Scores of economic figures go screaming across our screens every day, many of them contradicting yesterday’s figures, and perhaps half of them based upon lies. On top of that, we have dozens of economic theorists arguing back and forth. In the end, it’s all too muddled for most of us to make out. We each have our guesses, but none of them are terribly certain.
So, this week I’d like to point out the central economic facts of the moment, five fundamental conditions that we should all be clear on.
Obviously I’m not a fan of any of this, but it I think it’s crucial that we see what really is. Later, we can consider what we’d like to be.
Fact #1: We have debt-burdened money.
Dollars are created in tandem with T-bills, and T-bills pay interest. So, creating a dollar always creates an obligation to pay interest beyond the dollar amount.
But where do those extra dollars to pay interest come from?
Well, from more newly created dollars of course – but dollars that have interest requirements of their own.
What this means is that unless more and more dollars are made all the time, all the debts that are spun can’t be covered. Such a system cannot resolve unless there are debt-free dollars that can cover the gaps. And presently there are none.
So, the dollar system can run effectively in one direction only. It can operate smoothly while creating ever-more currency, but if the system starts to contract, there will be a currency shortage. And that leads directly to trouble.
Fact #2: We have unpayable debt.
Official US government debt is now about $20 trillion, and forward promises are probably north of $200 trillion. This will never be repaid under any typical scenario. And other countries are worse.
Right now, the central banks are buying up all sorts of bad loans to keep things going, but eventually, this problem will resolve in one of two ways:
Debasement, aka inflation. Print up enough currency units to drive a burger to $1,000, and all those loans can be paid back pretty easily. There would be disastrous effects, but the debts would be covered.
The nations could simply say, “Tough luck, we’re not gonna pay you back. Have a nice day.” That, however, would create a lot of bad feelings, so a default needs an excuse. And for a major nation, about the only excuse strong enough is war.
There are a few exotic possibilities, such as central banks printing money to buy the national debts then forgiving them, but those are problematic as well.
So, when reality can no longer be evaded, the solutions look pretty grim.
Fact #3: Stock and bond prices are maintained by the central banks.
The Federal Reserve itself has bought many trillions of dollars of stocks and bonds since 2008. This is being done to keep the (critical) upper middle class happy and paying taxes.
Without central bank buying and other tricks like stock buy-backs, the various investment markets would have crashed deeply. Trillions of dollars pumped into a fixed-size pond created a lot of liquidity.
If this wild buying stopped, the markets would lose their perennial backstop, and millions of supremely reliable subjects would be screaming in the streets.
Fact #4: Interest rates can’t be allowed to rise.
What I’m addressing here is the interest on national debts, but since they overwhelm the markets, more or less everything else would be dragged along.
Right now, government bonds pay shockingly low rates of interest, some of them actually negative. But if they rise – as they would in any “normal” or “healthy” scenario – the interest on all those national debts would be unpayable; government agents would almost have to go house to house and drag away assets.
Fact #5: Pension funds are based upon fantasies.
A large number of pension funds, believe it or not, are basing their calculations on annual returns of 8%, a figure than no one gets on a reliable basis these days. The “safe” investments pay about 2%, where they must stay because of Fact #4 above. A few weeks ago, the governor of Illinois had a fit when the state’s pension calculation was cut from 7.5% to 7%. He’d never get even that rate of return in any case, but it trimmed the state’s fantasy figures, requiring hundreds of millions in tax increases.
Illusions like this can be maintained for only so long. Right now the public is playing along, dreaming that it will all just work out somehow, but the end of their game will most certainly come.
Are They Locked into a Corner?
It would seem the financial overlords have painted themselves into a corner… and indeed they have. Unfortunately, there are still force majeure escapes available to them – extreme events, real and/or theatrical, that would justify a complete wipeout of the current financial regime and the installation of a new one.
And, it should be said, the overlords have reason to be confident about such scenarios. After all, no matter how wild their demands may be, they get 99.9% compliance. So long as they slap the masses with some high-intensity fear and then make a bunch of promises, the odds are high that they’ll get away with whatever they want.
And what would they like? Well, they’ve already told us: They want negative interest rates and a ban on cash. That gives them full manipulative powers and turns all the mundanes into serfs. To really sell this plan, however, they’ll need something appetizing to go with it, and they’ve been hinting about that too: guaranteed basic incomes.
Guaranteed basic incomes would be like welfare without the stigma, because everyone would get it, with no exceptions. (With reduced bureaucracies too.) I’ve dramatized the whole plan in The Breaking Dawn, but suffice it to say that it doesn’t end well for most people.
Is There No Answer?
Sure there is, but it requires courage, determination, and personal initiative. For those who prefer to shut up, sit still, and let the system drag them along, things look bleak.