As usual, I can't say when because there are just so many variables here, the biggest being that the US isn't the only country in trouble. If that was the case, it would be easier. Instead we have the central banks in Japan, the EU, China and the BRICS all taking heroic measures to restore growth. Simply, the world can't continue to grow at the rate we went through right after the decoupling of the dollar from a commodity standard. Take a look at this plot from Chris Martenson at PeakProsperity.com. Although this curve is now 6 years old, look at the amount of debt growth since 1989; not just federal spending but state spending, student loans, corporate spending and even consumer debt. It's all debt we need to crank out of the system. Even if we returned it to about half of the growth since 1980, 260% of GDP, it's still a tremendous amount of debt to pay off.
Chris Martenson does a guest post a Glenn Beck's website, and explains the math. It's absolutely essential we all understand.
Let’s start in 1980, when credit growth really took off. This period also happens to be the happy time that the Fed is trying to (desperately) recreate.The next 30 years simply can't look like the last 30, not because "everything has already been invented", like socialist darlings Thomas Pikkety and Paul Krugman say (and let me remind you Krugman is the guy who thought an alien invasion would be a good economic stimulus). Where do you get 50 US housing markets to build in 30 years? As I've said before, if you're going to sell bonds to borrow a large number, say $10Trillion, you can only sell those bonds to someone who has $10T lying around and can buy your bonds. There are very, very few places to sell that amount of debt, and those places all have their own problems. Growth can't continue at the 8% compound rate because the world has borrowed ahead so much that spending has to slow down to pay off the debt. The only thing that borrowing can do is move future growth (purchases) forward in time. As is the case with credit card debt, at some point, the consumer has to pay the debt down.
Between 1980 and 2013, total credit grew by an astonishing 8% per year, compounded. I say ‘astonishing’ because anything growing by 8% per year will fully double every 9 years.
So let’s run the math experiment as ask what will happen if the Fed is successful and total credit grows for the next 30 years at exactly the same rate it did over the prior 30. That’s all. Nothing fancy, simply the same rate of growth that everybody got accustomed to while they were figuring out ‘how the world works.’
What happens to the current $57 trillion in TCMD as it advances by 8% per year for 30 years? It mushrooms into a silly number: $573 trillion. That is, an 8% growth paradigm gives us a tenfold increase in total credit in just thirty years
For perspective, the GDP of the entire globe was just $85 trillion in 2012. Even if we advance global GDP by some hefty number, like 4% per year for the next 30 years, under an 8% growth regime, U.S. credit would be twice as large as global GDP in 2043 (!)
If that comparison didn’t do it for you, then just ask yourself: Why, exactly, would U.S. corporations, households, and government borrow more than $500 trillion over the next 30 years? The total mortgage market is currently $10 trillion, so might the plan include developing an additional 50 more U.S. residential real estate markets?
It's my belief that the trigger for this isn't going to be something like a routine act that one of the countries goes through: something like the Fed raising interest rates or Italy leaving the EU. There's enough warning for the systems to adapt, and develop ways around. Rather it will be an accident: something like a major financial house going broke (cough.. AIG) or perhaps some posturing between countries that leads to shots being fired. Perhaps even metaphorical shots, like a trade war. On that front, I tend to agree with the idea that Trump can't start a trade war with China: it's already going on.
Somewhere in the planning for this collapse there's an equivalent to Temple Grandin, who has constructed the human cattle chute so that too few "citizens" will take effective defensive action before the lights go out.
ReplyDeleteKeep buying silver/junk silver, and gold. The paper money might only be good for kindling if things really go sideways.....
ReplyDeleteNobody puts "dismal" in the Dismal Science like you!
ReplyDelete"May I have your attention. I smell smoke. Collect your belongings, take small children by the hand, and evacuate through the exits located in front of you to the left and right."
ReplyDeleteDarwinism deals harshly with people who freeze in emergencies. You haven't heard reports of victims of the Titanic sinking making rafts of wooden furniture and luggage to merely stay above the cold, calm water for a few hours, did you?
Over the holiday, discuss plans for starting a healthcare sharing ministry for use by your region's preppers, which is designed to continue functioning during medical rationing and wage and price controls. Remember that teenage children are perfectly capable of providing low-end healthcare, which conserves the time of higher-skilled personnel and reduces medical errors from rushing. Don't make the boys wear pink.
https://en.wikipedia.org/wiki/Hospital_volunteer
I'm gonna agree and disagree and hopefully change your mind.
ReplyDeleteI agree there is no way that we will avoid a terrible (biblical) economic crash making the great depression look like a long picnic. $20 trillion is an unbelievable amount of money and we will never pay if off or pay it down. Further once interest rates go back to normal the payment on $20 trillion will bankrupt us. We can't pay that interest if rates are merely 6% and if we have serious inflation and rates are 12% the game is over. AND we can't stop our addiction to borrowing and printing money. It's just a matter of time and no one knows how much time. It could be weeks, months or years.
I disagree that Trumps picks are bad simply because they come from the swamp we want to drain. You as an engineer know that your job cannot be done by a 30 year old drywall installer. If NASA has a technical problem they don't call on the janitor or even a banker to figure it out. IMHO who better than a banker or a businessman to know the inside issues and how to fix them.
I also disagree that the banks or Wall street is our "problem". We have many problems; government mostly, left wing dominance of schools and colleges, unions, dishonest politicians. But bankers or stock market investors are simply doing what you would expect them to do EXCEPT in those cases where they broke legitimate criminal laws (and there are some of those cases). The banks did not cause the housing crash our politicians did. In fact many banksters fought against what the politicians wanted and they were either forced to comply with tough regulation or bribes
You as an engineer know that your job cannot be done by a 30 year old drywall installer.
DeleteYou don't need slavery to pick cotton, nor to build roads, catch thieves, administrate medical doctors, coin metals into money, or fight invaders. There is no morally correct way to stick people up for money. Government "jobs" should not be being done by anyone. When you remove cancer, you don't "replace" it with anything.
Anon 1659 - I agree that Trump's picks aren't bad simply because they come from the revolving door of Government Sachs. My concern is that during the campaign he had a group of advisors that sounded much better and now that it's time to make real policy they seem to be gone. In particular, he had an advisor named Dr. Judy Shelton who was promoting a return to coupling the dollar to gold through something like the TIPS "bonds" the fed.gov sells. (Treasury Inflation Protected Securities, or something really similar to that). Bonds would be exchangeable for their face value in dollars or for a specified amount of gold. Dr. Shelton's ideas sound really good to me.
DeleteOK, maybe she's not a good pick for other reasons. Maybe nobody likes her. Maybe when Dr. Shelton walks into the room, Janet Yellen's head does a 360 or 720 degree rotation, like Linda Blair in the Exorcist. While I'd pay good money to see that, maybe a "real president" can't appoint someone too abrasive or too divisive.
Maybe Mnuchin and Cohn are really renegades at Government Sachs that just worked there, and are really secretly sound money advocates.
The fact that the DJIA is setting ATR after ATR (all time record) tells me that the buyers (largely Goldman and the other big banks) think that nothing is going to interfere with their little party. It sounds like cronyism all the way.
We have 7.2 billion people on earth. I don't think there is enough gold or silver to back the dollar. Not if you actually allow individuals and other countries to take payment in gold or silver. And if you don't allow individuals and other countries to take payment in gold or silver then the dollar isn't backed by gold or silver. If on the other hand it was 1900 and our population was 100 million or so and the world population was 1 1/2 billion and 95% of them lived in backwater somewhere THEN you could have a gold and silver backed dollar. We even have people today hoarding pennies and nickles because these base metals are worth more than the coins. I would love it if we could back the dollar in gold and silver but I don't think it is possible anymore.
ReplyDeleteThe Dow is setting up for a huuuuge crash. I don't know if Trump's policies once he gets in will push it off or not so I'm not predicting. I do expect a drop after the new year for profit taking and tax reasons.
I think you're thinking too small. Who says gold has to be $35 an ounce like 1971 or even $1160/oz, like now?
DeleteWhat if you divided all the dollars in circulation by all the ounces of gold in Ft. Knox (if, indeed, it's really still there)? You come up with something like $1 being one or two milligrams worth of gold, instead of 1/35 oz. I think that's close to what the dollar is really worth now, anyway. If gold trades for $1160 (quote a few minutes ago), that makes a gram worth $37.42, and a dollar worth 26.7 milligrams of gold.
And, of course, it doesn't have to be gold. It can be any agreed upon hard commodity that's not available in the unlimited supply of printer's ink or bits in a computer. You've seen the giant stone rings of Yap island? Too big? How about diamonds? Too hard to make change? How about an oil-backed dollar; a real petro-dollar? I think you get the picture: backed by something other than fiat.
The buzzword nowadays is a "basket of currencies" or commodities. The BRICS were doing that a while back: a mix of gold and some other references.
Basket doesn't work, it promises a fixed exchange rate between the things in the basket. When the real world exchange rate drifts from the promised rate due to technology change, traders get a risk-free opportunity to arbitrage. Then they suck the basket dry until the treasury stops redeeming. Historically happened when they put gold and silver in the basket. If you see a basket promised, it means the bankers aren't serious about redeeming in any situation where you would really want to redeem.
DeleteIn theory you could set up a gold standard tomorrow. You would have to ascertain the real market value of gold in dollars and then "fix" the dollar to that. It might be $1160 it might be more. You really cannot pick a larger number than the real value, say $1800 and ounce, just because you suspect that the dollar is propped up and it might be that is why you need to know the "real" number. Once you do that and you are on a gold standard then you must actually give any and all dollar holders gold for their dollars. Well, you cannot do that if you run a trade deficit so you would need to immediately bring trade between each and every state into a even trade position or to our benefit. Unlikely. Without doing that China would own all our gold in a few years and make no mistake so wouldn't countries that are our friends.
ReplyDeleteOf course there is a perfect remedy to that issue and that is to make sure the value or good will or perceived value of the dollar never fell below the real value of gold. That too would be difficult if not onerous. You would need a special department to revalue the dollar daily if not multiple times during the day. I know, I know you are going to ask why that didn't happen before when we were on the gold standard and when we dropped the gold standard and were on the silver standard. The simple answer is it did and that is why we had to drop the PM backing of the dollar. But before it happened our population was much smaller, our trade deficits were non existant or in our favor and most of the world huddled in mud huts in front of a fire. Those days are gone forever (or until WW III or the next black plague). Today I buy gold and silver because all of the worlds currencies are in trouble. If any currency was backed by PM's THAT is how I would do it. But because they aren't I have to pay someone $60 above spot more or less to buy an ounce of gold from them. So I really wish someone, anyone would back their currency in PMs I would get cheap PMs until they ran out of it.
And that is why it won't work ever again in our lifetime or our grandkids lifetime or their grand kids lifetime, unless WW III or that pandemic intervenes. I think the world is stuck with fiat money and inflation and printing press money and borrowing until it all collapses. The good old days are never coming back.
In theory you could set up a gold standard tomorrow.
DeleteYou're right! Get the Alibaba (container-sized purchases) and Alibaba Express (individual-sized purchases) web sites to settle payments in gold and silver coins. For efficiency, add a mint mark to a bitcoin competitor so you can tell that Sam's bitcoins are a warehouse receipt for Sam's PM coins.
The Dollar? That's just some savings coupon thing some regional protection racket demands you turn in every year or they will murder you. It's easy to defend from being murdered, just get a million people to stop turning in those savings coupons. Then what are their employees going to do, when their salaries stop getting paid? Nothing.
https://en.wikipedia.org/wiki/Debt_bondage
Currently, debt bondage is the most common method of enslavement with an estimated 8.1 million people bonded to labor illegally as cited by the International Labour Organization in 2005. Debt bondage has been described by the United Nations as a form of "modern day slavery" and the Supplementary Convention on the Abolition of Slavery seeks to abolish the practice.
The USA "national debt" is just as much white slavery as forcing illegal immigrants into prostitution to pay off "debts" they never agreed to.
This is the AnonyBuck, which I invented at a rich man's party on an island off Georgia. You are required to denominate your trade and bank accounts in AnonyBucks, or my employees will kill you. Also, if you don't pay me 30% of your income in tribute in AnonyBucks each year in April, my employees will kill you. You must describe some of my tribute as "contributions", and not list them on pay stubs, or again, my employees will kill you. Simple enough?
DeleteIt is the case that Americans will have to stop "buying" stuff from China with worthless extortion futures (Dollars backed by US Treasury junk bonds backed by tax collection which will never occur). This is not some great adjustment, it is merely honesty in trade. What do you produce that Chinese people want?
I don't see where the world's population enters into it at all. When we were on the gold standard, we issued currency dependent on the amount of gold we had, right? The idea that each dollar was redeemable for a set amount of gold. We could do that tomorrow, as you say.
DeleteIt has been a while since I did these numbers, but I wrote a long piece on it five years ago. Let me do a quick revision: Wikipedia says the US claims 353 million ounces of gold in the US reserves. For an estimate of the amount of dollars in circulation, we can use a number called the M2 money supply. It's not just active circulation, but includes other real obligations like 401ks, Keoghs, short term loans and a lot of other "little" sources. USDebtClock.org says that's $13.2T. If we simply divided the 13.2 trillion dollars in the M2 money supply by the amount of gold in our reserves (Ft. Knox and elsewhere), that would bring the price of gold to $37,400 per ounce, so each dollar would be backed by 1/37400 of an ounce (around 758 micrograms). That's a tiny amount but it literally means every dollar in the M2 could be redeemed for 758 micrograms of gold. The Federal Reserve has devalued the dollar to the point that the value of a dollar has gone down from 1/35 of an ounce, 810 milligrams, to 758 micrograms, almost 1000 fold.
If the US did that, you can bet we could buy up just about all the gold above ground, but simply by the numbers of dollars we'd have to back and the amount of gold we could back those dollars with, that's what you get. If that was proposed, a lot of other countries would get really upset. That's where conferences like Breton Woods come from.
When I was a kid my mother used to make each of us a "money cake" for our birthday. Pennies, nickles dimes wrapped in waxed paper baked in the cake but also a silver dollar in the slice for the birthday child. I can remember in the 40's going to the bank and she would give the clerk a dollar and the lady would hand her a silver dollar. That's what PM backed dollars mean you have to give anyone silver or gold when they turn in dollars if that's what they want. In 1948 (when my mother did this) we didn't have a trade deficit to China of $800 billion a year. If we did China could have given us $800 billion every year and taken back $800 billion in gold and silver from us. How long would it take until they had it all? But not just China, almost every country sells us goods and services. Those irritating calls to Microsoft experts answered by some barely English speaker in India would transfer gold and silver to India. Even the foreign aid we give away could and probably would be traded for gold or silver. That is the problem today. That is why population matters now and didn't 50-100 years ago. Today we trade with most of the world and 7.2 billion people understand that gold and silver beats paper.
DeleteIt isn't about the amount of actual paper money in circulation because that keeps going out and they would keep asking for the gold and silver when it comes back. More than likely you too buy gold and silver. Would you rather buy an ounce for spot price or spot price plus 5%-10%? You simply take the currency that backs itself in gold and silver and trade it in for the real thing at spot price. A billion or so people in India buy PMs it is part of their culture. Everyone wants PM's and there simply isn't enough to go around. Whereas if there were only 100 million people in the country and you didn't trade with other countries very much then there is enough gold and silver to back paper money and meet the needs of those who want the bullion.
Well, you know where this ends up, right? It ends up with what they're doing in Venezuela this week. They're replacing hyperinflated currency with new paper. We could restore gold to the price point where mom could bake a silver dollar into the cake by replacing our inflated currency with new paper. The New Dollar has a smaller face value than the current dollar, but has the same buying power, backed by gold.
DeleteActually, you could bake a cake with a Silver Dollar in it today: it's called a pre-1964 dime. Those are worth about $1.25.
China fixes their Renmimbi to the dollar (as near as I can tell ¥6.6375 to the dollar). Their currency then goes through whatever gyrations ours does, unless they unpeg. They've also been on a gold buying spree. It's possible they'll do it before we do.
Probably in our lifetime (and I'm 73 so that means I think it will happen soon) we will have to pay the piper and our inflation rate will soar or our economy will drop into the abyss. I can't say it will be Venezuela but it's possible. There is an individual 'fix' to this and that is to buy silver coins.
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