Monday, January 17, 2011

Putting It All Together: 14 Months Later

In November 2009, I put up this analysis of where I could then see things were going, and the reasons why no one should be happy about it. Since that time, I have continued to monitor the trends as best as I am able -- but at the same time, I have delved far deeper into the economics of our current monetary system.

For the latter, let's face it, is in a phase shift: the current system is no longer workable, with the dollar as the world's reserve currency, because the United States refuses to put a brake on its creation of new dollars. Right now, the U.S. Federal Reserve Bank is on track to purchase nearly all of the entire deficit being run by Barack Obama's administration in the current fiscal year -- which deficit, itself, is nearly unprecedented in the 222-year history of our republic (being outshadowed only by the deficit run up in FY 2009). For those who need it to understand the truth of that simple statement, please look at this official table of debt outstanding published by the U. S. Treasury. And here is a graph of the projected future deficits, compared to recent ones (note how the White House plays down the deficit estimates from the Congressional Budget Office, and note further that "deficit" -- the difference in any fiscal year between revenues and expenditures -- does not equal "debt outstanding", due to the way the government keeps its books):

Do you see how the deficits, both the current one and those future ones projected by the Obama administration, will dwarf all prior deficits run up in earlier years? If you can see that, then ask yourself the question: what has changed in our current circumstances since 2008 which would allow this country to entertain the idea of borrowing even more than we borrowed in the past? Is the economic outlook truly that rosy?

If you agree that our circumstances have not so improved in the last two years, then we are on the same page. Nothing -- and I mean nothing -- could ever justify the current level of deficit spending, if the purpose were to keep this country sound and intact. The truth is again very plain: the current level of debt is accumulating at a rate which future generations will never be able to pay back.

Since researching and writing my earlier post, I have tried to examine the roots of the problem. What is it about our current monetary system that would even make a politician think for a moment that spending behavior such as we have been witnessing would ever be sustainable for a multi-year term? My conclusion, after careful investigation, is not reassuring: there is a double whammy at work. On the one hand, Barack Obama and those who support him, and who implement his spending policies, are simply engaged in a race against the clock. They are betting, as in the Pigford scandal, or the much larger universal health care scam, that they can fool enough of the electorate into thinking by the fall of 2012 that their continued access to federal largess will depend on their voting to re-elect the President. And they are counting on the system having enough resilience not to go down before those elections in November 2012.

The second factor is being supplied independently, by the Federal Reserve under its chairman, Ben Bernanke. He has convinced his Board that the Fed must intervene massively in the current economy to avoid a repeat of the mistakes made by the Fed in the 1930's. (He has not convinced everyone on his Board -- read this article for a link to a truly disturbing dissent by the president of the Dallas Fed.) With its bottomless checkbook, the Fed has bought trillions of toxic assets from banks and other firms, in an effort to stop up the holes in their balance sheets. The individual prices paid for these assets, and their current value on the Fed's books, remain swathed in secrecy -- only aggregate figures are published. The fact remains, however, that the Fed has flooded the system with trillions of dollars in addition to the deficit spending by the Obama administration -- again, in an attempt to forestall imminent financial collapse.

Such a race against the clock is an unconscionable gamble. It may succeed until 2012, but in the longer term, it cannot be maintained. The world will not continue for long to accept debt denominated in dollars, when those dollars by sheer multiplication become meaningless. The signals are already plain that other countries are ready to move on, and to replace the dollar with some other form of reserve currency. And when that happens, those holding dollars will be left in the lurch. Like a third-world currency, whose politicians simply printed more and more in a vain effort to stave off economic collapse, and who were incapable of changing their ways as the situation required, the dollar -- and those who depended on it -- will become a relic of the past.

That is a sad indictment of our current system, but I see no signs whatsoever of any serious attempts to halt the current course. The first signal of where things are headed will be the upcoming vote on whether to raise the overall debt ceiling yet one more time, in order to increase the maximum amount which the U.S. Treasury is permitted by law to borrow at any one moment. Here, for your edification, is a graph of how that debt ceiling has been steadily raised in recent times (click to enlarge):

There is so much that is wrong with our current system that it is difficult to know where just to begin, in order to make the problems understandable and to lay the foundation for a sensible path out of the predicament. But the whole scenario is so crucial that the effort must be made. In upcoming posts, therefore, I will lay out just what is wrong with our current monetary system, why we persevere in making the same blunders over and over again, and the only way which I think offers some hope for a desirable future.

Stay tuned, because we are going to go deep into what lies behind the current system. Only with that understanding can we see where we have gone so wrong, and hope to thread our way out of the labyrinth.


  1. "If you agree that our circumstances have not so improved in the last two years, then we are on the same page."

    We're on the same page.

    I think what's somewhat puzzling to many folks (and which is also masking the problem) is the stock market booming.

    This anesthetic/drug is helping folks to keep their heads planted in the ground like ostriches.

    Your post helps to wake people up, so thank you for that.

  2. Stay tuned for the viscous verbal attacks on anyone who dares propose a cut in spending.

  3. Curmudgeon -

    We are also on the same page. As TU..AD has pointed out, people's reliance on the NYSE as a barometer of economic health has blinded them to the actual problem.

    Sure, they can make paper profits trading stocks and bonds, but when the rate of monetary inflation begins to exceed the rate of the stock market "profits", then the defecation is going to make contact with the oscillating air screw. By then, of course, it will be too late to do anything about it.

    Until we start focusing on how to generate true wealth, instead of collecting and amassing piles of paper dollars, we are going to be in trouble.

    It does not help that our Federal Government is lying through its collective teeth to keep everyone happy.

    It is time for Diogenes to find an honest man - or woman - and quickly!