What happens when Inflation returns?

Inflation WILL return once the economy starts to recover, because we will also have massive debt and compounded interest to pay on it. We are facing an unsustainable situation.

Obama sows seeds of demise

[...] Right now, Obama’s ratings must be pleasing to his eye. Voters like him and his wife immensely and approve of his activism in the face of the economic crisis. While polls show big doubts about what he is doing, the overwhelming sense is to let him have his way and pray that it works.

But beneath this superficial support, Obama’s specific policies run afoul of the very deeply felt convictions of American voters. For example, the most recent Rasmussen Poll asked voters if they wanted an economic system of complete free enterprise or preferred more government involvement in managing the economy. By 77-19, they voted against a government role, up seven points from last month.

[...]

For Americans to conclude that they disapprove of their president in the midst of an earth-shaking crisis is very difficult. But as Obama’s daily line moves from “I inherited this mess” to “There are faint signs of light,” the clock starts ticking. If there is no recovery for the next six months — and I don’t think there will be — Obama will inevitably become part of the problem, not part of the solution.

And then will come his heavy lifting. He has yet to raise taxes, regiment healthcare or provide amnesty for illegal immigrants. He hasn’t closed down the car companies he now runs and he has not yet forced a 50 percent hike in utility bills with his cap-and-trade legislation. These are all the goodies he has in store for us all.

Obama’s very activism these days arrogates to himself the blame for the success or failure of his policies. Their outcome will determine his outcome, and there is no way it will be positive.

Why?

• You can’t borrow as much as he will need to without raising interest rates that hurt the economy;

• The massive amount of spending will trigger runaway inflation once the economy starts to recover;

• His overhaul of the tax code (still in the planning phases) and his intervention in corporate management will create such business uncertainty that nobody will invest in anything until they see the lay of the land;

• His bank program is designed to help banks, but not to catalyze consumer lending. And his proposal for securitization of consumer loans won’t work and is just what got us into this situation. [...]

I think there are many on the hardcore Left who don't want to see the economy fixed; they would like to see capitalism, our consumer-driven economy, and the system of government that supports it, ruined, so they can replace it with something else.

Pat's been telling me that sounds to much like a conspiracy theory; that in reality they are just dumb Marxists who haven't got a clue what they are doing. That's quite possibly true. But either way, I think it's going to end the same; in a mess. Jimmy Carter Redux. Only this time, with trillions of dollars of debt and interest payments on that debt, which will ultimately mean... what?


Related Links:

The problem with the banks: illiquidity

Advice to the GOP: "Shut up and remain calm"
     

The Devaluing of American Currency Continues

Commentary: Time for another tea party?

[...] as the federal government continues to print money that isn't worth the paper it's written on and as our national debt soars past $11 trillion, a United Nations panel is set to recommend that the world ditch the U.S. dollar as its reserve currency in favor of a shared basket of currencies.

One of the enduring strengths of the dollar has been that it has always been the currency of choice in times of crisis. But that's not the case anymore. Our ballooning deficits have driven down the value of the dollar so much that the Chinese government recently asked for guarantees from Washington that the Treasury bills they own are safe. [...]

If the dollar is perceived as unreliable, it could lead to global "dumping" of all assets in American currency, further devaluating the dollar.

Fed to pump another $1 trillion into U.S. economy

[...] to the surprise of investors and analysts, the committee said it had decided to purchase an additional $750 billion worth of government-guaranteed mortgage-backed securities on top of the $500 billion that the Fed is already in the process of buying.

In addition, the Fed said it would buy up to $300 billion worth of longer-term Treasury securities over the next six months.

[...]

In effect, the central bank has been lending money to a wider and wider array of borrowers, and it has financed that lending by using its authority to create new money at will.

Since last September, the Fed's lending programs have roughly doubled the size of its balance sheet, to about $1.8 trillion, from $900 billion. The actions announced on Wednesday are likely to expand that to well over $3 trillion over the next year.

Despite a trickle of encouraging data in the last few weeks, Fed officials were clearly still worried and in no mood to cut back on their emergency efforts.

Fed policy makers sharply reduced their economic forecasts in January, predicting that the economy would continue to experience steep contractions for the first half of 2009, that unemployment could approach 9 percent by the end of the year and that there was at least a small risk of a drop in consumer prices like those that Japan experienced for nearly a decade.

The Fed rarely buys long-term government bonds. The last occasion was nearly 50 years ago under different economic circumstances when it tried to reduce long-term interest rates while allowing short term rates to rise. [...]

So we are creating this massive debt for ourselves, which is also devaluating the dollar internationally, which also weakens it at home. We have to pay interest on this debt, which keeps growing. What happens when interest rates go up, the interest on our debt it compounded, nations globally begin dumping our currency, and we can't borrow any more? And that causes a massive run on our banks, requiring the Fed to print up even more money, in order to comply with the FDIC? You might as well ask, What would a U.S. currency collapse look like?
     

Deep Impact: The Federal Deficit

From Maynard at TammyBruce.com: The Federal Deficit

This graph, taken from this Wall Street Journal article, shows what we're up against. It's a crime beyond imagination against the American people.

This monster is not of Obama's creation. It's a product of long-term rot and corruption; the consequence of fools and demagogues pandering to the lowest common denominator, promising ever-more goodies to an ever-needier mob.

For a brief moment, I hoped the shock of the current crisis would bring an element of reality to the debate in Washington. Certainly Obama would do the right thing. Not because he wanted to, you understand, but because he had no choice. I thought the nation had reached that late stage of addiction where the addict has hit bottom, and finally faces his issues head-on.

I stand corrected. We haven't hit bottom yet, but Obama is working on that. His "stimulus" package may become our final binge. What Reagan did to the Soviet Union, Obama is now arranging for us.

This is only the beginning. [...]

He goes on to say that as the baby boomer generation continues to age, demands on Social Security and Medicare will increase, consuming a greater portion of the GNP than the entire current Federal budget.

And hardly anyone is talking about the compounded interest on all the debt. What do you think will happen if interest rates rise? We just keep printing more money? Can you say "Currency collapse"?

This isn't about partisan politics. It's just simple math. Does anyone in the Federal government know how to do that anymore?


Related Links:

Is Obama compounding Bush's mistakes?

What would a U.S. currency collapse look like?

Washington really is broken. See how it "runs"
     

What would a U.S. currency collapse look like?

Since the '70's, our government has steadily been printing more money:


This graph in a recent post by Pat (Inflation and our "funny money" supply) is startling in it's implications. Neither Republicans nor Democrats have done anything to stop the devaluing of our currency since the 1970's. In fact, they all have been printing even more money and devaluing it even further. When will it stop? Will it stop? And if it doesn't stop? Where will it lead us?



I've been reading a book called "PATRIOTS: surviving the coming collapse. It's a novel, in which a severe economic meltdown in the USA takes place. It was the description of the understated "crunch", the economic collapse when the dollar fails, that really gave me the creeps. What would the collapse of the American dollar actually look like?

The story starts with the US having 19 trillion dollars of debt, with interest on the national debt consuming 96% of government revenue. Most of it is "off budget", like the debts for the Iraq war, but it's still national debt. There is still interest to pay on it.

Ok, at this point you might say, "19 TRILLION DOLLARS of debt? No way, it could never happen." I would hope it wouldn't. But if you told me 10 years ago that we would even be talking about trillions of dollars of debt today, I would have said "No way, our government would never be that irresponsible". Yet, here we are. And our government has been taking debt "off budget", and borrowing from Peter to pay Paul. If they think it's ok to run debt up another 1 trillion, or 3 trillion... once you say it's alright to go down that road, then where does it stop? How much is too much?

In the story, European bankers start to express doubt that the US government can make the interest payments on it's growing debt, with serious results: foreign central banks and international monetary authorities began to dump their trillions of dollars in U.S. Treasuries. Foreign investors begin liquidating their U.S. paper assets.

The value of the dollar plummets. Businesses fail. Unemployment goes to 20% and higher. Ultimately it leads to a stock market collapse, and domestic runs on U.S. banks begin. Like in the Great Depression of the 1930's long lines of people form at the banks, wanting to withdraw all of their money. But unlike the 1930's, this time there is the promise of FDIC, "All deposits insured to $100,000." But the only way to let everyone withdraw their money, is to print even more money. This leads to hyper-inflation; the more money the government prints, the less it's worth. Think of Zimbabwe as a recent example.

In the novel, the government can't stop the inflation unless they stop printing money, but they can't stop printing more, because people are demanding their FDIC protected cash. With the resulting hyper inflation, soon a can of beans costs $150.00.

Now this is, to me, where the story really gets scary. I figured that if a 1930's type "depression" happened, it would be bad, but we would all somehow muddle through it, just as we had in the 1930's. But there are some significant differences between then and now.

In the 1930's, the government hadn't over-borrowed and raked up trillions of dollars in debt. In the 1930's, roughly half of American families lived on farms. They may have been made poor by the Depression, but they still had means to grow their own food and scrape by.

Nowadays, the population of the United States is much larger. The majority of U.S. citizens live in cities. Only 2% of the population lives on farms anymore. The majority of Americans must buy their food at stores. Think what would happen if they could no longer do that?

The story goes on to describe a situation where American cities are gripped with rioting and looting. The National Guard and the Army Reserve are called up to quell the rioting, but many of them don't report in, because they are staying home to protect their families.

Inner city areas are burned to the ground, and no one can stop it. Factories near cities close down "temporarily", but never open again. The Freeways that run through the cities become impassable, due to the riots, and due to fuel shortages, with people running out of gas and leaving their cars on the roads.

Most of the goods and fuel shipments in the US are transported on 18 wheel diesel trucks that use the interstate highway system. They all pass through cities. The cities become impassable, so the shipments of goods and fuel stop.

Trains pick up some of the slack, but not enough, and even they are vulnerable; mobs soon learn they can rip up the tracks to derail the trains, and loot them.

Without fuel shipments to power plants, the electrical grid begins to shut down. The few remaining factories that are operating are shut down by this, as well as the oil refineries that make our fuel. Even the refineries can't produce enough of their own electricity to keep operating, because they, like everyone else, always assumed they could count on the national power grid.

As the power grid shuts down from lack of fuel, so do the telephones, the internet, radio and TV stations. We are plunged back into the dark ages, literally. Our civil institutions and the rule of law break down completely.

THAT never happened in the 1930's.

You'll have to read the book for the complete picture the author paints. Now I grant you, the author is a survivalist. His reason for writing the novel was to use it as a vehicle to teach many of the survivalist strategies and related knowledge he has compiled, in the context of a story where such knowledge would be applied. Therefore, he has painted the bleakest picture possible, as a canvass for that story (See review in link below).

One can argue that a real crash might not be so... severe? I'm sure there are lots of variables, but the story Rawles tells is very compelling none the less. If nothing else, you have to wonder, WHERE is all this endless deficit spending leading us? The disaster described above is completely avoidable, but will we? It often seems like everyone in government is either oblivious to or unwilling to deal with the dangers of huge deficits and inflated currency.

I know that with a personal or a family budget, if you start having "off budget" debts, your finances will be headed for trouble. Government budgets are no different. We must all live within our means. The consequences of ignoring that could be too horrible.

As for this book, I have to read it in parts, and then give it a break. It's intense. I'm not really of a survivalist mind-set. I like to be an optimist, balanced with a boy-scout "be prepared" attitude. The book is full of all sorts of useful tid-bits of information, such as "how long can you store gasoline before it's no longer useful in an automobile?" (about two years, unless you add chemicals to extend it's life). But the story... argh. I don't want to go there, not even mentally.

But even worse would be to go there actually, in reality. That's why I made this post about it. Let's NOT go there.

Lest this all sounds too depressing, the author says on his website that each of us has to decide for ourselves how bad things could get, and what preparations we want to make. Fair enough.

I hesitated to make this post at all, lest it sound too grim. I'd like to just forget about it, but then I keep seeing headlines like this one today:

New Bank Bailout Could Cost $2 Trillion

Our national debt is already more than 10 trillion dollars. Where is it going to stop? It just makes me want to ring the warning bell. Forewarned is forearmed.

We should not go down this road. But if the nation does anyway, we had best keep our wits about us, try to steer for "damage control", and make preparations along the way as we think might be wise for our circumstances. And never give up hoping, praying, and affirming the best outcome.


Related Links:

Patriots: a customer review on Amazon

An Economic 9/11? A Depression? Trends...

The Federal Deficit and the American Dollar


UPDATE 07-08-10:

Has the slow portion of the collapse already begun? A case is made for it:

Has US Currency already "collapsed"?

Has our nations current financial policies accelerated the collapse process? We may see as soon as next year:

What happens when Tax Cuts Expire in 2011?

Is there anything that can be done about it? I'm not sure, but I think the November elections this year will be our last chance to vote in politicians who can deal with the reality of our present situation:

Our true national debt: $130,000,000,000,000.

November is probably our last chance to stop the runaway gravy train, before it derails.