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The State of the Global Markets 2015

U.S. Economy, We Can Ignore Reality!

Economics / US Economy Dec 13, 2012 - 10:18 AM GMT

By: DeviantInvestor

Economics

“We can ignore reality, but we cannot ignore the consequences of ignoring reality.” Ayn Rand

With apologies to Ayn Rand, let’s explore some examples of ignoring reality.

We can ignore the (U.S. government) deficit, but we cannot ignore the consequences of ignoring the deficit. If the deficit increases each year, the total debt will soon be so out of control that it is unpayable. Oops, the United States is there now. The consequences that we cannot ignore are:


  • The budget deficit (expenses minus revenues) increases the total debt each year. A larger debt usually means a higher interest cost must be paid out of current taxes. If the Federal Reserve artificially reduces interest rates by purchasing most of the government debt, then the money supply is substantially increased and that eventually causes much higher consumer prices. Otherwise, the interest cost will rise so much that it consumes the entire federal government revenues. Higher inflation now and insolvency later or higher interest costs now and insolvency later?
  • If the government demonstrates that it cannot control spending, its international credit standing will deteriorate and eventually the dollar will be replaced as the world’s reserve currency.
  • If the dollar is no longer a reserve currency, the United States might need to reduce imports to match exports. Can you imagine paying for our imported oil with gold or exported corn?

We can ignore the fact that gold is real money, but we cannot ignore the consequences of ignoring real money. Prices were stable for most of the 19th century when gold was real money. But since 1971, when paper money has been backed by nothing more substantial than “full faith and credit,” prices have dramatically increased. Can you remember (even imagine) cigarettes costing $0.25 per pack or buying gasoline for $0.27 per gallon? Pretending unbacked paper money is real money has inflationary consequences.

We can ignore the fact that paper money always returns to its intrinsic value of zero, but we cannot ignore the consequences of that devolution. The dollar used to be “as good as gold.” Now it is as good as a politician’s promise – an IOU backed by nothing. The dollar has not returned to a zero value yet, but history suggests it will. Ask yourself, “Would I rather leave 170 paper $100 bills or ten (one ounce) gold Eagles to my grandson in 20 years?” I suspect most people have more faith in gold than in paper dollars when planning 20 years into the future. So, if gold will be the clear winner in 20 years, what would you choose for five years into the future? How about 1 year into the future? Will gold or unbacked paper dollars be a better store of value over time? If I need to buy groceries tomorrow, I will choose $100 bills, but if I want a store of value, gold is easily the better choice.

We can ignore the financial and social costs of welfare and warfare, but we cannot ignore the consequences of ignoring the financial and social costs of welfare and warfare. Do welfare subsidies to corporations, foreign countries, and individuals produce enough (anything) to justify their existence? Productive activity is critical because it allows individuals, countries, and civilizations to survive and prosper. Will squandering the results of another person’s creative and productive activity enhance either our own life or the nation as a whole?

Does making war on other countries benefit anyone besides military contractors, bankers, oil companies, and politicians? Yes, I know, the threat of a mighty military enhances the dollar’s foreign exchange value, its reserve status, and the ease with which we can acquire oil from other countries, but is that worth spending $1 Trillion or so per year? What if half or three-quarters of the welfare and warfare budgets were spent on producing things of value, like sustainable energy, healthy food, shelter, roads, bridges, better technology, efficient transportation, and good health? Would the United States be a better, happier, and healthier place to live if we were less focused on welfare and warfare? If we subsidize butter, we get more butter. Unfortunately, if we subsidize welfare and warfare, we get more of both, and the costs will eventually be paid by individuals and society in general.

We can ignore Quantitative Easing but we cannot ignore the consequences of ignoring Quantitative Easing. Does printing about $1 Trillion of new money every year to purchase government and banker debt sound like it will end well? Will it be $2 Trillion per year soon? When will it be $4 Trillion per year? Maybe we should not ignore that we have chosen “Quantitative Easing to Infinity.” (Inflate or die!) Oops, many of our choices from the last three decades were not wise choices. If spending ourselves $16 Trillion into debt (only the official debt – does not include the $100 Trillion to $200 Trillion in other unfunded liabilities) was not a good idea, then will $25 Trillion in debt be a better idea? They often say, “it will work out somehow…” Yes, that is what concerns me – the specifics of the “somehow!”

We can ignore tax increases, but we cannot ignore the consequences of tax increases. What if tax increases don’t increase total revenue as a percentage of GDP? What if people find ways to avoid taxes, reduce their income, cheat, buy exemptions from congress, or stop paying taxes? What if we increase government spending as a percentage of GDP, but the tax revenue does not increase accordingly? Oops again, we are there!

We can ignore unemployment but we cannot ignore the consequences of ignoring unemployment. The BLS (Bureau of Labor Statistics) assumes that if an unemployed worker has not found work in one year, then he is no longer unemployed. November’s tally – 540,000 people had been unemployed for more than 12 months – so they were no longer counted as unemployed. Hence the “unemployment rate” decreased. However, the total percentage of people working (Labor Force Participation Rate – see graph) has decreased down to the level of 1983, and substantially below its peak in 2000, but the unemployment rate is “magically” lowered.

Hypothetical example: Person X has been unemployed for 53 weeks and is no longer counted as unemployed or in the labor force. Do you think person X’s creditors will remove his debts from their accounts receivable and that his monthly expenses will magically be reduced to zero because he is no longer counted as unemployed? If politicians want the unemployment rate to appear even smaller, maybe they should reduce the one year time period down to three months. Whatever works in politics is good – right? Oops, ignoring both reality and the consequences again!

We Have Been Warned!

Endless BS from the BLS

Have you purchased enough gold and silver that you sleep well?

“We can ignore reality, but we cannot ignore the consequences of ignoring reality.” Ayn Rand

GE Christenson
aka Deviant Investor

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© 2012 Copyright Deviant Investor - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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