I’ve been doing some reading over the weekend on the state of our economy. I have been unable to think of a better way of expressing this statement: “We are fucked.” The health of any nation has been expressed as being directly related to the size and health of the middle class in that society. Our middle class is shrinking at an alarming rate, with all the wealth being funneled up into the top 1%. This, just by itself, is unsustainable.
The main-stream news media is touting that we are in a “new normal” where slow growth is unable to reduce the unemployment numbers. It takes 3% of “real” growth in the GDP – not inflation – in order to keep up with the population increase. This is from births, not counting the tide of illegals. In order to drop the unemployment numbers 1%, you need a growth of 5% in the GDP. This is not going to happen.
Income is what fuels consumption. Consumption directly affects the GDP in housing sales and “consumer spending” i.e. big screen TV’s, cars and other luxuries. Jobs are what provides this income for us to spend. Greenspan fueled the bubbles with debt, but the supply of debt is at an end. Our credit cards are maxed out, there is no equity in our homes to borrow against. The banks are liquidity traps, as they need to horde cash in order to keep up appearances on the books that they are not bankrupt. That is simply not the case. All banks are bloated with toxic debt – foreclosed homes – that they have to hold onto them to spread out the losses quarter over quarter. This liquidity trap also affects the velocity of money. Money has a velocity, the more it is turned over the greater the velocity, which is good for the banks and the government.
An explanation is in order. Bob gets paid on Friday and buys a pack of gum on the way home. That dollar is deposited into a bank, where it is then loaned to a homeowner who buys a home, where the dollar is now in the home’s seller’s account, a bank. This other bank loans it to a business on a line of credit so they can get renovations done. The dollar goes to a general contractors account who pays his carpenter the dollar in his paycheck.
This cycle is the “distance” the money travels. The faster this happens, then the dollar has a higher velocity. This is neither good or bad to us individually, but is huge for banking and the federal government. The more often the dollar is deposited the more often it is lent, and therefore makes money for the bank. The more often a dollar changes hands, then it has a greater opportunity to be taxed. Because the banks have to hold onto the money as capital in order to keep themselves afloat, the more income they loose, and the more opportunities for taxation the government looses. This puts our federal government deeper in the deficit hole.
Our unemployment situation is dire, and that’s a big understatement. Currently the nitwits are reporting that we have a 9.5% unemployment rate. The numbers behind the numbers are more enlightening. Last month 71,000 jobs were created, 159,000 jobs were lost, and 38,000 people became officially discouraged. We now have over 1.2 million people that have fallen off the rolls as “discouraged” workers and no longer affect the unemployment numbers. Let’s put those numbers into something we can visualize a bit better. We have enough “discouraged” workers to form a line, holding hands, from Miami, FL to New York, NY. That’s a lot of workers to ignore. There are over 15,000,000 people unemployed right now. Of those, 6.6 million people have been unemployed for more than 27 weeks.
Out of all the mortgages out there right now, only 25% of them are standard fixed-term mortgages. The remaining 75% are what caused the bubble in the first place – Alt-A’s, multiple mortgages, ARMs, etc. This ticking time bomb will have to be dealt with sooner, rather than later. This is another reason the banks are holding capital. As they reluctantly seize these assets they need the cash on hand to maintain solvency. We have not even discussed the commercial real estate market which in itself a clusterfuck of epic proportions. So the money slows more, and as funds are tied up in the banks it misleads us to what is going on. Once the banks have enough capital on hand to deal with it’s insolvent accounting ledgers, then the surplus cash will flood into the general economy with devastating results.
Q: If our government actually followed GAAP accounting principals, what would the yearly deficit be?
A: 4-5,000,000,000,000 per year.
There is only one solution to this problem, and it’s to devalue the dollar. We cannot cut spending and raise taxes – our GDP is not high enough. There is not enough money in America to pay for this. If the Government seized every asset, every cent from every citizen and company and cut all spending except for social security and medicaid, we would still be in the red. So helicopter Ben will have to fire up the virtual printing press – there is simply no other option available.
We are ill-equipped to handle even severe, never mind hyper, inflation. At least the Wiemar Republic had other currencies, widespread access to precious metals, and copious amounts of printed money available. We do not. How are we going to function as a nation when the credit card you have with a 10,000 balance is insufficient to buy a loaf of bread?
I’m a big fan of science. The best way to describe what we are experiencing is by drawing a parallel to one of natures most awesome phenomena – the Black Hole. We have all seen it on TV and movies, but our minds cannot fully grasp what’s going on there. Even Stephen Hawking is still puzzling out what exactly is going on in there. A black hole is where a star has collapsed in upon itself, where the gravity generated by the mass at it’s center is strong enough to prevent light from escaping. At the “edge” of the black hole there is something called the Event Horizon. This is where gravitational forces shred matter into it’s components and time itself is warped. If you watched a spaceship travel to the event horizon it would slow down and the light emanating from it would shift to the red. If you were in the ship, nothing would seem to be different until your existence was smeared all over the space-time distortion that is a black hole.
Our economy is happily zipping along in it’s spaceship thinking nothing is amiss. The reality that is the event horizon is about to smear that spaceship into it’s quantum matter (what neutrons, electrons, and protons are made of). We are already in the death spiral. Loss of income is reducing spending. This, in turn, reduces government income as it has to spend more on entitlement programs. The reduction is spending reduces jobs which further reduces income and GDP. On and on it will go. The question is when, not if, the government will begin devaluing the dollar to attempt to break the cycle. Quantitative Easing #2 and #3 are right around the corner. Once the banks have absorbed enough then the M3 will skyrocket. The M3 has been falling only because the process of wealth destruction is ongoing . The banks are loosing money left and right as they sell toxic assets.
I cannot see the economy stagnating for much longer. Sometime between January and July of next year we will be facing rising then skyrocketing inflation.
