Ed,
If you look at the first graph you'll notice a
slight kink halfway up the slope (at x-axis
$5,500b and y-axis at about 2001). This kink
could have been the start of a plateau and then a
descent of the debt. This was when the
productivity effect of computers in industry and
commerce over the previous 20 years was just
beginning to kick in powerfully and when, for the
first time since the end of WWII, there were
three years of budget surpluses! Greenspan
persuaded Congress and Clinton -- and they agreed
-- that part of this surplus (and it was a
growing one at the time) should be set against
the national debt. He reckoned that the national
debt could have been painlessly reduced to zero
well within 10-15 years. But Bush and Cheney
would have none of it -- debt didn't matter, as
Galland relates below -- and so, what with the
Iraq invasion, a vast extension of bureaucracy
and massive handouts to politicians'
constituencies at that time, the national debt
resumed its previous rate of rise.
The Occupy Wall Street people ought also to be
sending a few hundred to Bush's ranch in Texas
and Cheney's pad (wherever it is) to demonstrate
the blame for the present mess in a more balanced way.
Keith
At 13:10 19/10/2011, you wrote:
Monetary Madness Is the US Monetary System on the Verge of Collapse?
David Galland
David Galland
The US monetary system and by extension, that
of much of the developed world may very well
be on the verge of collapse. Falling back on
metaphor, while the worlds many financial
experts and economists sit around arguing about
the direction of the ship of state, most are
missing the point that the ship has already hit
an iceberg and is taking on water fast.
Yet if you were to raise your hand to ask 99% of
the financial intelligentsia whether we might be
on the verge of a failure of the dollar-based
world monetary system, the response would be
thinly veiled derision. Because, as we all know, such a thing is unimaginable!
Think again.
Honestly describing the current monetary system
of the United States in just a few words, you
could do far worse than stating that it is
money from nothing, cash ex nihilo.
Thats because for the last 40 years since
Nixon canceled the dollars gold convertibility
in 1971 the global monetary system has been
based on nothing more tangible than politicians
promises not to print too much.
Unconstrained, the politicians used the gift of
being able to create money out of nothing to
launch a parade of politically popular programs,
each employing fresh brigades of bureaucrats, with no regard to affordability.
Former VP Cheney, who fashions himself a fiscal
conservative, let the mask drop when, in 2002,
he stated that Reagan proved deficits dont matter.
Those words were echoed just a few weeks ago,
when both former Fed Chairman Alan Greenspan and
Obama economic advisor Larry Summers, in
separate interviews, said almost the same,
paraphrased as, There is no chance of the US
defaulting on its bonds, not when our government
can borrow dollars and print new dollars to meet any future obligations.
Of course, Greenspan and Summers were referring
to an overt default of just not paying and
not to a covert default engineered by inflation.
Unfortunately, like virtually all of the power
elite, both miss the point that the mountain of
debt that has been heaped up since 1971 is fast
reaching the point of collapsing like a too- big
tailings pile and taking the monetary system down with it.
US Deficit and National Debt
Importantly, the debt shown in this chart
whistles past the governments unfunded
liabilities, in particular for the Social
Security and Medicare systems. Adding those
would quintuple the US governments acknowledged
obligations to over $60 trillion.
Given the role the US dollar plays as the
worlds de facto reserve currency with all
major commodities priced in dollars, and dollars
forming the bulk of reserves held by foreign
central banks the dismal shape of the US
monetary system spells trouble for the global monetary system.
Making matters worse, following the lead of the
United States, governments around the world long
ago adopted similar fiat monetary systems. You
can see the deficit contagion in this next
chart. It is worth noting that the dire
condition of the United States now leaves it in
the same muddy wallow as Europes desperate PIIGS.
General Government Gross Debt
In a recent article in The Telegraph, Ambrose
Evans-Pritchard referenced a paper out of the
BIS that paints the picture using appropriately stark terms.
Stephen Cecchetti and his team at the Bank for
International Settlements have written the
definitive paper rebutting the pied pipers of ever-escalating credit.
The debt problems facing advanced economies are even worse than we thought.
The basic facts are that combined debt in the
rich club has risen from 165pc of GDP thirty
years ago to 310pc today, led by Japan at 456pc and Portugal at 363pc.
Debt is rising to points that are above
anything we have seen, except during major wars.
Public debt ratios are currently on an explosive
path in a number of countries. These countries
will need to implement drastic policy changes.
Stabilization might not be enough.
Viewing the situation from another perspective,
we turn to the work of Carmen Reinhart and Ken
Rogoff, who studied the factors contributing to
29 past sovereign defaults. They found that
default or debt restructuring occurred, on
average, when external debt reached 73% of gross
national product (GNP) and 239% of exports.
Using the Reinhart/Rogoff findings, Casey
Research Chief Economist Bud Conrad prepared the
following chart showing that the US government
is already far along on the path to bankruptcy.
External Debt of the US
Its hard to argue against the contention that
the situation is, to be polite, precarious.
Given that the obligations of the US government,
as well as most of the worlds other large
economies, are now impossible to repay and that
their reserves are just IOUs backed by nothing,
the stage is set for a highly disruptive but
entirely necessary do-over of the fiat monetary system.
Preposterous! say the lords of finance and masters of all.
Is it?
Of course, these very same mavens completely
missed the looming housing crash and the depth
and duration of the subsequent crisis a crisis
that is still far from over. In other words,
listen to them at your peril, because in our
view its essential in calibrating your
financial affairs to understand that, if history
is any guide, we are now well down the road to a
collapse in the monetary system.
Regards,
David Galland,
for The Daily Reckoning
P.S. Fortunately for those now paying attention,
the collapse of a monetary system doesnt happen
in a flash. It is a progression, like the spiral
of water down a drain. Thus, while no one can
predict exactly when the downward spiral will
accelerate out of control, there is still time to prepare.
Dark though the lens may be, this is the lens
through which we here at Casey Research view all
our investments. Simply, being right or wrong
about your investment decisions in the years
just ahead will be insignificant if the
currencies underpinning those investments
shrivel to just a fraction of their current values.
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Keith Hudson, Saltford, England http://allisstatus.wordpress.com/2011/10/
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