international attention among government policymakers and economists for very good reason – it’s what actually worked for the governments the last time around, and how they dodged default or hyperinflation.

However, while parallels exist, the current crisis is very different from the post-World War II government debt crisis. By the end of 1945, the war was over, and the challenge was how to pay down past debts that had been racked up but were no longer being incurred. Conversely, the main problem this time around still lies in the future, with the United States, Europe and others having made long-term entitlement promises that dwarf the current deficits.

For Financial Repression to have a chance in the current environment, the governments of the world must employ not just the strategies of the past, but even more powerful strategies to deal with a fast oncoming future crisis that is far larger than the post World War II crisis.

From the perspective of a government that is in financial crisis mode, with no end in sight, there is a powerful mathematical advantage to deploying a double-edged strategy which devastates the financial security of millions of retirement investors by slashing both the value of their savings (the first edge) and the value of their pensions and/or Social Security payments (the second edge).

The effects of the implementation of this strategy can already be seen all around us,[as follows]:

The solution to investing in the face of financial repression..is quite distinct from the all-or-none currency meltdown strategies that implode absent a meltdown, and the more conventional investment strategies. Ideally, an investor should deploy a strategy that can handle any or all…scenarios: one that survives and even thrives during and after a currency meltdown, and one which also not only survives but even prospers in Financial Repression (or combinations of meltdown and repression) while still doing fine if those scenarios end up not being as severe as many now anticipate.

Historic Financial Repression & Its Powerful Return

The most important thing that we need to understand about Financial Repression is that it works. The graph below shows that historically, as a result of war debts, the developed nations of the West owed about as much in total public debt outstanding compared to their economies in 1945 as they do right now. By 1980, more than 70% of that debt was gone, as a percentage of the size of the national economies.

The graph was derived from the data in an influential paper by Carmen Reinhart and M. Belen Sbrancia, which has been circulated by the International Monetary Fund to decision-makers on a global basis. What the paper shows is how it’s done: how the developed nations of the world took seemingly impossible debt burdens and brought them down to a manageable level. Here is a link to my analysis of this traditional first edge of Financial Repression, Financial Repression: A Sheep Shearing Manual, in which I discuss the way traditional investment strategies are devastated by the governments’ deliberate tilting of the investment playing field. Should you wish to also read the much longer original paper by Reinhart and Sbrancia, this is the Original Paper on the IMF website.

What was done – even if it was never described that way in the newspaper headlines or in the investor education books and columns – was as follows: 

• the governments used paper currencies that were prone to inflation, instead of the precious metals-backed currencies that were the norm before the 1930s.
• they also deployed a network of rules and regulations to create a playing field in which savers and financial institutions were pretty much forced to invest their money at interest rates that were below the rate of inflation.
• Each year as inflation destroyed part of the value of money, the real (inflation-adjusted) value of the governmental debt burden fell along with the value of money.
• Each year, inflation also destroyed part of the value of the nation’s savings with much of those savings being either directly invested in government debt, or indirectly, through accounts at financial institutions that were forced to heavily invest in government debt.
• Savers were effectively given no choice but to watch the purchasing power of their savings fall each year as government debts were paid down by inflation…

Even though the academic term Financial Repression fell into obscurity for about three decades, it is not just an artifact of the historic past. Indeed it has returned stronger than ever. To see the evidence: consider what you pay for food, energy, healthcare, education and many of the other essentials of life. As we all know, the cost for these resources has been rising at an annual rate that is much higher than the puny-to-nonexistent interest rates that we have been earning in our collective money market funds and savings accounts.

Now in a theoretical free-market, investors would force interest rates up to adjust for current inflation as well as for future inflationary expectations. This competing academic theory that governments can’t use inflation to pay down debts has wide acceptance among many commentators. However, it flies in the face of what actually happens in the real world, as shown not just with the experience of the last ten years, but also from 1945 to 1980. The point of Financial Repression from a governmental perspective is that there is no free market with regard to interest rates; instead the government uses its vast powers to effectively force a negative return on savers. Much more information on the recent and current experience can be found in my article “Cheating Investors As Official Government Policy“.

The Oncoming Global Crisis & Governments’ Need For Wider & More Aggressive Repression Policies

As mentioned in the overview, while the ratios of overall government debt levels to the size of the economies are roughly comparable between the years 1946 and 2011, there is a major difference which makes things far worse this time around. In 1946, the war was over, the massive deficits had stopped, and it was a matter of paying down debts already in place.

This time, the worst of the crisis still lies ahead of us instead of being behind us. What grips the developed world in the early 2010s is a sovereign debt crisis, the essence of which comes down to the governments having promised to pay far more to certain sectors of their societies than they have the tax revenues or even the economic resources to actually pay for and, as shown by numerous studies which go back for decades, the worst is still ahead of us.

The amount by which future government expenditures are likely to exceed future government tax revenues in the United States (under the current structure) is estimated to be somewhere in the range between $62 trillion and $200 trillion (with some estimates being in present value form and others not). Now officially, the US government merely has the staggering sum of $14 trillion in debt outstanding. But, that is using a government definition of debt, which is Treasury obligations only, rather than all of what the government has promised to pay in the future. If a corporation were to use that kind of selective accounting people would go to jail for fraud.

If we take the approach that the newspaper USA Today did, which was to treat the government like a corporation and report on the total by which its total future obligations rose in a year, then during 2010 (as illustrated in the graph below), the share of the one-year increase in total unfunded national obligations per solvent and able to pay (above poverty-line) US household came to $54,600.

The source of the above graph is my article, “Per Household Annual Deficit Exceeds US Income Per Household“. Also covered in that article is that according to the US Census Bureau, the median household income is only about $50,200 per year so the situation is far worse than “merely” having a national debt burden that is greater than the size of the national economy. We are in the incredible place where the annual growth in total unfunded government obligations per above-poverty-line household exceeds the current annual income of the median household.

This sounds fantastical and difficult to believe, but the math is basic: take the results of a study of US government obligations by a major mainstream newspaper, divide the annual increase in obligations by the number of above-poverty line US households, compare to the median annual US household income, and you have the preceding graph.

Obviously, the Financial Repression techniques of the past aren’t by themselves going to be enough to deal with the problem this time around. The future deficits are increasing at too great of a rate so if Financial Repression is to be successful again it is going to need to be modified in such a way that the size of those future payments is as much a target as earnings by savers. As we will cover below, that is the second edge of modern Financial Repression: it is devastating for retirees, it will be getting worse year by year for current and future retirees, and it has been underway for some time now.

The Solution For Governments: Inflation Index Manipulation & Theft By Statistics

Simply put, the solution for governments is to not pay what has been promised to entitlement beneficiaries (especially retirees) and public sector workers who rely on inflation-indexed payments. Instead, governments use their direct control of how inflation rates are calculated and reported to deliberately understate the rate of inflation, which then steadily reduces retiree and inflation-indexed workers standards of living on an annual basis over the coming years and decades. From the perspective of governments – which is a very different perspective from fairness and justice for individual citizens – this leads to a highly desirable outcome.

What is causing the “sovereign debt crisis” which is threatening the economic viability of the US and the EU simultaneously is that impossible promises have been made from the perspective of overall society. There has been a fundamental demographic shift, with a post-war boom in population followed by smaller families. For decades, politicians have made generous promises to a rapidly aging population without considering the cost of meeting those promises in the future, or how a relatively smaller group of adult children in their prime working years could support a very large group of elderly parents in the style which the politicians promised. It’s not even so much a matter of money and tax rates as that the promises made exceed the likely economic resources available to pay for them under any reasonable growth scenario. [As such the promises made in the past will not be fulfilled in the future... and, therefore,] these impossible promises will be broken in one form or another.

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We know there will be higher and higher Social Security costs in the US (and its equivalent in other nations), higher and higher public and private pension costs, and most dangerous of all, higher and higher health care costs for an aging population – even as relatively fewer workers are available per retiree to pay for the burden so we know there will be a steady mathematical decline in the ability to pay that will get a little bit worse every year. When $62 trillion or $200 trillion in future total deficits in the US are discussed – it is the demographics of an aging population that is the source.

One way of dealing with [the promises that were made] is to explicitly and openly change the rules and reduce the entitlements, and the first stages of this approach are already in process. However, for politicians, this is a very dangerous path indeed when taken too far. People have been falsely told for decades when they paid payroll taxes that these taxes were a public savings plan for retirement. Of course, this has been a lie the entire time, the money was never saved but was always spent the same year it was taken in, and the Social Security “trust fund” has always only been IOUs which the government has written to itself but many people don’t understand that. [As such, they naturally they get inflamed when what was promised to them, and what they thought they had paid for, is taken away from them. They feel cheated and they look for people – namely politicians – to blame. When this problem is compounded by particularly unscrupulous politicians seeking short-term advantage by denying that the problem exists at all - then open entitlement cuts are difficult, and no one is proposing a plan powerful enough to actually solve the problem.

The other path available is to use steady annual math to fight steady annual math. As covered in my article "Inflation Index Manipulation & Theft By Statistics", which was originally published in 2007, the mathematics involved are to publicly claim an inflation rate that is lower than the actual inflation rate. Then each consecutive year continue to deliberately understate the rate of inflation. This methodology is employed because most benefits are promised in inflation-adjusted terms, which is both the problem and the loophole. The problem is that as long as the government honestly makes fully inflation-adjusted payments to beneficiaries, then the burden of future government promises is impossible. The loophole is that the government controls what the inflation rate is defined as being.

When we look all around us [we see that] the costs of maintaining our standards of living are rising at a rate that is substantially higher than the earnings we receive on our savings; and there is also a higher rate of true inflation than the annual increases we get in Social Security payments or in cost-of-living adjustments to salaries. What we are seeing is a steady mathematical process of growing theft.

The illustration in the chart and graph above, from the article “Inflation Index Manipulation & Theft By Statistics”, uses assumptions of 10% for the real inflation rate, and 3% for the official rate of inflation. This means that the government cheats retirees out of 7% of their incomes each year. There is a 7% reduction in year one, and another 7% in year two, and another 7% in year three, until by the 20th year, the government is able to wipe out 73% of its future debt burden without ever explicitly taking a benefit away or breaking a promise. Crucially, this mean the otherwise impossible promises are now well within the capacity of future tax rates and the future economy to pay albeit at a terrible cost in falling standards of living for retirees and those whose salaries are tied to inflation indexes.

For the economically impossible to become possible, without explicitly reneging on retirement promises on a massive scale, the inflation rate must be deliberately understated. More specifically, the steady mathematical progression of breaking promises via reducing inflation-indexed payments is used to cancel out the steady mathematical progression of increasingly impossible promises as

• the ratio of current workers to retirees falls with each year,
• the makeup of the population of retirees is transformed by age, with an ever increasing percentage of Boomer retirees reaching 80 and beyond, along with
• the associated explosive surge in average annual medical expenses.

This is the necessary mathematics…and it is the reason why it’s likely to get only worse – indeed much worse – in the years to come. More on the math and the thoroughly interrelated political considerations can be found in this article.

The Double-Edged Risk For Retirees

Both of the two closely interrelated aspects of modern Financial Repression are likely to have a devastating impact on the future standard of living for tens of millions of retirees. These current and future retirees are investing to supplement Social Security and/or a pension, and this means the two edges of Financial Repression will be slashing them both coming and going. Unfortunately, the overwhelming majority of the population doesn’t see the blade or the deliberate nature of the attack, making it very difficult to build effective defenses.

For future retirees, in each year up to retirement and each year afterwards, there will be a steady squeeze which reduces the standard of living that can be paid for by Social Security and pensions. Their expenses are likely to be increasing at rates that are well above the increases in benefit payments which are tied to inflation-indexing as determined by the government…

Let’s return to our illustration of a 10% real rate of inflation, versus a 3% official rate of inflation that is used to calculate annual increases in Social Security payments. We’ll assume that we are talking about a 60 year old named Brian who had for many years been hoping to retire at age 65, but because his financial planning investment strategy didn’t work out as hoped, Brian is now shooting for 70 – if he is lucky. The current purchasing power of Social Security, in combination with Brian drawing down from what he hopes will be his retirement savings in 10 years, would be tight but doable, in terms of his future retirement standard of living. However, when he goes to the chart, and sees that, with the illustration assumptions, in 10 years the purchasing power of Social Security may only be 48% of what it is now, Brian realizes that it simply won’t work, and that he and his wife wouldn’t be able to retire at all with an above-poverty-line standard of living.

(The above chart was created in 2007, thus ten years out is 2017. While the chart could have been easily updated to the current year, it was left in its 2007 form to reinforce a very important point: this isn’t a new, surprising, or short-term development, but instead, governments resorting to inflation-index manipulation has been predictable for a long time, for the same fundamental reasons that such manipulations are likely to persist far into the future.)

Brian realizes that with his current plan, he can’t retire at 70. He also doesn’t know what his health will be in his 70s, and he isn’t entirely confident that he will still have a job in 5 years, let alone in 10 or 15 years. For these reasons, Brian and his wife decide to tighten their belts right now, and drop their standard of living, to try to save as much as they possibly can before their incomes fall in retirement. Perhaps between additional savings and earnings on those savings, they will be able to retire in ten years, or at least have the option if life makes the decision for them.

Which brings us back to the first edge of Financial Repression, the time-honored method governments can use to reduce the real value of massive debts. Having been badly burned with their more aggressive stock investments, Brian wants to stick to “safe” and liquid investments this time around, particularly since they don’t know for sure when they will need to start cashing them out. [As such,] they choose short-term, high quality investments where interest rates are being manipulated by the Federal Reserve to stay at levels well below the rate of inflation, as part of a deliberate government policy of Financial Repression.

For simplicity’s sake, we will assume that the relationship between short-term high quality investments and real inflation is the same as that between the official rate of inflation and real inflation which would mean that over ten years, with a 3% annual return, and the value of money declining at 10% per year,

• the purchasing power of a dollar that Brian saves today will be worth 48 cents in ten years (pre-tax)…[and, as such,] he and his wife try to prepare by saving as much as they can, in an uphill struggle against the future – but it gets worse.
• 15 years from now, when Brian turns 75, Social Security payments only have 37% of the purchasing power that they do today – and the dollars saved to make up the difference in purchasing power also only have 37% of the purchasing power.
• 20 years from now, when Brian reaches age 80, Social Security payments only have 27% of the purchasing power that they do today – and the dollars saved to make up the difference in purchasing power also only have 27% of the purchasing power.
• Brian’s wife has a bigger problem than Brian does because, on average, women are younger than their husbands, and will live for longer, meaning Angela could easily have ten or more years of inflation and financial repression exposure after Brian has passed and 30 years from now, Angela’s solo Social Security payments may only buy 14% of what those payments would buy today – while the dollars saved 30 years before might have only 14% of the purchasing power they have today – pre-tax, even after having been invested at market rates for 30 years.

What makes this bleak scenario all too likely is the other side, and the financial interests of the sword-wielder. Because of 30 years of systematic inflation-index manipulation, the government is saving 86 cents on the dollar when it comes to retirement beneficiary payments. That fantastic, incredible, unpayable $14 trillion in national debt from 2011 is worth only about $2 trillion in inflation-adjusted terms by 2041. Thus, the impossible numbers of unfunded obligations, the $62 trillion and more – turn out to be possible after all.

From a very cold, impersonal, mathematical perspective – the steady power of exponential mathematics was simultaneously applied from two different directions to quite effectively deal with the seemingly impossible 1-2 combination of current debts and promised future payments that are rapidly increasing. From the self-serving perspective of politicians seeking to stay in power there is a compelling political logic to choosing a slow and highly technical deceit that most voters will never fully understand, as opposed to repeatedly voting to reduce retirement payments in the open (these political considerations are covered in more detail in the “Inflation Index Manipulation” article linked above). From the perspective of the tens of millions of current and future retirees, [however,]… there is all too likely to be an intensely personal tragedy, repeated in city after city across the U.S., as well as in other nations. Honest hard-working people who played by the rules their entire lives, who made a lifetime of contributions, who did everything they were supposed to do in order to enjoy a pleasant and prosperous retirement – find themselves facing impoverishment in their later years, caught in a multi-sided financial trap with seemingly few ways out.

This is unfair, it is an outrage, and it is just plain wrong. One solution may be to scream and shout and spread the word, and if enough people do it [perhaps] that could help. The situation – and the math – being what they are, however, the most practical and effective solution may be to leave the conventional retirement investing box altogether, move to a different level of understanding, and learn to flip the government’s mathematics of retirement destruction into a personal arbitrage opportunity for building safety and wealth.

The Triple Risk For The Military, Teachers & Other Public Sector Employees

The greatest danger of all is reserved for those who currently still serve the public in their careers: military personnel, police, firefighters, teachers and the many other public sector workers. (While they fall in a different category, the millions of private sector employees whose incomes are also explicitly tied to official inflation indexes are also at risk.)

As the public workers face the severe challenges in making retirement investments in an intertwined world of financial crisis and Financial Repression, what may appear to be their greatest benefit relative to many in the private sector, may instead turn out to be the lead weight that drags them down. The advantage – and also the problem – is that they have a job and source of income that is (generally speaking) more secure than the uncertain prospects faced by many in the private sector. However, in these days of financial strain, unless they get a promotion, their pay is going to be limited to increasing with the rate of inflation. Much like Social Security beneficiaries, the only raises they will receive are those associated with the official index for inflation. Indeed, because they are paid by the government, public sector worker salaries come out of the same pool of money as entitlement beneficiaries, and will effectively sink or swim along with the entitlement beneficiaries.

Let’s consider the total challenge that is faced by a soldier, firefighter or teacher who is trying to prepare for retirement in 10 or 15 years…In an environment of Financial Repression, they face

• steady impoverishment from the first edge, that comes in the form of a declining purchasing power for future retirement benefits. Like Brian and his wife in the previous illustration, they face the danger that their public pension may have only 48% of its current purchasing power in 10 years, or only 27% in 20 years,
• steady reduction in the purchasing power of their savings from the second edge. They face the danger that a dollar they invest today to offset their benefits falling by half in 10 years, will itself only have half the purchasing power that it does on the day they first invested.
• steady financial squeeze on their savings because their income is explicitly tied to inflation indexes so, as public employees attempt to save ever more money, their household expenses (all else being equal) are likely to be rising as a percentage of their income each year, which translates to less money being available to save each year. This then places them in the situation where 1) their ability to save diminishes every year along with the purchasing power of their salaries; 2) the purchasing power of their savings declines each year; and 3) the purchasing power of their public pensions declines each year.

The above may sound like a horrible example of Murphy’s Law in action, but there is no coincidence here…The governments of the Western developed world are broke, and have no way out, unless they make some radical changes…Governments have massive current debts, along with impossible spending burdens ahead. The largest components of those spending burdens are salaries for public sector workers and transfer payments for entitlements – each of which are inflation-indexed. The “magic bullet” of manipulating the inflation indexes to steal from savers, public workers and retirees is what makes the math work.

Because they have three separate exposures – salaries, savings returns and retirement benefits – public workers face the likelihood of having three distinct “shots” taken at their current and future standards of living – this year, next year and every year thereafter.

The Choice Between Impoverishment & Finding New Solutions

While there is a significant chance of a financial and economic meltdown when it comes to the governments of the West, particularly if the euro and European economy were to collapse – there is no certainty of a meltdown. This meltdown may look inevitable to some people when we consider current laws and the way the banks and economies are currently structured, however, for personal financial survival, it is also essential to keep in mind that the rules are what the government says they are. Think of governments as being enormous, dangerous beasts who have been backed into a corner and are fighting for their lives. Bloodied, wounded beasts with full control over not only what the language of the law reads – but perhaps even more important – which laws are enforced and how they are enforced with how inflation-indexing works being only one example.

As we are already seeing in Europe [and] the U.S., the general governmental reaction to the increasing failure of government policies is not to say “we screwed things up, we’re all resigning in shame and here is your power back and a return to sound money”. Rather the government’s reaction to its own failure is to try to ratchet up its own power in the name of emergency, and to increase its control over its own citizens in the process.

The use of Financial Repression to emerge from enormous debt levels is not theory – it is proven history. It is what worked the last time the governments had this level of debt outstanding. The situation is worse this time around, but the double-edged sword of Financial Repression is already being aggressively wielded today by the US government against its own citizens. This can be plainly seen when we compare the real cost of living and how that changes on an annual basis in comparison to either returns on savings or the official indexes that are used to pay salaries and entitlement benefits. In my opinion, there is no question that the net result is that we are not being adequately compensated for saving our money, and that standards of living are falling for people who are completely dependent on payments that move exactly with official government inflation indexes…

There is an alternative, however, and that is to seek out strategies that are thoroughly nonconventional from a meltdown perspective, as well as in comparison to normal financial planning. Perhaps the best approach is to say: “I don’t know what the future will be, so I want a strategy that protects what I have if it’s meltdown, with a strong upside potential and I want a strategy that protects what I have if it is financial repression, with a strong upside there too. What I want is a strategy that works for me both ways.”

A continuation of Financial Repression into the future will likely severely damage many conventional long term investment strategies. There are the direct effects of the first edge, which means fixed income investors steadily lose the value of their portfolios to inflation.

It is the second edge of Financial Repression, however, that is the deadliest for traditional investment strategies…Baby boomers have been buying stocks which are absolutely dependent on growth in consumer spending in order to fund their retirements, with an intention to sell at the very time the Baby Boom is reducing spending in retirement, not taking into account that age-driven reduction in Boomer spending will slash much of the value of stocks that depend on growth in consumer spending. This then creates a loop as reduced investment values lead to reduced retirement spending ability, which further reduces investment values, and so forth. If retirees and public sector workers – along with inflation-indexed private sector workers – have falling real incomes because of inflation-index manipulation, then this has a devastating effect on consumer spending growth, which…then means that a stock market priced for never ending growth is radically overvalued, and subject to a punishing and long-term decline.

The repression may or may not be successful at preventing a total financial meltdown. Crucially, however, meltdown investors must understand that if currency collapse is dodged, even if there is a sustained but high real rate of inflation that is deliberately deployed as part of a strategy of Financial Repression, part of the very design of the playing field and tax structure will likely be to squeeze out and crush the assets of those pursuing simplistic and traditional meltdown strategies. The government actively makes the rules, and history shows that in times of emergency, motivated governments change rules very quickly on a wholesale basis. Unfortunately, however, too many people mistakenly believe that a desperate government that is scrambling to prevent financial collapse will merely passively maintain the current rules.

As close to financial security as can be found in these perilous and volatile times can best be achieved through pursuing unconventional strategies designed to handle both repression and meltdown.

* http://danielamerman.com/articles/2011/DoubleRb.html

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