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That has been the pattern for a very long time. The problem
Posted on: January 10, 2023 at 16:11:43 CT
JeffB MU
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is that the pattern is not some immutable law of nature. There is a saying in the financial world about investment strategies... "It works extremely well... until it doesn't."
Sometimes there is a paradigmatic shift and what worked well in the past no longer does. At one time the sun never set on the English empire, but things changed and England became "The Sick Man of Europe". Japan was once the 2nd largest economic empire in the world & many thought they would overtake the US as #1 in due time, but now they are mired in a mountain of debt and their central bank is hamstrung. They have been in a very stagnant economy for decades now with no end in sight.
Reading a history of bubbles in economies is rather eye opening as to how a world or national economy can be turned on its head in a flash.
https://www.investopedia.com/articles/personal-finance/062315/five-largest-asset-bubbles-history.asp
Worse yet are hyperinflation or in a worst case scenario a currency crisis. Two currency crises have happened in the US. The first was in the Continental War. The first US currency, the Continental, inflated away into a full blown currency crisis. The money became worthless. That begat the old phrase, "Not worth a Continental." In the 2nd instance the Confederate dollar became worthless, and the northern greenback lost some 40% of its value during the Civil War.
The currency crisis in Germany after WWI was so bad that the German Mark became virtually worthless. People used it to wallpaper their homes or burned them in wood stoves for fuel. People lost their life savings and it created the economic crisis that allowed Hitler to come to power.
Our official US debt is almost $31.5 trillion (see Chris Martenson's short video, "How Much Is $1 trillion? - https://www.youtube.com/watch?v=caMRBGmja3w for perspective), that is 121.51% of the US GDP, beyond what has historically been a debt load that countries cannot recover from without severe pain over an extended period of time. The truly sad thing, however, is that the official debt is a mere fraction of the actual federal debt if one includes their "unfunded liabilities" of Medicare, Medicaid, Social Security and the federal drug program for Medicare. The unfunded liabilities are $171,515,000,000,000. Adding them to the official debt would bring us to almost $203 trillion.
There are 127,462,126 federal taxpayers in the US. That means that US debt alone, not counting state or local debt, personal debt such as mortgages, car loans, student loans, credit card debt etc., would come to $1,592,590.73 per US taxpayer, or $3,185,181.46 for a family with 2 federal taxpayers. https://www.usdebtclock.org/
We have been running $1 trillion + deficits and our ability to reduce those, much less eliminate them is very limited. There is virtually no way in the world we are going to be able to pay our federal debt other than through large scale inflation, which can cripple economies and cause much pain for our citizens. Because of our world reserve currency status, inflation we generate also causes pain throughout the world and is currently doing so.
Our federal debt currently is financed with very low interest rates, but we still owe some $400,000,000 per year on our existing debt. Most of our debt is relatively short term. If interest rates go up or even hold steady, the annual interest expense on our monstrous debt will be going up, perhaps rather dramatically. The so called entitlement programs of Social Security, Medicare, and so on are called "the third rail" because any politician or political party trying to touch (cut) them will be killed in the next election. We wouldn't be able to balance the budget by cutting the military significantly, especially when both political parties seem hell-bent on instigating and funding wars around the world. Trying to make significant cuts elsewhere is virtually impossible.
So where do we come up with the extra $1 trillion+ per year? We can borrow it or we can "print" it. There are limits to how much we can borrow, of course. Many countries around the world buy our debt, but the vast majority of them are also heavily in debt themselves... and we buy some of their debt as well. How does that work? In essence, we all have fiat currencies and can "print" money as needed. That is the least painful way to do things because most citizens don't realize why inflation is eating away at their savings and their income. It just seems to come out of nowhere.
But there are limits to how much countries can inflate their currencies as well. Inflation can destroy an economy. It can cause strikes as workers demand higher pay and that disrupts economic activity, of course. It also tends to destroy faith in a currency and the inflation can feed on itself becoming an inflationary spiral. No one wants to buy bonds or save money in low interest accounts as the value of the currency continues to drop. So people spend it as soon as they can before prices go up further. That makes inflation even worse and the only solution is to raise interest rates. But that puts the Fed between a rock and a hard place. Raising interest rates causes pain too. It also increases the cost of the interest on the federal debt even higher.
If they lower rates, or even don't increase them enough inflation can get out of hand. That can in turn lead to a currency crisis if other countries start cashing in their US bonds &/or invest new funds elsewhere even as US debt climbs ever higher requiring more and more bonds to be sold.
Here is a chart of the US M1 money supply: https://fred.stlouisfed.org/series/WM1NS#0
As you can see the Fed has been printing money hand over fist for a little while now and the chickens are starting to come home to roost. They have printed enough money to keep interest rates low, which causes an economic boom, or at least minimizes an economic slowdown, but at the risk of inflation... and we are seeing inflation rear its ugly head.
Perhaps one can bet on the Fed reversing course and lowering interest rates again and letting the money supply continue to grow exponentially and come out alright in the short run if they bet correctly. There will certainly be pressure on the Fed to do so. But if they do there will be adverse consequences for the economy as well... more inflation, and perhaps a catastrophic currency crisis.
Edited by JeffB at 16:33:01 on 01/10/23
Sometimes there is a paradigmatic shift and what worked well in the past no longer does. At one time the sun never set on the English empire, but things changed and England became "The Sick Man of Europe". Japan was once the 2nd largest economic empire in the world & many thought they would overtake the US as #1 in due time, but now they are mired in a mountain of debt and their central bank is hamstrung. They have been in a very stagnant economy for decades now with no end in sight.
Reading a history of bubbles in economies is rather eye opening as to how a world or national economy can be turned on its head in a flash.
https://www.investopedia.com/articles/personal-finance/062315/five-largest-asset-bubbles-history.asp
Worse yet are hyperinflation or in a worst case scenario a currency crisis. Two currency crises have happened in the US. The first was in the Continental War. The first US currency, the Continental, inflated away into a full blown currency crisis. The money became worthless. That begat the old phrase, "Not worth a Continental." In the 2nd instance the Confederate dollar became worthless, and the northern greenback lost some 40% of its value during the Civil War.
The currency crisis in Germany after WWI was so bad that the German Mark became virtually worthless. People used it to wallpaper their homes or burned them in wood stoves for fuel. People lost their life savings and it created the economic crisis that allowed Hitler to come to power.
Our official US debt is almost $31.5 trillion (see Chris Martenson's short video, "How Much Is $1 trillion? - https://www.youtube.com/watch?v=caMRBGmja3w for perspective), that is 121.51% of the US GDP, beyond what has historically been a debt load that countries cannot recover from without severe pain over an extended period of time. The truly sad thing, however, is that the official debt is a mere fraction of the actual federal debt if one includes their "unfunded liabilities" of Medicare, Medicaid, Social Security and the federal drug program for Medicare. The unfunded liabilities are $171,515,000,000,000. Adding them to the official debt would bring us to almost $203 trillion.
There are 127,462,126 federal taxpayers in the US. That means that US debt alone, not counting state or local debt, personal debt such as mortgages, car loans, student loans, credit card debt etc., would come to $1,592,590.73 per US taxpayer, or $3,185,181.46 for a family with 2 federal taxpayers. https://www.usdebtclock.org/
We have been running $1 trillion + deficits and our ability to reduce those, much less eliminate them is very limited. There is virtually no way in the world we are going to be able to pay our federal debt other than through large scale inflation, which can cripple economies and cause much pain for our citizens. Because of our world reserve currency status, inflation we generate also causes pain throughout the world and is currently doing so.
Our federal debt currently is financed with very low interest rates, but we still owe some $400,000,000 per year on our existing debt. Most of our debt is relatively short term. If interest rates go up or even hold steady, the annual interest expense on our monstrous debt will be going up, perhaps rather dramatically. The so called entitlement programs of Social Security, Medicare, and so on are called "the third rail" because any politician or political party trying to touch (cut) them will be killed in the next election. We wouldn't be able to balance the budget by cutting the military significantly, especially when both political parties seem hell-bent on instigating and funding wars around the world. Trying to make significant cuts elsewhere is virtually impossible.
So where do we come up with the extra $1 trillion+ per year? We can borrow it or we can "print" it. There are limits to how much we can borrow, of course. Many countries around the world buy our debt, but the vast majority of them are also heavily in debt themselves... and we buy some of their debt as well. How does that work? In essence, we all have fiat currencies and can "print" money as needed. That is the least painful way to do things because most citizens don't realize why inflation is eating away at their savings and their income. It just seems to come out of nowhere.
But there are limits to how much countries can inflate their currencies as well. Inflation can destroy an economy. It can cause strikes as workers demand higher pay and that disrupts economic activity, of course. It also tends to destroy faith in a currency and the inflation can feed on itself becoming an inflationary spiral. No one wants to buy bonds or save money in low interest accounts as the value of the currency continues to drop. So people spend it as soon as they can before prices go up further. That makes inflation even worse and the only solution is to raise interest rates. But that puts the Fed between a rock and a hard place. Raising interest rates causes pain too. It also increases the cost of the interest on the federal debt even higher.
If they lower rates, or even don't increase them enough inflation can get out of hand. That can in turn lead to a currency crisis if other countries start cashing in their US bonds &/or invest new funds elsewhere even as US debt climbs ever higher requiring more and more bonds to be sold.
Here is a chart of the US M1 money supply: https://fred.stlouisfed.org/series/WM1NS#0
As you can see the Fed has been printing money hand over fist for a little while now and the chickens are starting to come home to roost. They have printed enough money to keep interest rates low, which causes an economic boom, or at least minimizes an economic slowdown, but at the risk of inflation... and we are seeing inflation rear its ugly head.
Perhaps one can bet on the Fed reversing course and lowering interest rates again and letting the money supply continue to grow exponentially and come out alright in the short run if they bet correctly. There will certainly be pressure on the Fed to do so. But if they do there will be adverse consequences for the economy as well... more inflation, and perhaps a catastrophic currency crisis.
Edited by JeffB at 16:33:01 on 01/10/23
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That has been the pattern for a very long time. The problem - JeffB MU - 1/10 16:11:43