An
American Concept: Crushing Debt Fact vs. Fiction
on Today’s Economy by David Galland - May 28, 2010
Commenting
on the European crisis – because this has gone well
past being one that can be termed “Greek” –
the New York Times cited a senior U.S. official on the significant
role the U.S., including Obama himself, played in getting
Europe’s leadership to agree to a bailout approaching
one trillion. One particularly telling quote…
The U.S. officials began talking to their counterparts
about an American concept: overwhelming force. “It’s
all about psychology,” said the senior official.
Funny how these things work, isn’t it? In response
to its own debt crisis, the U.S. mirrors the failed Japanese
experiment in quantitative easing, except that we look to
“fix” the flaw in that experiment with the overwhelming
force of trillions upon trillions of unsupported spending,
in the process making the idea of unleashing a money flood
an “American concept.” Europe, desperate and
without the advantage of the time needed to witness the
ultimate consequences of the latest American concept, agreed
to a money flood of its own… with the result that
it, too, plans on taking on nearly a trillion dollars in
new debt.
Now, the funny thing is that the way this latest bailout
is structured calls for the European Central Bank to try
and sell over $500 billion in new bonds offered by what
is being termed a special purpose entity, whose bonds will
be backed by the European member states – Greece,
Portugal, Spain, and all the other PIIGS included. The rest
of the money will be delivered by the IMF (17% of whose
funding comes as a transfer out of U.S. taxpayers’
pockets).
Will the new special purpose bonds prove popular with investors?
Or will they prove unpopular, requiring higher and higher
interest rates? What happens then?
And who is going to buy all these bonds, given the energetic
selling going on by the U.S. Treasury?
When you strip away all the psychology that senior officialdom
seems to think is what really counts, you have a bunch of
sovereign deadbeats attempting to impress by moving into
a really nice new mansion – maybe even in Brooklyn
Heights – hoping to cover the mortgage with a “no
(real) money down” liar loan.
Do you want to own a piece of that loan? Because soon,
thanks to the American concept and the new special purpose
entity being cobbled together in Europe for the sole purpose
of spitting out yet more debt, you’ll be able to buy
up all of the stuff you want. Meanwhile, here’s what
you’re actually buying…
Note, as bad as those numbers
are, and they are bad, they don’t take into account
unfunded liabilities – you know, little things like
Social Security and Medicare. Throw those into the mix,
and the picture gets a lot darker.
And what does Mr. Market really think about
these numbers? As you can see from the table below, gold
is starting to trade up against all the fiat currencies…
just as we have been expecting it would.
Commenting on the situation,
Casey Research CEO Olivier Garret had this to say…
Another thing that can't last is interest
rates going down as debt goes up significantly. We are in
for a fun ride, better buckle up. By the way, Greece is
not that much worse than most developed countries when it
comes to debt-to-GDP ratio; no wonder that Obama and the
European leaders tried to do something before the market
got spooked too much.
I sometimes feel like a broken record (for
our younger readers, that is a reference to solid vinyl
discs with grooves in them that, when run over with a needle,
would create sound… when scratched or “broken,”
the record would repeat the same notes over and over) in
my dire prognostications about just how wrong-headed it
is what now passes for fiscal and monetary policy.
You can’t cure debt with more debt.
And if you can produce the stuff in unlimited quantities,
then it’s not money – that is, not if your definition
of money is something you can use to efficiently hold and
transfer wealth.
No wonder the big money traders are beginning
to recall gold’s historical role as money.