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On The Historical And Cultural Habits That Will Lead To Economic Apocalypse

 
 
Reply Thu 20 May, 2010 02:17 pm
Let me begin by stating that the U.S. economy is beyond the point of no return; it is now inevitable that the U.S. economy will begin to collapse in a time frame of one to three years. To be specific, there will be massive inflation in the economy. The price of a loaf of bread, for example, currently at about $1.50, will grow to approximately $25.00. Lower income people will not be able to afford to eat and the government will have to step in to place price controls upon groceries; this will lead to shortages of food. The whole thing will lead in the long run to a change in the form of government. The result will likely be a form of quasi-dictatorship with permanently imposed forms of martial law.

In 2009 the U.S. federal government ran a deficit of 1.4 trillion dollars. In 2010 the projected government deficit stands at 1.3 trillion dollars. I do not believe the government will ever be able to run for even one three month period going forward in the future without incurring a large deficit. The U.S. federal government will never be able ever again to balance its budget.

The current national debt of the U.S. is nearly 13 trillion dollars. If we were to add the debt of the newly aquired Fannie and Freddy Mortgage giants, which equals approx. 6 trillion dollars, and also include the real costs of Social Security, Medicare, and Medicaid, the national debt is at 79 trillion dollars more than 5 and a half times our GDP of 14 trillion dollars.

Apple Computers is one of the greatest companies on earth today. For fiscal year 2009 Apple paid 2.28 billion dollars in Federal taxes, the U.S. would need to see the creation of 700 companies like Apple just to balance our 2010 projected budget deficit: And this is impossible.

The problem arises out of the growth of the U.S. financial sector. Without much public notice, the U.S. financial sector - banks, broker-dealers, consumer finance, insurance and mortgage finance- muscled past manufacturing in the 1990's to become the largest sector of the U.S. private economy. By 2004-2006 financial services represented 20 percent to 21 percent of gross domestic product, manufacturing just 12 to 13 percent. The U.S. moves money around instead of makes things.

The federal government for decades has provided bailout after bailout of financial companies. These bailouts have sustained the financial services sector even as the market fundamentals have weighed against them.


Also, the dot com bubble, which is popularly understood as representing a technological advance, was in reality a Wall Street driven bubble fuelled by absurd IPO's and financial mania. After the crash of the dot com bubble the Federal Reserve lowered short term interest rates to 1% which fuelled the irrational excuberance of the now infamous housing bubble. During the housing bubble U.S. manufacturing continued to decline: the rising prices of houses during this time was purely inflationary and absolutely unproductive. The rising prices of houses produced nothing of value for the U.S. economy.

And the current rise in G.D.P. is due only to the taking on of debt by the government. In fact, the government debt is rising faster than G.D.P.

There is no way to reverse the current course. in order to reverse course short term interest rates will have to rise precipitously. Such a rise in rates would bankrupt the average consumer who holds large amounts of debt. A rise in interest rates would mean a rise in student loans, car loans, mortgages, and credit card rates thus bankrupting the consumer. Also, a rise in interest rates would push the interest that the federal government has to pay on its debt obligations beyond its ability to pay.


So the course cannot be changed due to the addiction of debt on the part of the average American as well as the federal government. This is what I mean by cultural and historical strictures or habits that are driving the U.S. economy to collapse.


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exile
 
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Reply Tue 25 May, 2010 02:00 pm
@Pythagorean,
This debt is owed to other people and thus is exactly balanced by credits. In this situation the creditors have more to worry about than the debtors as it is always open to the government to default - many governments have in the past, the most recent the Russian one (1998).

Alternatively, it can inflate its way out of trouble.

Or, it can stop spending so much money. Or it can raise taxes.

Or it can just keep borrowing. Bondholders have nowhere else to go - all governments are in much the same position.

World War II was a collosally expensive exercise which left governments throughout the world with debts which in real terms were far larger than today. And yet this was followed by a 30 year boom.
Pythagorean
 
  1  
Reply Tue 25 May, 2010 03:04 pm
@exile,
exile;168668 wrote:
This debt is owed to other people and thus is exactly balanced by credits. In this situation the creditors have more to worry about than the debtors as it is always open to the government to default - many governments have in the past, the most recent the Russian one (1998).


Let's discuss this relationship between creditor and debtor then. The U.S. borrows for consumption. The Chinese lend to subsidize an expansion in manufacturing production. This is the trade imbalance. Manufacturing is real value while consumption has no value. A sharp correction is required and will come in the form of a dollar collapse. After which the Chinese will still be in posession of their manufacturing and the Americans will be facing a lower standard of living.


Of course the honest thing for the U.S. to do is to default on their obligations for it is technically bankrupt. The nightmare is precisely due to the fact that the U.S. will not default but will print money as it is now doing. Raising taxes will lead to lower growth and greater government powers over the people; political unrest is inevitable. Meanwhile unemployment in the U.S. stands at 10%.

exile;168668 wrote:
Alternatively, it can inflate its way out of trouble.


The decision has already been made. hyperinflation is inevitable.


exile;168668 wrote:
Or, it can stop spending so much money. Or it can raise taxes.


The government will not stop spending money because it has so much power. In fact, the U.S. will never be able to balance its budget again. Raising taxes with 10% unemployment will lead to social unrest with the power of the government coming down upon the heads of the people as they become poorer.

Quote:
Or it can just keep borrowing. Bondholders have nowhere else to go - all governments are in much the same position.
I agree that fiat currencies are doomed.

Quote:
World War II was a collosally expensive exercise which left governments throughout the world with debts which in real terms were far larger than today. And yet this was followed by a 30 year boom.

Where is this growth going to come from? Manufacturing? More consumption? Ha, ha! There is no way that that type of growth is even remotely possible in the future. The governments are too large the populations of the West are too old. Today the debt in the U.S. is growing faster than the G.D.P.

The U.S. government needs to shrink by about half, but no one has the stomach for strong medicine. The government employees earn twice the amount of money that the average worker earns today. The U.S. government will declare martial law before it cuts government spending.

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