US Debt
I usually find numbers easy to grasp, yet the sheer scale of the numbers being tossed around referring to US debt and interest on that debt are so immense that they are hard to comprehend.
I am posting a link to a You Tube video that puts these numbers in perspective. I urge the reader to watch.
Reasons to Recommend Precious Metals, or Real Estate (with no debt), or Real Assets
When one tries to gain a perspective on what is happening today, it is hard to imagine how this debt crisis can be solved.
A Brief Historical Perspective
I agree that hindsight is wonderfully accurate, yet we must realize what happened.
It started with the Republicans in the initial bailout of immense amounts of debt. It continued with the Democrats. Both parties felt it was necessary.
in hindsight, there should have been more belief in free enterprise. There would have been an economic collapse. Then the world would have licked its wounds and started building up.
it was foolish for the US government to bail out the banks (especially as most of the bail out wound up in non-US institutions).
It was foolish to guarantee Freddie and Fannie, because the bottomless pit is bottomless.
It was foolish to pump liquidity into financial institutions who were so proud of how they hoodwinked the government that they declared themselves enormous bonuses with the bail out money.
WHAT A GOOD LIFE! Money for the asking. It grows on trees, and is printed in basements!
What we have done instead, is to steal from the future because no one else can pay the bill that we owe, or steal from the stability of the very foundation of our society. The stupidity of the attempt to maintain normality by printing money and flooding the markets with money is just mind boggling.
This was a philosophy taught us by Alan Greenspan. Every time there was an economic downturn on the horizon, he and the Fed printed more money. One of the basic tenants of capitalism is to allow periodic cleansing of abuses and excess. Greenspan thought he was smarter and to the relentless cheers of elected officials, whenever a cleansing appeared on the horizon, he printed more money to get over the rough spots (the downturns).
Quantitative Easing it is called. The idiocy of the mindless is a better name.
The US government learned well. They followed what they had been taught, and printed money. They had the choice to let matters fall where they would, but everyone was terrified of the next great depression, so they printed more, and more and more money. Free money, except it really isn’t free.
I think history will judge Mr Greenspan as the great destroyer of the capitalist society known as the USA.
Where Are We Now?
We at Cymor still believe that the USA and the Western economies will recover. For the reasons mentioned in previous blogs, and the inherent strengths of Western democratic society, we think the road is difficult, but navigable. We think the next great wave of prosperity will carry the day.
But many do not. The reader has to choose which scenario is more likely, the collapse of our society or the pain of recovery.
Fortunately, the type of investment that you should make in either scenario is similar.
Many believe that we have a situation that is irreversible. I do believe the US will eventually right itself, that normality will return. That capitalism will rein supreme again. I have previously listed the factors that will win out in the end. I will not repeat them here.
Yet the path to get there will be tortuous. The US interest on its debt right now is so great that paying just the interest is almost impossible.
The Path to Salvation
If one takes a larger prospective, the ways out are limited.
Inflation
Inflation is what has historically solved these types of problems. Under inflation, currency falls rapidly in value so that it takes $100 to buy what $1 bought last year. There is great unrest as everyone holding or dealing with that currency feels greater and greater pain. Often this type of inflation leads to social unrest.
After sufficient inflation has occurred, the old money is worth so little that realistic amounts of the new money can pay off the old debts.
Voila – the debt is extinguished.
Settlement of Debt for Lesser Amounts
When a country cannot pay its debts, and its currency has tumbled, other countries are forced to enter the fray to save that country and agree to reduce the amounts owing to them.
It is necessary because otherwise, the defaulting country will drag down the rest of the countries. This is happening to smaller countries today – witness Ireland, Greece, etc.
What irony that China and India might have to rescue the USA.
Social Unrest Elsewhere That Causes a Flow of Money to the USA
This can happen. China could have another revolution, or the Middle East could erupt in nuclear war, or some other catastrophe can occur.
This scenario is less likely, but wars happen, and unrest happens.
How Do You Protect Yourself
Whenever one of these world altering events happens there are winners and losers. Most lose.
Winners pick up cheap assets that become worthless because no one can afford them and no one is bidding for them. Winners recognize that this is a game of timing and patience.
After the upheaval, those assets picked up at such little cost, start recovering in value as normal commerce starts to reassert itself, as confidence gradually returns to the minds of the people.
It takes years until the next cycle starts to assert itself, but when it does, assets have value again.
