POSSIBLE U.S. ECONOMIC COLLAPSE
(Part I)
WARNING
The mainstream media and government are communicating that the economy is on a positive track toward recovery while downplaying the likelihood of another economic catastrophe similar or worse than that experienced in the fourth quarter of 2008 and first quarter of 2009. In actuality, there is a significant chance that the U.S. will experience a severe economic collapse, beyond what has already been experienced, either this year or within the next few years. If there is a perceived, sustainable economic rebound before this happens, do not be fooled - the underlying economic problems still exist and will likely eventually surface in economic collapse.
This following analysis further explores this warning by describing:
- The 4 key reasons an economic collapse is likely imminent
- Why these 4 reasons make the economy vulnerable
- Warning signs and triggers to monitor to foresee a collapse before it happens
- What can result from an economic collapse
- Ideas for preparation
The 4 Key Reasons an Economic Collapse is Likely Imminent
- The U.S. has unprecedented, massive amounts of current and coming debt.
- Foreign countries have experienced their own crises, and they cannot offer added levels of debt funding for the U.S. Even if they could, they are unlikely to do so.
- Productivity is declining, and everything the government is doing is further hurting productivity.
- The U.S. is printing unprecedented, massive amounts of money and no longer has an ability to control inflation and deflation.
1. The U.S. has unprecedented, massive amounts of current and coming debt.
- Over $11.4 trillion in current debt and growing
- $1.8 trillion deficit in current budget - $9.3 trillion over next decade (likely to be higher)
- Outstanding future debt of $43 trillion to $102 trillion from entitlements
- Debt Comparison to U.S. GDP
A. Over $11.4 trillion in current debt and growing
U.S. federal debt is now over $11.4 trillion. As this graph is slightly outdated, you can imagine how far off the graph the line will need to go to chart the increase.
B. $1.8 trillion deficit in current budget - $9.3 trillion over next decade (likely to be higher)
The $3.6 trillion budget most recently passed is estimated to incur a $1.8 trillion deficit. The deficit is estimated to add up to $9.3 trillion over next decade. These are estimates by the government, but they include economic assumptions that have already been exceeded.
For example, the budget assumes a max of 8.1% unemployment. We are now at 9.4% unemployment. This means the deficit will most likely be larger than projected.
Even with the current estimates, the deficit line on the outdated graph below will go far off the chart. Also, the federal debt discussed above (bullet "A") will increase over time by the amount of the deficit.
C. Outstanding future debt of $43 trillion to $102 trillion from entitlements
The U.S. has made long-term commitments to fund Social Security, Medicare, and Medicaid. Because of the increase in the retiring Baby Boomer population and the continuing increase in medical costs in the U.S., the demand on these payments is also increasing. Additionally, the U.S. government borrows from already-collected funds to undertake additional spending, adding to the entitlement funding problem.
The coming added debt estimates from entitlements are as low as $43 trillion and as high as $102 trillion. To put these debt levels in context, total U.S. Gross Domestic Product (GDP) is about $14.1 trillion and falling.
Graph from a 2008 U.S. Government Accountability Office report
As the above U.S. Government Accountability Office graph is outdated from 2008, here are a few important points to note:
- The graphed values are based on the $43 trillion low-end estimate as of 2008. There are several other estimates all the way up to $102 trillion.
- Since this graph was created, there are already significant increases required given the recently reported acceleration of the social security shortfall.
- Increasing interest rates beyond 2008 projected levels are likely to add to the debt beyond what is stated here.
- Likely slower GDP growth will increase the percentage of GDP stated here.
Healthcare reform is an attempt to ease the blow of the coming Medicare debt tsunami. While it is possible that this will have some medium-term effect on the debt outlay (to the detriment of healthcare quality, of course), on the contrary it is also quite possible that it will quickly add cost/debt, and regardless, the timing for these changes to take effect will have little impact for several years.
D. Debt Comparison to U.S. GDP
Below is a government-created graph of U.S. public debt (i.e. not including intragovernmental holdings, which bring the current debt total to $11.4 trillion) projections as a percent of GDP through the coming decades.
Graph from a 2008 U.S. Government Accountability Office report
As the above U.S. Government Accountability Office graph is outdated from 2008, here are a few important points to note:
- We have already exceeded debt that is 50% of GDP and we are moving quickly past this level given our unexpectedly large current and projected budget deficits.
- The data line must be shifted significantly to the left given the recently reported acceleration of the social security shortfall.
- Increasing interest rates beyond 2008 projected levels are likely to add to the debt beyond what is stated here.
- Likely slower GDP growth will increase the debt percentage of GDP stated here.
2. Foreign countries have experienced their own crises, and they cannot offer added levels of debt funding for the U.S. Even if they could, they are unlikely to do so.
The issuance of U.S. Treasury securities is how the government gets loans to fund its spending activity beyond what it collects in taxes. If you buy a Treasury, you are giving the government a loan, which it has to pay back to you with interest. About half of public-owned government debt is held by foreign creditors.
The 3 most significant U.S. debt holders are Europe (European Union and UK), Japan, and China. Japan and China make-up almost 50% of foreign held U.S. Treasurys at 21% and 24% respectively. It is unlikely that these lenders will continue funding U.S. debt to its requirements.
Largest Holders of U.S. Debt - U.S. Treasury (2009)
The 2 key reasons why the U.S. is losing support from its debt holders are:
- Countries are experiencing their own crises and funding (and having trouble funding) their own stimulus
- Countries do not like our currency devaluation as it hurts the value of the return on their U.S. Treasury investments.
Take a look at the recent status of the larges U.S. creditors:
Europe
Several EU countries and Russia are significant holders of U.S. debt. All of these countries have their hands full with economic problems in their own countries and with countries for which they are responsible within the EU. Take a look at the current landscape in Europe.
Countries in Europe that have recently collapsed or are on the brink of collapse:
- Iceland (collapsed)
- Latvia (collapsed)
- Russia (on brink)
- Hungary (on brink)
- Ukraine (on brink)
- Additional Eastern Europe countries (on brink)
In recent time as Eastern European countries have attempted to emerge as viable economies they have become significant borrowers from Western Europe. As Eastern Europe feels pain, the banks and economies of Western Europe feel pain as well.
Failure to save East Europe will lead to worldwide meltdown - Telegraph (2009)
World Agenda: Eastern Europe's economic collapse stalks the West - Times Online (2009)
Eastern Europe's Economic Crash - Business Week (2009)
In addition to Russia's severe economic struggles, they are signaling a move away from the U.S. dollar:
Russia to propose new reserve currency at G20 - Reuters (2009)
Russia Warns Against Relying on Dollar - New York Times (2009)
Russia plans to reduce U.S. Treasury holdings in its reserves - MarketWatch (2009)
While all Western Europe countries are struggling, here are a few noteworthy economic situations currently unfolding:
Britain
Will Britain go bankrupt? - MoneyWeek (2009)
George Soros: Britain may have to seek IMF rescue - Times Online (2009)
Germany
Germany's slump risks 'explosive' mood as second banking crisis looms - The Telegraph (2009)
Spain
Spain's Economic Outlook Grimmest in Europe - New York Times (2009)
Ireland
Is Ireland fated to be another Iceland? - Guardian News (2009)
Celtic Tiger tamed as economy collapses - The Independent (2009)
Ireland is ECB's sacrificial lamb to satisfy German inflation demands - The Telegraph (2009)
Switzerland
Switzerland threatened with bankruptcy - CreditWritedowns (2009)
Japan (holds 21% of foreign held U.S. Treasurys)
Japan: Worst crisis since war's end - CNN (2009)
Japanese exports plunge by nearly 50% - Guardian News (2009)
Japanese GDP falls at biggest rate since 1955 - MSNBC/Associated Press (2009)
China (holds 24% of foreign held U.S. Treasurys)
China is the largest creditor for the U.S. The country is currently growing at close to half the projected pace before the crisis. The lifeblood of their economy (exports) is declining rapidly, and unemployment is rising quickly.
China exports down 25% - Washington Post (2009)
China Puts Joblessness for Migrants at 20 Million - New York Times (2009)
ADB Cuts China 2009 GDP Forecast On Global Crisis - Wall Street Journal (2009)
China is making loud signals about the declining value of their U.S. Treasury holdings, and backing up their words with consistent moves from long-term treasury holdings to short-term treasury holdings. They are also quite vocal about the need for the world to move away from the U.S. dollar to a new global currency.
Wen Voices Concern Over China's U.S. Treasuries - The Wall Street Journal (2009)
China Takes Aim at Dollar - The Wall Street Journal (2009)
China pushes SDR as global super-currency - Reuters (2009)
A 'Copper Standard' for the world's currency system? - The Telegraph (2009)
China's gold reserves jump, making nation No. 5 holder - MarketWatch (2009)
China's central bank frets over Fed bond purchases - MarketWatch (2009)
China's Short-Term Treasury Binge - The Wall Street Journal (2009)
China is quickly diversifying their investments away from the U.S. so that they do not have so much dependence on exports to the U.S. and the declining value of their U.S. Treasury holdings. They are doing this by investing in other country's tangibles and through focusing more on growing their own domestic economy.
China said to mull buying oil with foreign reserves - MarketWatch (2009)
China Starts Investing Globally - New York Times (2009)
China's shopping spree - The Independent (2009)
China overtakes the US as Brazil's largest trading partner - The Telegraph (2009)
Brazil Turns to China to Help Finance Oil Projects - The Wall Street Journal (2009)
Most recent statistics show China's holdings of U.S. Treasurys now likely at nearly half of China's GDP. Given the country's troubled economic situation in the crisis, signals of looking for a U.S. dollar alternative, and the diversification of their investments into other country's tangibles and their own domestic economy, China is not a reliable source for ongoing elevating levels of U.S. debt.
3. Productivity is declining, and everything the government is doing is further hurting productivity.
Economic productivity is were value is created, which enables the government to collect the money it requires (i.e. in the form of taxes) to pay for its spending and debt. Additionally, productivity enables U.S. citizens to grow their savings and makes them more likely to invest the savings in U.S. Treasurys (i.e. debt). In our current situation, not only is productivity declining, but the government is overwhelmingly hurting the ability for productivity to grow at a pace that would allow our debt to be managed.
Signs of declining productivity:
-GDP is declining
-Corporate earnings are down
-Layoffs/unemployment is up
-Productivity centers like automotives and manufacturing suffering
-Venture capital is suffering
-Private equity is suffering
-Mergers & acquisitions (M&A) and IPOs are suffering
-Technology, biotech, and other cutting edge industries are suffering
-Exports are suffering
-Growing population of retiring baby boomers
-Low international competitiveness in education; not in PISA top 20 of math, science and reading
-Personal and business savings are low
-Personal and business debt is stretched
What government is doing to hurt productivity for the long-term:
-Causing regulatory uncertainty through bailouts and changed rules/laws
-Protectionist policies are being implemented
-Tax structure hurts productivity - corp taxes, increases on cap gains, talk of national sales tax, etc.
-Attacking property rights/contracts
-Crowding out investment and industry with special public works projects
-Nationalization of industries - auto, banks, and more to come
-Welfare and unemployment entitlements expansion
-Unionism is getting more government support
-Implementing stifling health care reform
-Economically invalid environmental approach
-Adding equal opportunity laws
4. The U.S. is printing unprecedented, massive amounts of money and no longer has an ability to control inflation and deflation.
There is a common fallacy that the definition of inflation is rising or higher prices. Instead, inflation is actually an increase in the supply of money to a level that devalues the currency's purchasing power. Higher prices are not inflation, but a result of inflation; when there is more money to buy the same amount of stuff, the prices of the stuff rise. Inflation harms the economy as it causes the following:
- Errors in economic calculation (organizational planning) for entrepreneurs
- Products and services become more expensive before incomes can rise to afford them.
- Dilution of the value of the dollar.
As described above, the U.S. cannot rely on other countries' or our own productivity to manage our exorbitant debt. Rather than allowing defaults on this debt, the government is resorting to unprecedented amounts of money printing:
- $10.5 trillion committed, $2.7 trillion spent for crisis bailouts
- $1.2 trillion Fed balance sheet expansion - expected to expand to $4.5 trillion by September '09. Much of the purchases for this expansion are illiquid, long-term assets that are not easily sold when the money supply needs to be reined in as inflation escalates.
- Included is $300 billion dollars for Treasury bond purchases (i.e. quantitative easing) expected to expand to $1 trillion in purchases, especially since interest rates are quickly becoming uncontrollable.
Here is the recent history of the Fed's balance sheet:
Here are the implications for the monetary base:
You may ask yourself why we haven't yet experienced inflation given all this money printing. What is actually happening is we are experiencing less deflation (contraction of the money supply, and appreciation of the dollar) than we otherwise would have without the money printing. Any kind of economic stabilization in the near future would cause the excess reserves (held-back credit) now in the banking system to quickly infiltrate throughout the economy and inflation would ensue. However, it's important to note that economic stabilization is not a requirement for inflation to surface and we could see inflation before any kind of recovery.
June 30, 2009
(Part II will be posted in a few days)
www.arbitraryvote.com
Email this Article to a Friend 
Printer Friendly Version
