The madmen who are responsible for the coming economic disaster continue to behave as if they can manage to avoid it. Violating Einstein’s definition of insanity, they continue to apply the same poison that caused the problem. These fools believe they can manage complexities they do not understand. We are bigger fools for providing them the authority to indulge their hubris and wreak such damage.
So writes Monty Pelerin (economicnoise.com) in edited excerpts from his original article* entitled Extreme Fear Is Reasonable.
Pelerin goes on to say in further edited, and in some cases paraphrased, excerpts:
Apocalypse In One Picture
James Quinn provided the following graph. If a picture is worth a thousand words, this graph is worth millions. The route to economic demise is depicted below:
The relationships in this graph are terrifying! Debt is shown relative to GDP. GDP growth has been one-third the growth in debt for the period. That is, the economy required $3 of debt to produce $1 more in real GDP. In recent years diminishing returns to debt required $6 of debt to increase GDP by a $1. Whatever the benefits of debt, they have clearly diminished, almost to zero. Debt expansion has gone exponential in order to salvage the weak growth in GDP.
To put this into a perspective the average reader can understand, think of GDP as a household’s spending:
The “family” depicted above has to borrow each year in order to maintain its spending level.
Imagine the condition of your family if you borrowed 6 times the amount of incremental spending each year.
Then imagine the condition of your family after 40 years of continuously increasing your debt levels substantially in excess of your income.
It is impossible for a family without a printing press and a cooperative Federal Reserve to engage in such behavior.
The government is different, you say? Surely it is, but not necessarily in a meaningful financial manner. Just as you would not survive such behavior, governments cannot either. History is full of examples of government collapses resulting from excessive debt and overspending. A printing press only provides the luxury of more time before the failure.
You may…[be of the opinion] that a macro economy is different from a family, [that is, that] debt (parroting the political claim) makes an economy grow faster. The evidence shown…[in the chart above, however,] does not support that claim. Government reported GDP growth rates are shrinking as the debt expansion accelerates. Since 1965 the growth rate of the economy has been declining.
Even if you accept government GDP reporting, the chart…[above] shows a trend…[that] points to an average declining standard of living. That point will be reached when the GDP growth falls below the population growth.
The U.S. economy has been underperforming since the 1970s according to government’s statistics. That is after all the games have been played with these numbers. How much longer can these trends continue and what happens at the end? No one can reasonably answer either of these questions.
What Is Known And Not Known
Two things are known:
So long as borrowing increases faster than GDP, the ability to repay diminishes. That has been occurring for more than forty years and the differential growth rates have widened dramatically in recent years.
Not borrowing at this pace would likely have decreased reported GDP dramatically. While that may have been a proper economic response, it is now politically impossible (or highly unlikely).
Continuing to increase debt at a rate greater than GDP ensures financial collapse. Stopping or slowing down at this point likely leads to the same point. This country has maneuvered itself into a no-escape situation.
…Those in favor of more debt argue that a calamity would have occurred had the massive rise in debt, and its accompany stimulative effects, not happened. For the Paul Krugmans of the world, more debt and stimulus is always the answer.
The rapidly increasing amounts of debt since 1965 have been accompanied by not rising but falling rates of growth. One may speculate what this growth would have been with different rates of debt expansion. Whether the rate of debt expansion increased or decreased the rate of real GDP is moot. Economists can use their competing paradigms to duel over this issue but cannot come to a conclusion that is acceptable to most.
Mathematics, on the other hand, is more definitive. There are mathematical limits that control the ability to service debt. Once these limits have been breached, some amount of the debt will be defaulted on. The breach point is referred to as a debt death spiral. The U.S. has passed this mathematical point and is in a death spiral.
The political class in America, either via misguided economic policies or a deliberate attempt to hide the true condition of the country, has put us here. They will continue to employ whatever policies they believe will keep things going for a while longer. The tragic ending has been cast. Economics cannot trump mathematics.
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
The U.S. government is in what is known as a “debt death spiral”. They must borrow money to repay prior debts. It is as if they are using their Visa Card to make an American Express payment. The rate of new debt additions dwarf any rate of growth the economy can possibly achieve. The end is certain, only its timing is unknown, and, once interest rates begin to rise, and they will, it’s game over. Read More »
Whether you are an investor, concerned citizen or merely someone trying to understand the current economic situation, you should be worried. Watch this video to get an outstanding overview of what is occurring. It is probably the best short explanation as to why the end of this economic death spiral is so hard to call. Read More »
The U.S. debt situation when broken down to one of family statistics really seems absurd. Yet it’s true. It’s a slow motion train wreck that can be seen coming miles away but which, like deer paralyzed in the headlights, everyone is unwilling to face up to and to take any meaningful corrective action – and it will be the downfall of them all. Words: 550 Read More »
16 point 7 trillion dollars. That is our current national debt. 12 point 8 trillion dollars. That is the amount households carry in mortgage and consumer debt. We are now addicted to debt to lubricate the wheels of our financial system. There is nothing wrong with debt per se, but it is safe to say that too much debt relative to how much revenue is being produced is a sign of economic problems. At the core of our current financial mess is how we use debt as a parachute for any problem. [Unfortunately,] addictions are never easily cured and we have yet to come to terms with our insatiable appetite for debt. Words: 850 Read More »
Why are so many politicians around the world declaring that the debt crisis is “over” when debt-to-GDP ratios all over the planet continue to skyrocket? The global economy has never seen anything like the sovereign debt bubble that we are experiencing today. This insanity will continue until a day of reckoning arrives and the system implodes. Nobody knows exactly when that moment will be reached, but without a doubt it is coming. Are you ready? Words: 1270
Many articles are being written these days that more or less scope the dire financial circumstances the U.S. is in. That being said, I had not been able to find one “analyst” – even one – who had the guts to outline the probable outcome and general hopelessness of the situation and to offer any meaningful prescription for investors to survive this coming catastrophe – until now. Words: 710
If Congress does not raise the debt ceiling, the result will be no different than the Jones family deciding that they have maxed out their credit cards and that, if they continue borrowing and spending over their means, there will be significant pain to the family at best and bankruptcy at worst. Any attempt to prove otherwise is futile because it’s just not true! [To further make his point the author provides below 7 other examples of why the economics of government are no different than those of the typical American household.] Words: 585
There has been a lot of media coverage about the United States’ debt issue these days. Why should we care? Because as U.S. citizens, we all own stock in this “company” called the United States of America (let’s say the ticker symbol is USA). We purchased this stock through the various taxes we pay every year (income tax, payroll tax, corporate tax) and we receive dividends through the various benefits we receive every year (security provided by defense budget, Medicare/Medicaid benefits, Social Security benefits, etc.). This article attempts to explain the U.S. national debt in simple layman’s terms by analyzing the United States and its debt issue as if it were a stock investment. Words: 1929; Charts: 5; Tables: 1
People riding a runaway train can party and remain oblivious to the fact that the train is about to crash into a huge obstacle. Our runaway financial train is about to destroy the status quo as it crashes into the obstacle of mathematical consequences – the inevitable financial train wreck. “If something cannot go on forever, it will stop.” [Let me explain.] Words: 974
It is relatively easy to predict further commodity price inflation as a result of the massive money printing going on worldwide and that hard assets, not paper assets, will help protect purchasing power but it is much more difficult to project where else this money printing leads and to what extent a crash is inevitable. What is the endgame? Will it be another financial crash such as in 2008 or will it be a more destructive financial and economic crash that causes a severe but temporary disruption in the delivery of goods and services? Words: 1470
The internet is awash (drowning?) in hundreds of doom and gloom videos providing dire warnings of coming world depression, food shortages, rioting in the streets, rampant (hyper) inflation, deepening banking crisis, economic apocalypse, financial Armageddon, the demise of America – well, you get the idea. Below is a small sample of such videos with a hyperlink to each.
Warning: New evidence points toward an imminent financial collapse and the destruction of American wealth. Income, investments, retirement, and even personal safety are now at severe risk. In this new video I lay it all out for you. Words: 515
This short video – on the sustainability of government spending – should be watched by everyone, including those not yet old enough to vote. It should be shown in every high school and college classroom.
The level of debt has surpassed the possibilities of being serviced. Mathematically, the debt problem cannot be solved, regardless of economic policies. That, unfortunately, is written. For it to be serviceable would be to violate the laws of mathematics and that cannot happen. [As such, America is quickly approaching a catastrophic economic collapse. As repelling as that sounds, it’s in your own best interest to learn just how bad the situation is. This article is an attempt to do just that.] Words: 310
The corrosive nature of politics and government has destroyed the economy and the moral fiber of citizens. These issues are not insurmountable, but they are very close to being so. Their ramifications are potentially existential in nature: the average length of life, the very time span or cycle of a nation has been proven in history to be approximately 250 years. Since the USA was born in 1776 this says we have about 14 years of life remaining for America. The way things are going we don’t doubt it. [Let me explain.] Words: 768
Timing the U.S. debt implosion in advance is virtually impossible. Thus far, we’ve managed to [avoid such an event], however, this will not always be the case. If the U.S. does not deal with its debt problems now, we’re guaranteed to go the way of the PIIGS, along with an episode of hyperinflation. That is THE issue for the U.S., as this situation would affect every man woman and child living in this country. [Let me explain further.] Words: 495
…The US Government and its catastrophic fiscal morass are now viewed by the world as a ‘safe haven’. This would easily qualify for a comedy shtick if it weren’t so serious….[but] the establishment is thrilled with these developments because it helps maintain the status quo of the dollar standard era. However, there are some serious ramifications that few are paying attention to and are getting almost zero coverage from traditional media. [Let me explain what they are.] Words: 1150
Over the past few years, policy leaders worldwide have grown accustomed to kicking the can down the road with each step in this ongoing financial crisis making incremental moves rather than cultivating viable long term solutions. More recent attempts seem to have evolved into simply just trying to kick the can out of the driveway. Now we fear there may not be enough firepower left to simply kick the can over. [Having done so, we are left between the proverbial rock and a hard place.] If lawmakers do nothing, by all accounts we are likely to see a recession. Should lawmakers extend the Bush-era tax cuts, you make no progress towards long term deficit reduction, potentially raising the risk and magnitude of a future financial crisis. [Let me discuss this predicament further and how best to invest in such precarious times.] Words: 1602
The next few years are not going to be pretty. We’re looking right into the teeth of a rolling global deleveraging recession—the End Game, I’ve called it – and the decisions we make in the next couple years about how to handle our debts and budget deficits here in the U.S., in Europe, in China, in Japan, and elsewhere, are going to be absolutely crucial. Words: 507
The deficits aren’t going to stop anytime soon. The debt mountain will keep growing…Obviously, the debt can’t keep growing faster than the economy forever, but the people in charge do seem determined to find out just how far they can push things….The only way for the politicians to buy time will be through price inflation, to reduce the real burden of the debt, and whether they admit it or not, inflation is what they will be praying for….[and] the Federal Reserve will hear their prayer. When will the economy reach the wall toward which it is headed? Not soon, I believe, but in the meantime there will be plenty of excitement. [Let me explain what I expect to unfold.] Words: 1833
The problems of the US government are insoluble. They will result in the sovereign default of the federal government and the collapse of the US economy. Monty Pelerin explains why: “The claimed debt of the Federal Government of $16 Trillion is enough to threaten its viability and that of the US economy. The current glide path of spending and revenues ensures that debt will increase. Explicit and implicit Treasury guarantees will be required to bail out failing public and private agencies. The situation becomes hopeless when the unfunded liabilities are taken into account.”
In today’s overleveraged world, greater deficits and government spending, financed by an expansion of public debt and the monetary base (“the printing press”), are not the answer to our economic woes. In fact, these policies have been proven to have a negative impact on growth. [Therefore] as long as we continue down this path, the “solution” will continue to be the problem. There is no miracle cure to our current woes and recent proposals by central planners risk worsening the economic outlook for decades to come. [Let us explain.] Words: 1510
At the risk of looking/sounding like some crazed religious fanatic usually seen carrying a sign or proclaiming: “Repent, the end is near,” I shall avoid the word “repent”. To me, the rest of that proclamation appears accurate and reasonable, at least with regard to our economic condition. [Let me explain:] Words: 1896