The state of the US and world economy

Following my post about the economy a couple of days ago, I’ve had a few e-mails accusing me of being an ‘alarmist’, saying that things really aren’t that bad, and claiming that we’ll muddle through somehow. I have no problem with that last statement . . . it’s just a question of whether we’ll be able to afford to eat anything while we’re muddling!

I think a lot of people genuinely don’t understand that you can’t print enough money to buy your way out of economic trouble. Excessive money supply is one of the primary reasons that we’re in the mess we are today. Furthermore, people don’t understand how interconnected the world economy has become. We’re no longer able to stand aloof from the problems of others; their problems are ours, and vice versa. Consider:

• If the Euro tanks (as appears increasingly likely), the economy of the European Union will go to hell in a handbasket for several months at least, while the various banksters and politicians involved try to salvage the shattered remnants and glue the pieces together in some sort of new structure.
• That means that everyone who exports goods to Europe (primarily China and other Far Eastern nations, but also including some very large US corporations – for example, Boeing) is suddenly faced with the loss of a major market. Their companies can no longer sell their goods into that market, which means there’s a massive oversupply of them. They’ve already had to face a considerable reduction in demand from the USA, too. They’ll have to eat even more losses, lay off workers by the hundreds of thousands . . . hel-loooo, economic disruption!
• Until recently, China’s money has been keeping our economy afloat. They own trillions of dollars in US bonds and other securities. If their economy tanks due to a reduction in demand from the USA and Europe (the first signs of economic problems are already visible there), they’re going to have to redirect all their reserves into keeping their own country afloat . . . which means they’ll dump US debt for pennies on the dollar, in a desperate attempt to get as much liquidity as they can to preserve the Communist Party government from the wrath of its citizens.
• With all those US bonds and securities being dumped so cheaply, the Federal Reserve literally won’t be able to sell a single bond to new investors. Those that want our bonds after Europe and China tank will be buying up the cheap securities being dumped by the latter nations. Say goodbye to deficit spending in the US, because no-one will fund our deficit any longer. Can you say “Halve US government spending immediately”? I thought you could . . . so there go most, if not all, of our entitlement programs. Overnight. That includes Social Security, Medicare and Medicaid, and most welfare payouts.
• If the Federal Reserve tries to print enough money (well over one and a half trillion dollars per year, at present rates of expenditure) to cover our deficit spending, it’ll cause such massive inflation and internal economic disruption that the ‘cure’ might well be worse than the ‘disease’. It’ll also piss off the rest of the world, because all those dollar-denominated bonds they bought from us will suddenly be worth a whole lot less. There goes the US dollar’s international reserve currency status.

National Review Online put the US budget into perspective a couple of days ago.

… take some of our key economic numbers — how much money the U.S. government brings in, how much it spends, and how much brave politicians are “cutting” to bring those numbers into balance — and simply lop off eight zeros (i.e., divide by 100 million) to make those numbers something that American families can relate to:

Why S&P Downgraded the US:
U.S. Tax revenue: $2,170,000,000,000
Federal budget: $3,820,000,000,000
New debt: $ 1,650,000,000,000
National debt: $14,271,000,000,000
Recent [April] budget cut: $ 38,500,000,000

Let’s remove 8 zeros and pretend it’s a household budget:
Annual family income: $21,700
Money the family spent: $38,200
New debt on the credit card: $16,500
Outstanding balance on the credit card: $142,710
Budget cuts: $385

Even as a self-described policy wonk, I found this eye-opening. It’s harder to pretend that Washington leadership is serious about restoring fiscal sanity when their budget cuts are seen in this context.

There’s more at the link. How anyone can even begin to be complacent about the US economy, when those numbers are the daily reality we’re living with right now, is utterly beyond me. To see our politicians arguing over whether to fund disaster relief expenditure by cutting other expenditure, or adding it to the deficit, is mind-boggling. Can’t they understand that they’re fiddling while Rome burns? The odd billion here or there pales into insignificance beside the fact that we’re 1.65 trillion dollars in the hole this year alone. We’ve got no more room left to maneuver on the deficit. We simply can’t go on spending money we don’t have. It’s almost destroyed us already. Why can’t they see this?

They aren’t alone in their catastrophic ignorance and wilful blindness, of course. The governing ‘elites’ all over the world have been peddling the same lies for decades – lies that are now being exposed by their failure. As Richard Fernandez points out:

The market is writing down the value of the world economy. Right across the board. It is making a judgement on what they think the future is worth. By recent numbers, not much. Not just because policymakers have gotten it wrong about the “root cause” of terrorism, or the Euro; but also about “Too Big To Fail”, population policy, multiculturalism, a crippling environmentalism and Global Warming, to name a few. The financial, national security and educational systems of the world are in utter collapse because they are stuffed with lies, which even when they are shown to be obviously false suck up trillions of dollars in their pursuit. And nothing will turn the global elites from continuing their ruinous path until they have spent the last nickle and dime they can lay their hands on.

More at the link. Bold print is my emphasis.

What does this mean in the short term? As Karl Denninger put it yesterday, “Welcome to the Collapse of 2011“!

Recognition that you’ve been scammed can be a truly ugly thing. It is usually violent at an emotional and financial level, and more often than one would like it has a habit of being violent in the physical sense as well.

Well, America (and the world), you’ve been scammed by the financial institutions and governments for the last 30 years. 2008 was the first spasm of recognition but was short-circuited by…. you guessed it…. even more scams. Rather than demand truth and an end to the games the American consumer lapped up the frauds and schemes of the politicians on both sides of the aisle who conspired with the financiers to rip you off once again.

The opportunity to address these issues as I have been tirelessly attempting to do, was ignored by those in policy roles in Washington DC. Those who have been reading The Ticker are well-aware of my efforts going back into 2007 and through the 2008 Presidential campaign on both sides of the aisle, along with my efforts since.

They’ve been ignored with the political establishment choosing to knob-job the banks and lie to you, the public, rather than address the fact that the entire last 30 years have been one gigantic economic scam and that what they were attempting to do could not, as a matter of mathematics, succeed.

Now recognition of that fact is dawning on people in a convulsive fashion, and markets of all sorts are reacting as one would expect when their entire worldview is exposed as having been a gigantic and intentional pyramid scheme constructed of debt layered upon debt that cannot be paid down. The wrong thing was done in 2008 and there is zero evidence that our government has changed one iota in their singular focus on misdirection and lies in this regard.

Welcome to awareness; I hope you’ve taken the last couple of years to become prepared.

Again, more at the link.

Let’s give a slightly more hopeful – but no less realistic – last word to Walter Russell Mead.

Global economic events are moving so rapidly that we have no way of foreseeing the economic environment for next year. It will probably not be very good, but how bad it will be and how it will look to voters cannot yet be foretold.

More to the point, we need policy discussions more than we need political ones. This is not just about how big the deficit should be; it is about whether the international financial system will survive the next six months in the form we now know it. It is about whether the foundations of the postwar order are cracking in Europe. It is about whether a global financial crash will further destabilize the Middle East and, if so, what we and the Europeans are going to do about it. It is about whether the incipient signs of a bubble burst in China signal the start of an extended economic and perhaps even political crisis there. It is about whether the American middle class is about to be knocked off its feet once again and indeed whether the middle class as we’ve known it will survive. It is about whether sovereign governments can still underwrite economic performance and financial stability in the leading economies of the world.

In all cases, I think the odds still favor outcomes well short of catastrophic and worst case scenarios — but the global economy is now in the catastrophe zone where speculation about such scenarios is no longer science fiction but becomes part of prudent planning.

. . .

I still hope the old house can weather one more storm, but it is clear that we can no longer take that for granted. The ground under the foundations is washing away; the wind threatens to rip off the roof, and cracks are appearing in load bearing walls. Sooner rather than later we are going to have to redesign and rebuild.

Financial market crashes come and go; the world may spin back into recession or the economy may wobble for a bit and then stabilize. But we’ve had a glimpse into the abyss; in Europe, in Asia and in the Americas some of our most fundamental institutions and social policies are going to have to change.

Bold print is my emphasis. Go read the rest for yourself. It’s good stuff.

Peter