My Views on the Economy

I don’t know if you all are aware of this website at http://www.usdebtclock.org/ . It tracks US debt real time as displayed below with all sources of information identified if you put your mouse over the individual item. Anyways, some scary things come to mind along with what I’ve been reading from various sources. None of this may come true, but its always best to stay informed. And if you’re bored, well this may lead to a fantastic nap.

If you look in the upper left corner at the US Federal budget Deficit ($1.37 trillion) this is the current one year spending deficit. You might ask where you could make cuts in the budget to save $1.37 trillion. If you look at the box below that number “largest budget items” you’ll see that the vast majority of the $3.56 trillion in total spending coming from just six items (Medicare/Medicaid, Social Security, Defense, Income Security, Interest and Pensions). These 6 items make up just over $3 trillion. This leaves all other spending less than half of the actual yearly budget deficit. So synopsis 1 is that entitlement programs and interest on debt are strangling the US and its abilities to pay for what we buy and even if we find a way to plug this deficit, which currently is HIGHLY unlikely, there is little to no chance of actually paying of the debts we already have. We would simply stop accumulating more.

With that being the case, let’s look at the actual national debt which is the first box in the upper left. At $14.4 trillion dollars, this is 97.8% of GDP (which is located on the right, one box down). What isn’t usually discussed on the news is the box at the bottom middle entitled “US unfunded liabilities”. This is everything we have already “promised” citizens that we don’t have the money to pay for. We are paying those “entitlements” with the money paid in by people currently working but only covering the costs of those who aren’t. Eventually we wont eve have enough for that and then it all goes away. Even with both parties saying keeping or getting rid of Obamacare will save so many trillions of dollars over 10 years doesn’t even come close to touching the $114 trillion in underfunded medical entitlements we are currently facing.

The scariest part about this is that even while we print currency to pay for these things, all of these debt balances are still headed in the wrong direction which means we can’t even get out of this by devaluing our own currency.

The only way we stay afloat now is because we have the unique ability to print money which we use to fund our way of life, because many goods and trade (especially energy) is valued in US dollars. If you look at the section below labeled “trade numbers”, you can see that foreign countries own $4.5 trillion of our debt and the current trade deficit is nearly $700 Billion dollars. When was the last time that you could remember this being a surplus? So synopsis 2 is that our current fiscal and monetary policy barely keeps our heads above water today and there are gigantic flood waters approaching.

There have been a lot of doomsday predictions since the mortgage crisis, and I’ve read most of them. Individually they are shocking but can seem out of proportion. But what happens if any of the following happens (I only list three, but obviously a number of other events could likely occur):

Other countries stop buying our debt? – Interest rates begin to soar. The $209 billion in interest a year on the debt explodes to 2, 3, 4 times current levels drowning our budget with red ink. Home mortgage rates skyrocket as a result, destroying a fragile housing market, depressing home prices nationwide, leading to massive unemployment and foreclosures.

Goods are no longer indexed to the dollar – A large reason oil prices rose to $150/barrel was because of the depressed values the dollar saw compared to a basket of other foreign currencies. As a result, many countries started looking into using a basket of other currencies to price not only oil but a range of other commonly trade commodities and goods. The result would be an overnight jump in oil prices. You think a 30 cent increase is bad, try 2 bucks, overnight. Don’t think that’s feasible? Look what most every other country that imports oil pays. ($5-$7). Instantly this would cause prices of most every other commodity, service, and transportation to jump. If you think about what it costs to manufacture and transport goods from trucks to airlines this would make sense. Already with the current rise in oil, we have seen a steep increase in commodities ranging from cotton to copper. Overnight, the consumption capacity of American families would be hit by a large percentage, with the majority of households already living in debt or beyond their means.

Municipalities and State governments begin defaulting on loans – State and local governments are in an even worse situation that the federal government because they have no monetary policy, they can’t print money to kick the can down the road, they can only incur more debt. Look at California, NY, Illinois. The budgetary gaps are so large there are double digit cuts to most every social program, CA actually issued IOU’s for tax refunds. If the states are allowed to default, there will be massive unemployment and deterioration of already earned and future projected pensions leading to a further deterioration of these economies. Should the government step in and assume these debts, the federal government would see a drastic increase in their liabilities and interest rates would soar overnight.

A host of smaller events could ignite any of the above. While the housing crisis may be behind us, there are still very uncertain views of commercial real estate busting, the refinancing of mortgages or a second drop in housing prices with a mere flicker of inflation. The current Middle East turmoil spreading into Saudi Arabia could fuel (no pun intended) consequences related to oil. A double dip recession could wipe out a number of “too big to fail” companies as the government most likely wouldn’t step in to bail them out again after the backlash from the first round. The list goes on and on.

It’s alarming that there is little mention on a national scale about most of these issues or how to fix them. Instead our government at all levels seem to have given up. Even with the Republican influx after the 2010 elections, their focus has primarily been on curbing discretionary spending. Any talk of entitlements (as proposed by Paul Ryan) is met with fierce opposition, FROM BOTH PARTIES. The Fed is still implementing QE 2, printing money as fast as possible to continue to buy bonds to deflate interest rates to encourage lending and borrowing to stimulate the economy. There is even STILL talk about QE3. The mere fact that we are now starting to hear from both the Fed and the Treasury similar claims “there is no near term fear of inflation” or “we will not devalue our currency” these common attempts to dispel concern tend to in fact occur more often than not.

Feel free to view this as muckraking as I have no clear opinion as to how to fix it, but maybe the people much smarter than me will eventually start to discuss it openly. The only other thing I can do is try and protect current assets from any pending calamity. It’s my belief that the end game in any of the mentioned scenarios above lead to one result. INFLATION baby, and lots of it. Whether working or not, its my firm belief that avoiding dollar denominated assets is the key. Bonds, CD’s and cash primarily used by retired folk seem riskier than ever. Surrounding oneself in foreign assets and currency, commodities, tangible goods (real-estate) and jewelry, etc. is the safest bet. Global stocks (large corporations with international revenue streams) and or funds seem the play in the stock market. Also, if you have a job, it may not be a bad idea to assume as much debt as you can take on now (such as buying a bigger house or more land) at fixed rates, for if there is mass inflation, those debts become much easier to pay off. And if none of the is does end up happening, well at least you have forced yourself to save and invest in your future.

Sincerely,

Coco