More economic news

There were a number of very interesting and thought-provoking articles out there today.  Here’s a brief selection.

1.  The New York Sun has an excellent editorial commenting on the relationship between the Federal Reserve and Congress.  Here’s a brief excerpt.

Our own view is that everyone — the Congress, the Federal Reserve, and the American people — would be better served were this issue opened up on every front. This is a moment for our leadership to acknowledge, nay, to declare that the topic of monetary reform needs to be put on the table and debated. Value was seeping out of the dollar even as Mr. Bernanke spoke. At the end of the day today, it was down to less than a 1,775th of an ounce of gold.

The value of the dollar, in other words, has collapsed to less than half of the number ounces of gold it was worth when President Obama acceded to the presidency and to less than a sixth of what its value on the day, say, George W. Bush acceded. Is there a candidate in either party — or for any seat in the Congress — who thinks this collapse, breath-taking in its rapidity and depth, is unrelated to our national economic travail?

There’s more at the link.  I endorse and recommend the whole thing.  Kudos to the New York Sun for putting it out there so bluntly.  I wish other mainstream media outlets would follow the Sun’s example!

2.  The co-founder of PIMCO, the largest bond investor in the world, is Bill Gross.  In the latest edition of his investor newsletter, he comes out flat-footed about our economic prospects.  Here’s an excerpt.

Armageddon is not around the corner. I don’t believe in the imminent demise of the U.S. economy and its financial markets. But I’m afraid for them. Apparently so are many others, among them the IMF (International Monetary Fund), the CBO (Congressional Budget Office) and the BIS (Bank of International Settlements). I hold on my lap as I write this September afternoon the recently published annual reports for each of these authoritative and mainly non-political organizations which describe the financial balance sheets and prospective budgets of a plethora of developed and developing nations.

. . .

When all of them speak, we should listen and in the latest year they’re all speaking in unison. What they’re saying is that when it comes to debt and to the prospects for future debt, the U.S. is … a serial offender, an addict whose habit extends beyond weed or cocaine and who frequently pleasures itself with budgetary crystal meth. Uncle Sam’s habit, say these respected agencies, will be a hard (and dangerous) one to break.

. . .

… these studies (when averaged) suggest that we need to cut spending or raise taxes by 11% of GDP and rather quickly over the next five to 10 years. An 11% “fiscal gap” in terms of today’s economy speaks to a combination of spending cuts and taxes of $1.6 trillion per year! To put that into perspective, CBO has calculated that the expiration of the Bush tax cuts and other provisions would only reduce the deficit by a little more than $200 billion. As well, the failed attempt at a budget compromise by Congress and the President – the so-called Super Committee “Grand Bargain”– was a $4 trillion battle plan over 10 years worth $400 billion a year. These studies … suggest close to four times that amount in order to douse the inferno.

. . .

It’s well publicized that the U.S. has $16 trillion of outstanding debt, but its future liabilities in terms of Social Security, Medicare, and Medicaid are less tangible and therefore more difficult to comprehend. Suppose, though, that when paying payroll or income taxes for any of the above benefits, American citizens were issued a bond that they could cash in when required to pay those future bills. The bond would be worth more than the taxes paid because the benefits are increasing faster than inflation. The fact is that those bonds today would total nearly $60 trillion, a disparity that is four times our publicized number of outstanding debt. We owe, in other words, not only $16 trillion in outstanding, Treasury bonds and bills, but $60 trillion more. In my example, it just so happens that the $60 trillion comes not in the form of promises to pay bonds or bills at maturity, but the present value of future Social Security benefits, Medicaid expenses and expected costs for Medicare. Altogether, that’s a whopping total of 500% of GDP, dear reader, and I’m not making it up. Kindly consult the IMF and the CBO for verification. Kindly wonder, as well, how we’re going to get out of this mess.

Again, more at the link.  Bold print is Mr. Gross’s emphasis.  Informed commentary about his article may be found here and here.  All those articles make very useful (and troubling) reading.

(I should point out, of course, that Mr. Gross’s figure of $60 trillion is both less than the true total of our indebtedness – which is estimated by some sources to be almost four times that amount! – and also irrelevant.  We don’t have that much money.  Those sums will never be paid, despite all the promises made by our politicians.  In fact, some politicians would love to see massive inflation take place, because they could then pay those sums in inflated dollars worth much less than the present value of our currency.  That’s the only way they can keep their rash promises to the electorate.  Of course, when it’s paid, that money will no longer be worth much at all . . . but hey, the politicians never promised it would be, did they?)

3.  I wrote last night about the hyperinflation experienced in the Weimar Republic after World War I.  Several readers appear to be unfamiliar with this episode, which is almost unique in world economic history.  It probably couldn’t happen again in precisely the same way, but similar fiscal seeds are being sown right now in Europe and the USA, and may have somewhat similar effects in due course.  (Frankly, I’ll be surprised if they don’t!)

Adam Fergusson‘s famous 1975 book ‘When Money Dies:  The Nightmare of the Weimar Collapse‘ is a superb account of what happened in the early 1920’s in Germany.  It’s now back in print (and in e-book format) after being unavailable for many years.  (There’s also an online version, an Adobe Acrobat document in .PDF format;  and a good review of the book may be found here.)

I recommend this book very highly indeed.  It’s an invaluable in-depth examination of what happens when an entire national economy self-destructs.  As I said, I don’t think exactly the same thing could happen again today;  but that’s not to say that something similar may not be bearing down on us, even as I write these words and you read them.  I regard this book as essential background information to understand our modern fiscal and financial dilemma.  If you’re serious about preparing yourself for economic hard times, you can’t afford not to read it.

There.  Three sources of food for thought, all worth your attention.

Peter