The idea
that the very same economic forces that are currently plaguing Greece,
et al., are somehow not relevant to the United States' circumstances
does not hold water. As goes the rest of the world, so goes the US.
When
we back up far enough, it is clear that money and debt are there to
reflect and be in service to the production of real things by real
people, not the other way around. With too much debt relative to
production, it is the debt that will suffer. The same is true of money.
Neither are magical substances; they are merely markers for real things.
When they get out of balance with reality, they lose value, and
sometimes even their entire meaning.
This
report lays out the case that the US is irretrievably down the rabbit
hole of deficits and debt, and that, even if there were endless natural
resources of increasing quality available at this point, servicing the
debt loads and liabilities of the nation will require both austerity and
a pretty serious fall in living standards for most people.
Of
course, the age of cheap oil is over. And as Jim Puplava says, the oil
price is the new Fed funds rate, meaning that it is now the price of oil
that sets the pace of economic movement, not interest rates established
by the Fed.
However,
of all the challenges that catch my eye right now, the one most
worrisome is the shredding of our national narrative to the point that
it no longer makes any sense whatsoever. I'm a big believer that our
actions are guided by the stories we tell ourselves. To progress as a
society, having a grand vision that aligns and inspires is essential.
But
when words emphasize one set of priorities and actions support another,
any narrative falls apart. At a personal level, if someone touts their
punctuality but chronically shows up hours late, the narrative that says
"this person is reliable" begins to fall apart.
Likewise,
if a company boasts about being green but its track record belies them
as a major polluter, the "green" narrative fizzles.
And
at the national level, if we say we are a nation of laws, but the
Justice Department selectively prosecutes only the weak and relatively
powerless while leaving the well-connected and moneyed entirely alone,
then the narrative that says "we are a nation of blind justice and equal
laws" falls apart.
I
wish this was just some idle rumination, but I see more and more
examples validating the importance of alignment of narrative and
behavior. Because when there is a disconnect between words and actions,
anxiety and fear take root.
Unfortunately, there is quite a lot to fear and be anxious about in the most recent State of the Union address and GOP response.
State of the Union
The
recent State of the Union speech by Obama, and its Republican response,
are both remarkable for what they say as well as what they don't say.
The summary is this: The status quo will be preserved at all costs.
Here
are a few examples of the sorts of disconnects between rhetoric and
reality that are absolutely toxic to the morale of all who are paying
the slightest bit of attention.
Obama
Let's never forget: Millions of Americans who work hard and play by the rules every day deserve a government and a financial system that do the same. It's time to apply the same rules from top to bottom. No bailouts, no handouts, and no copouts. An America built to last insists on responsibility from everybody.
We've all paid the price for lenders who sold mortgages to people who couldn't afford them, and buyers who knew they couldn't afford them. That's why we need smart regulations to prevent irresponsible behavior.
It's
time to apply the same rules from top to bottom? Is Obama aware of what
Erik Holder is up to over there in the Justice Department? The
robo-signing scandal alone has thousands and thousands of open and shut
cases of felony forgery that can and should be applied to as many
individuals as were directly involved, from top to bottom in every
organization that was engaged in the practice.
Here's
the reality. Under Obama, criminal prosecution of financial fraud fell
to multi-decade lows during what is and remains one of the most
target-rich environments in living memory.
(Source)
Obama
And I will not go back to the days when Wall Street was allowed to play by its own set of rules.
So if you are a big bank or financial institution, you're no longer allowed to make risky bets with your customers' deposits. You're required to write out a "living will" that details exactly how you'll pay the bills if you fail -- because the rest of us are not bailing you out ever again.
Has
Obama checked with the Federal Reserve to assure they are on board with
the new 'no bail out' policy? Because last I checked, they were the
ones mainly involved in bailing out the big banks and providing swap
lines and free credit to anyone and everyone that needed help, US or
foreign.
To
be fair, Obama can make no statement or claim about what the Federal
Reserve can or can't or will or won't do. It is not under executive nor
even legislative control. If, or I should say when, the Federal
Reserve bails out the next bank or country or whomever, it's "the rest
of us" who will be paying the bill -- in the form of eventual inflation.
Obama
[W]orking with our military leaders, I've proposed a new defense strategy that ensures we maintain the finest military in the world, while saving nearly half a trillion dollars in our budget.
Let's
review the proposals for military spending then. The language above is
nearly impossible to decode. What is really being said is that proposed defense increases have been scaled back, and that this is what is being called savings.
In
2000, Defense spending was $312 billion dollars. In 2012, the proposed
budget calls for $703 billion, a 125% increase in 12 years.
What
the plan he mentions really calls for is spending increases in 5 out of
the next 6 years. The lone holdout is 2013, when the plan calls for
cutting spending by a whopping $6 billion less than the amount already
approved for 2012.
Somehow that all translates into rhetoric that implies cuts of "nearly half a trillion dollars."
As Lily Tomlin used to say, "As cynical as I am, I find it hard to keep up."
GOP Response
“The routes back to an America of promise, and to a solvent America that can pay its bills and protect its vulnerable, start in the same place. The only way up for those suffering tonight, and the only way out of the dead end of debt into which we have driven, is a private economy that begins to grow and create jobs, real jobs, at a much faster rate than today."
This
platitude-laden set of ideas is blissfully blind to the role of energy
in the story, the amount of debt in the system, and the fact that both
parties have contributed equally over the years to the predicament at
hand.
How
exactly is it that the private economy is supposed to flourish here,
with the Federal government borrowing more than a trillion dollars a
year and oil at $100 per barrel? The simple truth is that the US
government needs to begin borrowing at a rate lower than the previous
year's economic growth. If GDP grows at 2%, then the total debt pile
must not grow by anything more than 2%. That is the only way that the
official debts can shrink relative to the economy.
GOP Response
“We will advance our positive suggestions with confidence, because we know that Americans are still a people born to liberty. There is nothing wrong with the state of our Union that the American people, addressed as free-born, mature citizens, cannot set right."
Last
I checked, the original vote tally in the Senate on the National
Defense Authorization Act, which empowered the armed forces to engage in
civilian law enforcement activities and selectively suspended the habeas corpus
and due process rights (as guaranteed by the 5th and 6th amendments to
the Constitution), passed by a voice vote of 93 to 7 in the Senate.
It's
kind of hard to swallow the idea that the GOP stands with Americans as
"a people born to liberty" when their members are in perfect lock-step
with the Democrats, chipping away at the most basic and cherished
freedoms. There's no difference between the parties when both seem
intent on limiting individual freedom and increasing the power of the
government to reach into and examine our daily lives.
When Words Hurt
The
above examples are not meant to pick on any one person or party or set
of ideas, but to illuminate the profound gap that exists between what we
are telling ourselves at the national level and the actions we are
undertaking.
Again, it is the gap between what we tell ourselves and what we do
that creates a sense of unease, anxiety, and oftentimes fear. When we
hear words "X" but see actions "Y" over and over again, it is hard not
to come to the conclusion that the words are meaningless; empty rhetoric
designed with polls and focus groups in mind, but little else.
It
is the blind obedience to the status quo that worries me the most, as
it raises the likelihood that nothing of any substance will be done
until forced by circumstances, at which point, like Greece, we will
discover that the remaining menu of options ranges from bad to worse.
Left Unsaid - Our Missing Narrative
In
neither Obama's address nor the GOP response do we hear anything about
Peak Oil, a stock market that has gone nowhere in ten years, or the fact
that with two wars winding down there ought to be massive savings from
defense cuts that we can capture. There's lip service to the idea of
using more natural gas to begin weaning us off our imported oil
dependence, but no commensurate trillion-dollar program offered to
rapidly build out the infrastructure necessary to utilize that gas in a
meaningful way.
A
more honest set of messages would note that mistakes were made,
opportunities squandered, and priorities misplaced. It would note that
the US is on an unsustainable course with respect to spending, debts,
and liabilities. There would be an explicit admission that having your
central bank print trillions in "thin air" money in order to enable
runaway deficit spending is a dangerous and foolish thing to entertain.
Most
obviously missing is a national narrative that is coherent and comports
with the facts. Both parties basically imply that if we elect a few
more of their type, do a little of this and then tweak a little of that,
then we will get our nation back on track.
There
is no call to a shared sacrifice for something greater. There is
nothing to rally around except a laundry list of disconnected programs; a
little something for everyone. There is no overarching theme under
which everything else can be hung, such as a space race, a civil rights
movement, or a massive upgrading of our national infrastructure.
A
good narrative is one that inspires people and is based in reality but
also asks something larger of us that we can share in. What is our
vision for this country? Where do we want to be in ten years? How about
twenty? How will we get there, and what will be required? What should we
stop doing, what should we start doing, and what should we continue
doing?
None of these things are on display, and all are badly needed if we are going to make the most of the next twenty years.
The Troubling Facts
Of
all the facts that got skimmed over or avoided in the State of the
Union extravaganza, the fiscal nightmare in DC was probably the most
glaring. Yes, both parties have decided to talk about the deficit, but
neither is giving the appropriate context.
For
FY 2012, the federal government is projected to run a $1.1 trillion
deficit. Let's compare that number to the projected revenues:
(Source)
The
$1.1 trillion deficit is 42% of total revenues and 73% of all income
taxes. That is, in order to spend what the US currently spends without
going further into debt (i.e., to have no deficit), income taxes must
immediately increase by 73%(!).
This
is the sort of territory that, were the US any other country, would
have already landed its debt markets -- and likely its currency, too --
in very hot water.
Historically,
countries that have run deficits 40% greater than revenue for more than
two years have experienced profound financial and political crises. The
US is now in its fourth year of inhabiting this rare territory.
How
can it keep doing this when every other country that has tried has
gotten into trouble? Simple. The Federal Reserve has enabled such
egregious deficit spending by buying up mind-boggling amounts of
government debt. This has both kept rates low and created a lot of
additional buying demand for Treasuries.
Exactly
how much US debt is the Fed buying? Under Operation Twist, the Fed has
bought anywhere from 51% to 91% of all gross issuance of bonds dated six
years or longer in maturity.
(Source)
It
is quite obvious that the Fed has been a major participant in the bond
markets and a major reason why Treasurys are priced so high and offer so
low a yield.
It
seems that it is well past time to speak directly to the enormous
fiscal deficits in a credible way, not merely bemoaning them being too
high. And we're also overdue for an adult national conversation that
it's unwise and unsustainable for a country to lean on its central bank
to print up the difference between receipts and outlays.
Oil and Recoveries
There
is a clear relationship between high oil prices and recessions,
confirming the idea that the price of oil has the same impact on the
economy as higher interest rates (perhaps even more so nowadays). Both
are a source of friction. With higher interest rates, less lending and
less consuming happens. With a higher price of oil, more money gets
spent on energy, much of it sent to foreign producers of oil, and thus
less money is available for other consumption.
Both
higher oil prices and higher interest rates cause people to think a bit
more before pulling the trigger on either ordinary spending or a big
capital project.
Note
that all of the six prior recessions were preceded by a spike in oil
prices. In the case of the double-dip 1980's twin recessions, oil
remained elevated after the first recession was (allegedly) over. Don't
be fooled by the logarithmic nature of the chart below -- note that the
typical decline in oil prices between the recession-inducing peak (blue
lines) and the recovery-enabling trough (green lines) was a substantial
30%-50%:
(Source)
Also
note in the most recent data that oil prices happen to be at roughly
the same level that triggered the first recession in 2008 (the purple
dotted line).
If
we needed one simple chart to help us understand why trillions of
dollars of stimulus and handouts are not causing the economy to soar,
this is the chart that explains the most. High oil prices and recessions
are highly correlated, and it's not too much of a stretch to postulate
that economic recoveries and high oil prices are inversely correlated.
Note also that the above chart is not inflation-adjusted. If it were, it would show that there have been exactly zero recoveries when oil prices are near or over $100 per barrel.
For
those counting on an economic recovery here to lift all boats and
assist the bailout efforts, the burden of history is upon them to
explain why this time we should ignore the price of oil.
I
say we cannot. Policy planners and citizens alike should be ready for
disappointing market and economic activity in response to the usual bag
of printing, borrowing and delaying tricks.
Dead Ahead: A Currency Crisis
The
State of the Union speech and GOP response neither accurately portray
the true fiscal condition of the US, nor present a compelling narrative
that speaks either to the realities of today or a future we might like
to head towards.
The
US is simply on a fiscally ruinous path, and neither party seems up to
the task of laying out the story in a way that is mature, clear, and
direct.
No
recovery has ever been possible from oil prices this high, nor with
debt levels this extreme, and it is quite improbable to think that both
conditions could be overcome with anything less than a completely
clear-eyed view of the true nature of the predicament faced.
Decades ago, Ludwig Von Mises captured everything discussed here elegantly:
There is no means of avoiding the final collapse of a boom brought about by credit expansion.
The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.
Our
current dire fiscal condition, our leaders' dysfunctional unwillingness
to address the flawed behavior that caused it, plus many other recent
events both in the US and in Europe, point to the idea that a voluntary
abandonment of further credit expansion is just not on the menu.
That leaves us with some final and total catastrophe of the involved currency system(s) as the inevitable outcome.
In Part II: Surviving a Currency Crisis,
we explain what a currency is, what happens when a currency collapses,
and, most importantly, how to position yourself prudently in advance.
At
this point, time to prepare is your greatest asset. But as we can see
from the precarious global economic situation described above, time is
running out. Use what remains wisely.
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