Tipping Point

By Michael Wade

I can’t say with any certainty what this forebodes, but this is a staggering amount of debt to pile onto any country, especially within just a few months (my emphasis):

The U.S. government and the Federal Reserve have spent, lent or guaranteed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s.

New pledges from the Fed, the Treasury Department and the Federal Deposit Insurance Corp. include $1 trillion for the Public-Private Investment Program, designed to help investors buy distressed loans and other assets from U.S. banks. The money works out to $42,105 for every man, woman and child in the U.S. and 14 times the $899.8 billion of currency in circulation. The nation’s gross domestic product was $14.2 trillion in 2008.

The really scary thing is, the government is not even close to being done spending money. Yet we’ve already committed about 90% of GDP. Where is all that money going to come from?

As we’ve said before, there’s only a few options: (1) taxes; (2) borrowing; and (3) printing press.

Taxes will only raise so much, even when the government starts raising rates on lower income quintiles, and certainly not enough to keep up with the ballooning debt-service payments.

Borrowing just isn’t going to happen because there isn’t anybody else who either wants to or is capable of lending us more money. To wit, here’s some of Peter Murphy’s analysis on our borrowing problems:

The biggest buyers of US Government (and Agency) debt, for the past several years, have been China, Japan, and the Oil States.

However, the supply of loanable funds among these entities from which the US can borrow is drying up.

China’s current-account surplus, the source of the funds for its Treasury purchases, has dropped precipitously as the global economy has contracted over the past several months.

Japan, another major buyer of Treasuries over recent years, is now posting trade deficits for the first time since the early 1970’s. This current account deficit, combined with a significant fiscal shortfall and planned issuance of $33 Trillion Yen ($340 Billion USD) in government debt this year, means that Japan will be, in effect, competing with the US for funds, rather than lending to us.

And, the oil-exporters are in no shape to be buying anything right now, as oil prices have collapsed since last summers $147/barrel peak. Russia is busy selling foreign exchange to prop up its currency.

Brad Sester of the Council of Foreign Relations reports that foreign demand for long-term treasuries has faded, and notes, ominously, that “global reserves aren’t growing”.

Accordingly, borrowing does not look like an option. Which leaves really just one choice.

Printing money in a down economy, which will have to be done, increases inflation and saps purchasing power (potentially leading to hyper-inflation). We may be able to pay off our debts this way, but we’ll wipe out the wealth of the nation doing so. Think post-Franco-Prussian War where France drove its economy into the ground in order to pay off about 22% of its yearly GDP in war reparations to Germany … over three years. That strife led to the Paris Commune uprisings among other things. Or worse, consider post-WWI Germany, with inflation rising so fast that workers had to be paid twice a day and cart around wheelbarrows full of money just to buy a loaf of bread.

Is that what we’re headed for? I sure hope not, but the signs aren’t very encouraging if history is any guide. It is true that a much more dynamic and nimble economy exists today as compared to the late 19th and early 20th centuries. But the world tendency right now seems to be to shackle that economy, making it much less dynamic and nimble. The end result must be less wealth produced, and less money to pay these debts. In short, our government is currently cashing checks that our economy can’t pay.

http://www.qando.net/?p=1847

Michael Wade’s comments can be found regulary at http://qando.net/