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Sins of Proportion

Monday, 16 July 2012 13:43 Written by 

There is a primal and inevitable force at play in the World Economy that is much larger than any politician or government can deal with effectively. I have often commented that regardless of who won the 2008 U.S. Presidential Election, this Primal Force would work itself out to its final conclusion and change the World’s economy and monetary system as we know it. The only difference is that the guy who won is taking us there much sooner than I thought possible. It is a concept so simple and easy that only an economist cannot understand it: debt.

For some time now, many of the World’s nations and economies have crossed the point of no return and can no longer manage their debts in a manner that is sustainable. They are past the point where it is possible to significantly reduce or pay them off. This is the overarching and galactic tidal wave that will wash away all of the noise and other factors that politicians, CNBC financial anchors, and blind optimists attempt to proffer as signs of a recovery. Other economists who try to strike a moderate tone that somehow we will just manage to muddle through this malaise until things recover are equally wrong. Employment numbers, the inflation index, and additional European bailouts are all just noise or symptoms of the larger problem: rapidly increasing debt which is starting to go parabolic on a global scale never seen in human history. No my friends, that light at the end of the tunnel is another train coming.

As I had explained in my last column on Normalcy Bias, the American psyche does not have a collective memory of struggle akin to a World War or a Great Depression, so there is a huge blind spot to the impending financial crises. As a result, any positive piece of economic data is clung to as a sign of recovery: Trade deficit or employment numbers are slightly better than previous months? Doesn’t matter, look at our growing debt. Europe has reached another “solution” to the Euro debt crisis? Doesn’t matter, Europe’s Nations are either insolvent or becoming so rapidly. Emerging markets, such as China, will lead the way out of this through economic growth? Doesn’t matter, Chinese banks have a higher percentage of bad loans and insolvency than American banks. These “Sins of Proportion” are an assault on basic reasoning. A few huts raised on stilts will not save a fishing village from a Tsunami.

How bad is it? We could eliminate every department and expenditure in the Federal Government (including defense spending, Medicaid, and Civilian Agencies) except for Social Security and Medicare, and we would still be running a yearly deficit. Both of these behemoths are growing rapidly and demonstrate that even the otherwise intelligent and wonkish Congressman Paul Ryan has not shown a serious understanding of the severity of the problem through his proposed “draconian” cuts. 

How bad is it? While the Federal Government’s official debt clock stands at $15.871 Trillion as of July 12, 2012, our actual debt if we use standard GAAP accounting is closer to $120 Trillion. Debt exceeding 90% of GDP is generally regarded is the point of no return for a Nation (our 2012 forecasted GDP is $15.917 Trillion). Even the otherwise clueless USA Today published an article on May 24 of this year admitting that the “real federal deficit dwarfs the official tally” for 2011 and was actually “$5 Trillion last year under those rules (GAAP). The official number was $1.3 Trillion.”

How bad is it? While each new European bailout has a shorter half life than its predecessor, some estimates have claimed it would require a $10-12 Trillion bailout to solve the Euro crises and would likely only give 3 years of breathing room before returning in earnest.

The mission of Western Governments is to shield their citizens from reality, and by extension their roles in creating hardship. Modern economists (Ben Bernanke, Alan Greenspan, Keynesians, et al.) intentionally use complicated language to confuse the unwary. My actionable advice is this: keep it simple by always considering the direction of US and Worldwide debt. Whenever listening to the warm fuzzy prognostications of some market perma-bull or news pundit, ask yourself if the situation with US and Worldwide debt is on the mend. Have the US and other major World Governments started running surpluses? No. Have there truly been drastic cutbacks in Government spending? No. Have large nations begun repudiating their debt as Iceland did in 2009? No. Pretending that “green shoots” sprouting through cracks in the black pavement of the World’s sick economy are signs of recovery does not make one an optimist, but rather an idiot. The Great Reset lies before us.      

Last modified on Saturday, 18 August 2012 00:32
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Matthew Conlan

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