Not the sort that comes with a threat, of course. Besides being illegal to issue threats, the threat involved here isn’t mine. It’s the markets, and the mathematics.
Let’s start with our budget and our debt:
Interest is currently 4.63% of the budget, and about 10% of tax receipts. This is due to the Federal Reserve tampering with system liquidity and record-low interest rates. This is about half what we were paying in 2007 for interest, even though we have gone from $9 trillion in debt to $13.5 trillion, a more than 40% increase.
A simple reversion to the 2007 interest rate structure will cause the interest expense to explode to roughly $600 billion, or some 30-40% of tax receipts, and that’s if we stop adding to the deficit today, which we won’t. Read this folks: That’s a level three hundred percent of what is being spent now in terms of tax receipts, and in terms of actual money.
What’s worse is the projections – within the next few years simple mean-reversion will drive interest expense north of $1 trillion, or 50% of tax revenues.
That, incidentally, is approximately the point where it becomes impossible to get out of the trap.
Therefore, The Fed will be pressured not to let it happen, and to keep interest rates unreasonably low. Just as they were in 2003. Just as they were in 2009 and 2010 – now. Just as they were coming out of the 1987 market collapse.
But instead of fueling economic recovery, what this liquidity has fueled instead is an explosion in commodities. Since Ben Bernanke made clear he was not going to exit (as he claimed he would) commodity prices have risen at annualized rates of from ONE HUNDRED to FOUR HUNDRED PERCENT.
There’s no exit from this path folks, if you allow it continue.
It has to stop, and you have to stop it.
If you don’t, we will get trapped as has Japan. There will then be no ability to exit without instantaneously collapsing THE GOVERNMENT.
You know, that thing you work for and consider so important?
QE is seen by some of you, I’m sure, as a means to allow “recovery” actions by the government. It is not. It is a trap. A trap that, if you don’t stop trying to avail yourself of it, will lead to the government’s collapse.
This is not speculative.
It is a certainty.
For the prime example just look at Japan. Explain how a normalization of interest rates there, where the government’s debt goes to a blended yield of, say, 4%, can have its interest expense met.
Make sure you’re sitting down, because it is physically impossible for the Japanese government to do that. Therefore, they won’t – right up until confidence that the con game will continue is lost, at which point a “sudden stop” will occur in Japan.
When – not if – that happens, we will not escape the impact on yields. OUR yields will be forced upward. If we have dug the same hole, we will collapse too.
We also might go first. Confidence might be lost in our government’s ability to manage our ability to pay. This is not really a speculative matter either. China is already saying that the dollar is in danger of destruction. Ignore them? Not wise.
Argue that the commodity mess won’t happen? It already has.
Consider what Bill Gross said at 1:00 PM CT on 9/28 on CNBC. He said that “The Fed is attempting to invigorate animal spirits, so you’ll buy stocks like P&G instead of bonds.”
Damned if they do – you, the government, are screwed. Your interest expense spikes and you die.
Damned if they don’t – you keep trying to “Stimulate” via borrowed money and eventually confidence is lost in your ability to pull it off – rates go higher and you die.
Japan is trying to devalue their currency despite being in the hole, in order to keep their export business from imploding. The very business you claim is “helping us.” It’s not working, and it won’t. But it does add to the debt, which means that the time when their fuse goes inside the box – and their government and central bank implode – draws closer. It will happen if they keep trying to protect their exporters. This, too, is not speculative.
We cannot export our manufacturing offshore and replace our jobs with Starbucks coffee-pullers and McDonalds’ burger flippers. Not when we think the way to do this is through slave labor and pollution. Incidentally, Larry Summers more than a decade ago (in 1991) basically promulgated intentional abuse of workers and the environment as an intentional act while at the World Bank:
…..Dirty’ Industries: Just between you and me, shouldn’t the World Bank be encouraging MORE migration of the dirty industries to the LDCs [Least Developed Countries]? I can think of three reasons: 1) The measurements of the costs of health impairing pollution depends on the foregone earnings from increased morbidity and mortality. From this point of view a given amount of health impairing pollution should be done in the country with the lowest cost, which will be the country with the lowest wages. I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that……
Yeah, now Larry is going back to Harvard. After he sat back and let us sink more than $3 trillion of additional funds into the black hole.
I am well-aware that nobody wants to tackle the real problems with our budget. That’s because nearly all of the problem is in fact in entitlements. Taking this on means telling people they won’t get what they were promised. Nobody wants to do that.
But it doesn’t matter what you want to do. What matters is what you can pay for. And we can’t pay for these entitlements. Not when they consume the ENTIRETY of the tax revenue the government takes in, and right now, today, this is the case.
Raising taxes won’t fix it either. There’s not enough marginal revenue available. The United States has never managed to garner more than about 20% of GDP in tax revenue. Ever. As soon as rates go up avoidance of further work and taxes rise too. Legally. The result? No more revenue. So at best you can squeeze another hundred billion or two out of the system this way – but no more. It’s not enough.
The problem lies here:
You can’t fix this through any other path than truth. The hard, nasty, ugly truth. The blue line must go under the red line, basically. That is, the government’s debt must grow more slowly than private GDP does, or you inherently create bubbles which burst, and the people who do so then demand more and more government bailouts and handouts, which simply forces the blue line higher!
The Government must contract in size – dramatically. 30, even 40 or 50%. For real. And just by the math, it has to come out of entitlements. It cannot be otherwise.
Outstanding credit must contract in size – dramatically. About 50%. This will produce howls of protest – and laughter I’m sure. It doesn’t matter if you howl or not. It has to happen. It is the only way to restore balance. We’re talking about 25 trillion dollars here. We can’t pay it off, therefore, we must default it. There is no other option. Most of this excess credit was issued fraudulently. Force the fraudsters to eat it, and let them die. Protect depositors – nobody else. If we have to “print money” (or sell debt at an insane premium) that’s the one place we can justify doing it. If this destroys lower Manhattan’s “titans of banking”, then it does. We can protect the banking system and there will be other people who will set up and operate new Banks. I’m sure of it – entrepreneurship guarantees that.
These two things will contract GDP. By a lot. Probably back to 2000 levels – $10 trillion or so. This too will produce howls of protest – and peals of laughter. It doesn’t matter. We can choose between that contraction, which is what we have to accept after distorting the system for 20 years, or we can run the risk of an even larger contraction, perhaps by as much as 75%, when our government’s ability to borrow collapses and with it our monetary system disappears.
Our state and local governments must also contract. We recently added a new “Enhanced” EMS unit to our local volunteer fire department. It’s nice. We don’t have the money for it, and are going to have to accept that there is a 2% higher risk that if you call for an ambulance it might be your last ride. I don’t like this, but it doesn’t matter what I like.
Likewise, computers in the classroom are a great idea. So are high-paid executives and administrators in the school. We don’t have the money. We must instead focus on the essentials – reading, writing, mathematics, hard science and history. That’s where the money has to go. We can’t afford the rest. Local and state tax systems must contract dramatically, which means local and state services must contract dramatically. Yes, by that same 30, 40 or even 50%. It cannot be otherwise.
Folks, exponential growth cannot be continued forever. The landmass of this rock – and our nation – is finite. We have run the false belief that we can have 5% growth annually forever. We can’t. This is what happens when you try it:
Why did I choose 70 years? Because that’s roughly what I figure my daughter has to look forward to from the base year, 2000.
Do you really think we can have a GDP of $289 trillion by the time she is ready for an old folk’s home? Really? 28 times over what we had in the year 2000? REALLY?
Or, if you prefer, last year (calendar) we expanded federal debt (including Social Security and Medicare) by 15.5%. Let’s presume you can hold it to 10%. This is what the graph looks like, using 1/1/2010 as the base, and again extending out – the same 70 years.
Ok, ok, that obviously won’t happen. Well how about this? That’s only the next 20 years:
Are you willing to push the monetary and budgetary games necessary to try doing this?
We won’t make it through the next ten years if you do. Our Federal Debt will be approaching $30 trillion by 2020, and at a “modest” 3% interest rate you will consume all of Federal Income Tax attempting to cover it. Before you get there, our creditors will force your hand.
You will doom America as a nation.
You will destroy the best and finest nation, with all her warts, that the world has ever known.
The blame, and the legacy for it happening, will be yours.
Most of you will live long enough to both see it and be held accountable for it – especially those of you who are in your 50s or younger. That includes me, incidentally, and I’m going to bring the rotten tomatoes when the time comes – and I’m quite-certain it will. Those in your 70s? You’ll die first – because when Medicare and the entire Health System collapses under the weight of what you’re doing, your routine “old age” stuff won’t be able to be treated and irrespective of your wealth, you will expire.
Consider the facts folks. Get out a calculator. This is not hard. You’ve been bamboozled by people like Bernanke who never pull out the $10 calculator and show their work. They never look at a simple exponential graph.
They don’t and they try to keep you from it because they know if you do, you’ll figure it out.
You’re being sold an empty box.
A promise that can’t be kept.
A house of cards.
And the wind is rising…….