I tend to think so. It is becoming increasingly clear that our financial system is at least $2-3 trillion in the hole, and it is the commercial banks which create most of the money in our economy through their lending. That being the case, not bailing out the financial system isn’t an option to anyone who looks seriously at the issue. When credit bubbles collapse, the banks always get bailed out in modern economies, with the only difference being the form that bailout takes- e.g. the Swedish nationalization model, the Japanese “bury your head in the sand for a decade while your economy stagnates and then bail them out” model or the recent British/US model of large-scale cash infusions.
The bank bailout can be funded either by Congress borrowing money or by the Fed simply printing money. It’s becoming clear that there’s no political will for Congress to vote for more and more bank bailouts, so I strongly suspect that the Fed is just going to have to do the heavy lifting by printing money. That will of course cause currency devaluation and inflation in the long term, though it’s unclear how long the deflationary forces which prevail now will have the upper hand. It could be longer than many people think since so much credit has simply disappeared, but the end result of inflation can not be in serious doubt. With all its debt, our government simply can’t afford to function long-term in a deflationary environment, so the Fed will do whatever it takes to defeat deflation.
Once this financial crisis has passed, we will be at or near the event horizon of our fiscal crisis, the timetable of which has been moved up considerably by recent events. I’m referring of course to the Medicare/Social Security crisis which will occur as the baby boomers retire in ever greater numbers. I had thought that sometime around 2017 would be the start of the fiscal crisis, but in light of all the borrowing we are doing now, the current financial crisis may end up merging seamlessly with the fiscal crisis. I don’t think that there will be any greater political willingness for Congress to deal with this fiscal crisis, so the Fed’s printing press is going to have to crank up once again.
I’ve got all of my money in CDs, so I wish I saw some way out of this wealth destruction, but I don’t. I think we’re just going to have to get used to the fact that a lot of our “prosperity” of the last couple decades was a mirage caused by 1) our borrowing money that we can’t repay except in cheap dollars and 2) by the bogus asset appreciation (stocks, real estate, etc) caused by an unsustainable credit bubble (made worse by China’s continuing to buy our debt and subsidize our irresponsibility).
People talk about this being a recession, but it’s really more accurate to say that our entire economy is being revalued to account for the new realization that there is going to be far less leverage/credit in coming years, and thus far less economic oxygen to go around. That’s why I don’t think there will ever be a true “recovery” in the sense of going back to the heady Greenspan days of fast growth, full employment, cheap money and low inflation. Those things just don’t co-exist in a non-bubble economy. But we’ve still got all this private and public debt out there, and it has to be dealt with somehow. To anyone who has been watching how Washington operates lately- the answer to how that will occur is clear: the Fed will simply have to print a staggering amount of money in coming decades. So hug your dollars while you can- they are about to get devalued.
I’m not sure I understand how one could devalue the currency. The USD, like most other currencies in the world today, isn’t worth anything. That is, it’s not worth a specific amount of gold, or units of some other country’s currency. So it can’t be officially devalued, although other central banks are free to decide, individually, what value they will give for it.
With that said, I agree the future looks ominous. Perhaps the most unsettling comment I’ve heard lately was from a financial expert the other day on NPR. As we are now so deeply in debt to countries like China and India, he said, the day of reckoning will come when they pressure us to reduce spending and live within our means, like any long term creditor might feel justified in doing in regard to a creditor who continues to spend. To live within our means is a worthy ideal on a perosnal level. But on a national level, will they challenge us to reconsider such things as universal education through high school, universal access to electricity and transportation, and so on, in light of the fact that most Indians and Chinese do not enjoy those privileges? One man’s necessity is another man’s luxury, and the first man doesn’t want the second man to start dictating.
I was looking at Google Earth yesterday, and thinking to myself, my country did most of this. We sent people to the moon and launched the satellites that make things like Google Earth and Google Maps possible. We were once great.
The problem with this doomsday logic is that virtually every other country is worse off than the U.S. What other currency is going to become more valuable or stable than the dollar?
Granted you have a good point there. I try to follow the news in Europe, at least if it’s in English, German or Dutch, and it’s not a bowl of cherries over there either. But over the long term, I think America is more vulnerable in a couple of ways. Although we produce some of the oil we consume, which is more than one can say of, say, Switzerland, we are more dependent on oil – by reason of decimated rail systems and car dependent lifestyles by an order of magnitude. Also one doesn’t hear about Germany, for example, being beholden to China for a trillion dollars, nor of one mass market retailer commanding supplier prices that make local manufacturing largely unsustainable. And we have mass immigration leading to steady population growth, which also is unsustainable. Anyone who thinks it is just needs to drive around Southern California, Arizona, or Nevada. Nor is immigration the only contributing factor to population growth. A small but significant percentage of the domestic population, for religious reasons, are opposed to contraception and birth control. But they do not necessarily believe that a family with four or five kids should have to live in a small three bedroom house with one bathroom–rather they want space just like everyone else. In the end this leads to bigger houses, more consumption, and longer commutes.
Does none of this happen in other countries? Of course not. But I don’t see it happening to the same degree elsewhere, Europe being the primary case in point. Just like Americans, early 20th century Europeans were thrilled by the automobile, and the streets of European cities were soon filled with cars, just as in America. But they didn’t give up their trains or rip up the tram tracks in the cities. In my view leaving the old system in place as a fallback is always wise; you can go back to it if we have to.
As I see it, the US and China are locked together-the USA will buy manufactured goods from China (while our industrial base decays). But the Chinese buy nothing from us-hence the deficit. What choice do they have? If they quit selling to us, their people will become unemployed and revolt.
Acknowledged, but what I meant was that the USD is no longer worth 1/20 oz. of gold like it was until FDR devalued it to 1/35. IIRC Richard Nixon devalued it to about 1/40oz. where it remained for a couple of years until the modified gold standard was completely revoked. It has its market value against commodities and other currencies, but no official pegged rate.
Consider that another way to phrase your question is:
Will our descendants be willing to fully repay debts we created?
I am inclined to believe the answer is “No.” Why should a kid born into today’s generation feel an obligation to bear a tax and redistribution burden for debts incurred by the generations which preceded him?
It will be difficult to persuade our descendants that our motivation was anything except a desire to live beyond our means. We want government guarantees for employment, healthcare, housing, retirement and general stuff.
Should our various schemes to create a society in which somehow all of this comes to pass and enough wealth is generated to pay for it all, the dollar will not devalue. Should we fail to create this utopia there are two mechanisms for repaying an overwhelming debt: Use inflated dollars or dissolve the government which owes the debt. They are not necessarily mutually exclusive.
I see no hope of avoiding substantial inflation and I see little hope, longer term, of avoiding dissolution of the government.
While it’s possible our children will, instead, do what no other generation has ever done and actually pay the debt back in today’s dollars, I find it exceedingly unlikely.
I asked this in another thread that died:
What should we be doing as a hedge against inflation? I do not feel comfortable saving US dollars at the moment.
Also, should people start locking into long term price agreements or options on items that will be ridiculously cheap after a sustained period of high inflation?
The German national debt is about the same percentage of their economy as the American national debt. We’re also in the lower half of the nations of the world when it comes to population density. Our population growth rate is lower than the world average, and our fertility rate is at just about replacement level. So things aren’t as negative as you’re portraying them.
Population growth is a good thing for the economy.
Inflation (with an assumed corresponding increase in the availability of credit) would be a very good thing right now. The biggest problem with the American economy right now is that no amount of government fiddling can stop the de-flation trend we’re so worried about.
Is that so? Every other country is having a recession worse than the USA? I believe that is absolutely not true. It is in fact not ture.
Well, the Euro is already in great measure replacing the US$ as a reserve currency. In 1999 it was 71% / 18% and in 2007 64% / 27% and I believe the trend will increase.
Oh, come on! China sells to the rest of the world too and has a huge internal demand. In spite of the recession in America China continues to have a healthy growth rate. More cars were sold inside China in January than inside the USA. The view that China lives off what it seels to America is just too simplistically ignorant. They have a huge internal demand. They consume more mobile phones and more of other things than America does.
It certainly won’t be us that gets hurt if they default on they debts we incur in their name. I don’t see how they have much choice in the matter. If they default on the national debt, they will be much worse off than if they raised taxes and paid the bill we left them. And they should thank us for doing what was necessary to right the financial ship that hit a glacier at the end of the Bush Administration. Their lives will be measurably better than if we fail to increase federal spending now, and let the country sink further into depression. Things can be a lot worse than having high taxes and a huge debt.
"Consider that another way to phrase your question is: Will our descendants be willing to fully repay debts we created?"
The likeliest scenario is that they will repay them with inflated dollars to avoid hurting themselves even more.
I may have been too oblique in the way I phrased it, but it’s much more likely they will allow the dollar to be devalued by inflating it than fully repaying our debts. For this reason, I argue that devaluation of the US currency is more or less inevitable. It is equally possible we’ll run up an overwhelming amount that, coupled with some yet unforeseen crisis collapses the whole government. Or both–inflation first; collapse eventually.
But what does this mean, exactly? When was the last time a government “collapsed”. Even Zimbabwe. with all its problems, still has a government. I suppose Somalia might be an example of a collapsed governemnt, but look what it took to cause that.
I think predictions of the collapse of the US government are premature and a little over the top. We have a long way to fall before total collapse of the government.
Perhaps my future timeline meets your definition of “premature.” I’d give us 20 or 30 years; not 50. If Cecil can keep the Dope alive, maybe we can pull up this post in a generation or so…
The last big collapse, I suppose, was the Soviet Union–1990 or thereabouts. If you consider Zimbabwe to have a government, well OK…I don’t mean there will be anarchy. I’m talking about the US Federal Government as it is currently structured, and more specifically, the general model of taxing the 50 states and providing services back to them, along with meeting debt obligations. When the interest on the debt rises to the point where all revenues collected are expended only to meet the debt–and there is no money left for services–borrowing power ceases. At that point (or a little before) surely the end game will be for states to secede and quietly bow out of the Union.
We’ll do a much better job than Somalia, for sure. But I’m really talking about the long-term Treasury obligations. I don’t see those being the rock-solid gold standard they are today for more than 20 or 30 years. Details around how we fail to repay are probably the subject of another thread debate, but one thing I do assert is that US currency devaluation is absolutely inevitable.
Our dollar is already deflated against the Euro. The exchange rate varies generally from 1.3-1.6. Same true against the pound.
So much of our present Congress is basically a bunch of thieves, taking orders from corporate America, lobbyists, and others that will fund their campaigns. They are sort of a Robin Hood in reverse. Instead of stealing from the rich, and giving to the poor, they do the opposite. Their reckless spending doesn’t inspire confidence in its people. Their whole answer seems to be lately, let the federal government manage more of your money.
Ten trillion dollars of debt is a lot of money, and with everybody in Congress from both parties willing to spend like there is no tomorrow, I don’t know why America should be exempt from becoming another banana republic if trillion dollar plus annual deficits start to become the norm. Maybe not today, or next year, but continue on this course for ten years or so, and let’s see where we are at.
I agree with much of your post but I do not understand this comment.
While you may feel the wealthy are not taxed enough, what is the basis for the statement that the government is taking from the poor?
In round numbers, the 1%, who earn 20% of the income pay 35% of all income taxes. The top 10% income earners pay about 65% of all income tax.
The bottom 50% earn about 13% of the income and pay 3% of income taxes.
There are many ways to massage these numbers, including looking at Soc Sec, Medicare, and all other taxes. But I don’t see evidence that the Federal Government steals from the poor and pays the rich. That’s great rhetoric to get elected but doesn’t have much basis in numbers.
A steady population growth and above replacement level fertility is one of the reasons the USA is not as thoroughly in the shitter as several European nations. You think you have a problem with baby boomers going on pensions, think about countries like Italy or Spain with about the same level of deficit as you, very little pension savings and a fertility for many years which will ensure that they will have to finance their retiring baby boomers on half or a third as many workers per non-working old person. Those are nations set to fail.