The governments of Portugal, Ireland, Italy, Greece, and Spain have a problem very similar to the U.S. and many other countries. It’s easy to describe: Too much debt as the result of living beyond their means for way too long. So looking at the PIIGS is like opening a window to the future of the United States.
The PIIGS are at the forefront of a development that will soon reach global proportions. And there is no easy way out. But most of the voters and their leaders still don’t get it. And many who do get it simply look the other way because they don’t like what they see.
I don’t like it either. But I always knew that something like this couldn’t go on forever. There are economic laws that can’t be aborted … not by political will, not by chicanery and not by central bank arrogance. Greenspan, Bernanke, Geithner surely knew this when they made their reckless decisions.
Now it’s too late. There is no easy way out, just hardship and struggle. And the longer we wait to address the problem the harder it gets.
The way I see it, there are three possible paths governments can take …
Path #1 — Budget Cuts:
Nobody likes the
bitter medicine!
In Spain and Greece for instance, citizens are demonstrating, striking, revolting. Think about it: Anti-government protests, publicly shouting for the economic crisis to go away.
While at the same time they’re not willing to accept the necessary steps to get the economy back on a healthy and sustainable growth path! Why? Because in the short run it would bring more hardship.
There is also an important psychological force in play …
Political leaders of all stripes have consistently told voters that it was possible to get something for nothing, to bring about growth and wealth creation by printing money and going ever deeper into debt.
Now it’s backfired! And voters are dead set against doing what it takes to make things right.
The U.S. is still behind the PIIGS. But with actual and planned budget deficits of more than $1 trillion as far as the eye can see, it will quickly catch up.
That brings me to …
Path #2 — Government Defaults:
Ignite global banking crisis!
Default is an option, of course. And financial history is littered with examples of governments opting for this escape hatch. For the have-nots this solution sounds attractive.
They seem to have nothing to lose. They may think that after defaulting on its debts the government will go on exactly as before, and the world can turn back to what seemed to be normal for too long. That the lenders, such as China, who were treated badly and robbed with the stroke of a pen would quickly be back lending fresh money to the robbers.
And maybe they would. But I think it’s wishful thinking, a mirage.
They’ll likely say, “Fool me once, shame on you. Fool me twice, shame on me.”
There is another argument against the default escape hatch. Big banks and insurance companies are major holders of government debt. A default would throw us into another banking crisis, larger than the one of 2008, and possibly of biblical proportions.
The financial industry has an influential lobby. They will try everything to avoid a default and protect their interests. They stand a very good chance of succeeding, at least in the UK and the U.S.
Now, let’s look at the political favorite …
Path #3 — Crank Up the Presses:
Kick the can, once again!
If the majority of voters oppose spending cuts and the financial industry exerts enough pressure to sideline defaults, there is just one option left: Money printing.
That’s exactly what Ben Bernanke has always recommended. This advice was his ticket to the Fed chairmanship. And the case for him getting what he wants seems to grow stronger by the day.
As an investor you should understand these interrelations. Inflation is not a necessity, but a political choice. To me it seems to be the most probable one. That’s why I keep recommending gold as an insurance policy against runaway inflation.
Short term I expect a price correction in gold. If this turns out to be the case, you should consider it a buying opportunity. Either coins, bars or an ETF like GLD.
Best wishes,
Claus
{ 40 comments }
What people do not understand about what has got the world in a mess is the fact that like the US the Euros create their money as debt and with a fractional reserve banking system it is driving us over the cliff. We should nationalize the FED and put in the treasury and spend the peoples money into circulation for infrastructure improvement. Lincoln used this system to finance the civil war without debt. When you create your own money and spend it you don’t have debt. What we have done since 1913 is transfer wealth from the people to the wall street thugs. If we adopt the American Monetary Act, this country could be run without income tax. We would have to shutdown the military/intellegence cartel however
Of course paying bills with printed money would devalue the currency. Just a minor little annoyance, right?
the last four years of the clinton presidency, the usa ran surpluses and was the largest creditor nation on earth. eight years later, we were the largest debtor nation on earth? how’d that happen? well, we hd a president who, for the first time in our history, started a war and cut taxes at the same time.oh. and started two wars, one based on lies and the other on a dumb strategy. oh. and the only government agency that has never had it’s budget cut in 60 years is the war department. oh. and that department now spends more than the rest of the world combined. oh. and the class war is, essentially over:the marginal rate which was 91% under eisenhower, is now about a third of that.oh. and the usa is number one now on the ginni coefficient for inequality of income.oh. and corporations no longer pay a significant amount of taxes.oh. and you can’t see a strategy for getting us out of this mess.oh. have a nice day
Clinton era surplus was a large bubble!!!. There was no real concrete surplus.
US is facing financial bankruptcy and even worse is that it is slipping towards moral bankruptcy.
For its healing it needs to turn back to God and curb spending, have more fiscal discipline and imbibe social, family and traditional conservative values.
Mr. Lyon,
It’s true that our military adventures are bankrupting us much like it did the Soviet Union, but in short order, did you know that if the US government took everyones income for the year it wouldn’t balance the budget? And most of the spending is for government redistribution schemes like Social Security, Medicare, and Medicaid? At least Defense was a sanctioned function of Federal government in the Constitution.
Under the current monetary regime, the only solution is default or severe inflation. This can will be kicked down the road until the end and then the bulldozers will extend the road. This is apparently close to the limit of the debt expansion. We are right about where Germany was in the early 1920’s. That didn’t turn out so well…
The disparity between rich and poor is not about marginal tax rate. It’s about printing money.
“Someone is always the first to possess the new money and the first to be able to spend it. These first beneficiaries are the inflation winners—they enjoy an incalculable advantage, for they can make purchases on the market at old prices, before the new demand drives prices higher. However, those who are last in line to get the new money are the inflation losers, forced to pay much higher prices.” — Claus Vogt (Global Debt Trap).
When we credit Clinton for having a surplus, it is easy to forget that he followed two presidents who opted for lower taxation. Should we forget Regean who followed Carter’s miserable presidency (21% interest rates and inflation rates out of sight at 11.22% in 1979, followed by 13.58 and then 10.35%) who helped bring inflation rates down well below double digits, and that he did it through reduced taxation? It is easy to condemn our defense budget but since we have taken on the task of policing the world because other countries shun the duty, we are hard put to find an alternative. We can expect this situation to worsen as the world slips further into debt – other nations will simply reduce their defense efforts and pull altogether away from helping in the hot spots (based on any reason other than their impoverishment, of course, because England, France, and possibly Germany, like the U.S., are following the PIIGS into oblivion
Hello! Is it possible to say in what case interest rates would increase the most, in a default or moneyprinting?
Surely you must know there is an Option 4: Raise taxes; to pretend otherwise is disingenuous. The Bush tax cuts are one of the largest contributors to the deficit.
The country did VERY well during the Clinton era, higher taxes notwithstanding. We even had a nominal budget surplus (even though one could argue there was a lot of off-budget spending, not to mention liabilities).
The real answer, the fair and practical answer, is probably a combination of 1, 3, and 4. A good place to start on option 1 is to end the three unnecessary wars we’re involved in.
raising taxes wont do much but a lilttle dent on the HUGE debt, besides 45% of Americans do not pay any taxes, HUGE tax credit to big corportations, what it needs to be done is CUT spending, cut a bunch of waste of money branches good for nothing, tax every body, every one has to pay taxes, and cut 3 times as much wasteful spending! we need to bring this country back on track…..BUT there is a problem, the majority of the Americans wants FREE things, tax credit, do not want to pay taxes. so the fix will be the HARD AND PAINFUL WAY when USA hits rock bottom. until then the not so smart people will realize what they wanted DID NOT WORK, and that brought this country to its knees….
RJ,
Did you know that the Greek government takes anywhere from 50-60% of Greek income and will still default their debt in some form or fashion?
The solution is monetary reform. The first step is understanding the problem, check these two videos out for how things really work. It’s rather eye opening!
Money as Debt 2 Promises Unleashed: http://www.youtube.com/watch?v=_doYllBk5No
The Money Masters: http://www.youtube.com/watch?v=lXb-LrVkuwM
Folks – it is Congress, not the President, who holds the primary responsibility of spending. NONE of Bill Clinton’s budgets were balanced – it was the Republican Congress, the first in 40 years, who balanced the budget. In spite of the war and 9/11, deficits were heading down under Bush until the Democrats took over in 2006. Also, what people forget about is a significant increase in revenues into the Treasury as a result of the tax decreases – don’t confuse tax rates with tax receipts.
Bush did a crappy job of holding the democrats back, but make no mistake – the spending spree was largely from the left.
There is no left and right … jsut one “big government” party that takes turns ruling.
many are citing the Clinton surplus as a reason to increase taxes. That might work if the spending were also cut to match the expenditures of that era. Bush tax cuts were too broad. Low tax rates do work—but they must be crafted via careful study of what has worked well in the past in a variety of countries to obtain a specific outcome, such as domestic business growth and job ( hopefully decent paying) creation. Sensible, not overbearing, regulation of the financial industry should get the government out of the loan backing business. Too big to fail, not enough skin in the game, too many $’s chasing too small markets ( commodity ETFs) still need to be corrected before USA can make a comeback to solid finances.
most of the leaders of the piigs don’t get it?? you guys at weiss should quit spewing this nonsense that the leaders of all nations don’t get it. china gets it! as does russia, iran and others, but ben bernanke doesn’t???
Everybody gets it.Each leader will do what ever they want to do.Everyone can complain that a leader should do this,or that, the leaders could care less.Agreed,everyone should stop writing about what must be done,no leader is listening.
It’s very interesting – so many people look at the US$ as being a safe haven for their life savings and they see gold as having no real financial value. However, here are the facts:
A US$100 bill weighs approximately 1 gram, therefore 30+/- $100 bills weigh about 1 ounce.
Virtually every government in the World stands behind gold at a price of $1,500 / oz. It cannot be produced overnight, it has a production cost of about $500 per ounce and it has a limited supply. I don’t hear of any government selling their gold.
The US government alone stands behind a piece of paper at a price of $3,000 per ounce. It can be produced in seconds, it costs about about $1.20 per ounce to make and it has an unlimited supply. By the way, a Walmart checkout clerk refused to accept my $100 bill yesterday because the ink was still wet :-)
Left out: taxes.
Taxes on corporations and the wealthy are at their lowest since just before the Great Depression. And there is no way that cuts in discretionary spending can cover the loss of revenue.
When the tax rates on corporations and the wealthy were far higher, we saw better balanced budgets, and the economy sailed along.
This article reflects the kind of thinking that got us into the mess we are in – which isn’t that different from the mess of the Great Depression. Budget cuts (‘austerity’) didn’t get us out of that one, and – aside from the more-bloated war machine – budget cuts won’t get us out of this.
The comparison between PIIGS and the US in budget cuts leaves out the real source of over-spenidng: the Pentagon and out-of-control spending on the war machine and our police state apparatus.
Further, our debt, though huge is not as high in terms of GDP as it was after WWII. The nation didn’t go up in flames then, and it needn’t go up in flames now. But they had one major grace that we do not have now: they had real patriotism, the belief that we are all in this together, and that we all must do what is necessary to pull out of this. There was a greater sense of fairness then. CEOs did not earn hundreds of times the average wage of their employees; and we had rational trade policies, with no ‘free trade’ and no ‘outsourcing.’
They had seen the face of fascism – corporatocracy – up close, and everyone recognized it for the evil it was (and still is).
Their financial institutions had already been reformed. No mention of banking reforms, Mr Vogt? No mention of restoring any regulations that had previously protected us?
Ireland thought it could go down the neocons’ road without problem – and the neocons here all pointed to ‘the Irish miracle.’ Well, ‘the Irish miracle’ was nonsense.
Our finances do require a bitter pill for their cure. But the pill must be swallowed by those who have profited most: the banksters, the multinational corporations and their CEOs, and the various elements of the military-police state machine.
Thirty years of ‘Reaganomics’ has brought nothing but trouble. And yet it continues to be peddled. I suppose nobody reads Santayana anymore.
That was really Nixonomics after Nixon removed us from the Bretton-Woods convention, i.e. the last vestiges of the gold standard. Now there is no real brake on any government spending when the Central Bank can loan money out of thin air however much is needed and every other nation has to buy your currency to settle trades.
There aren’t enough tax receipts at any tax rate to pay the current budget. We don’t have a tax problem, we have a spending problem.
Forgot to mention something different this time from WWII. Back then, the government slashed war spending and 10 million GIs came home to work and create wealth. Explain to me how that will work this time around?
In reading these comments I feel I have entered a political forum with total predictability depending on a political party posture. There are those that think taxation is the answer and there are those that think reduced spending is the answer. One need only visit to get some real data. When you do that you see that REGARDLESS of tax rates, government revenue is ~ 17-18% of GDP (1940-now). Then when you watch the deficit you see that spending has been +/- 2-3% of GDP (mostly +) except for WWII years and now. In WWII the deficit was ~28% and now the deficit has been ~ 10%. What’s worse, the pundits show that the budget deficit will be in the 10% range or worse in the future.
Obviously you can’t tax enough to reduce the deficit, you must grow the economy. That means real growth from the private sector. The government must reduce spending and must deploy all measures to reduce impediments to business – reduced corporate tax rates, hobble OSHA, hobble EPA, etc. A smaller government at every level is the goal.
Of course you are right Claus; if using the economic lens of a Keynesian Past Saving model. Harold Moulton (1935), Fulton Sheen (1948) Louis Kelso/ Mortimer Adler (1958) and Norm Kurland (1965) and many others, all new a Just Third Way of, “How to Finance the Future and pay off the debt?”. Utilizing a model of expanded capital ownership with Future Savings – Earnings. The short is called “Capital Homesteading” have you ever heard of it?
Feel free to contact Dr. Kurland at http://www.cesj.org the number is there.
i afraid we are where the russians were after WWI. they repudiated their war debt after exterminating the romanoffs.
Hello Claus,
Few talk about the real culprit behind the economic issues we face today. Mr. Betts is on the right track, and Mr. Lyon has some good points. But everyone who has left comments fail to see what, in my opinion, is at the heart of the matter.
No one has said it any better than President Jefferson: “I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.â€
We are seeing, and will continue to see as this all unravels, the fulfillment of his prophetic words. For a clear picture of the most probable outcome, your readers will find the following article, “No Double Dip” most insightful: http://www.matterhornassetmanagement.com/2010/08/16/there-will-be-no-double-dip/
So far, we are still stuck in a very deep recession — YES, we have not had a recovery! Econ 101 tells us that growth, less inflation determines whether an economy is growing or contracting.
The Federal Government doesn’t publish factual data when it comes to inflation. For this, one good source is John Williams at http://www.shadowstats.com. His latest figures indicate inflation is running north of 6%. The anemic growth figures that came in for last quarter show we are south of 2%. Therefore, we have a contraction in out economy of about 4%.
If Mr. Williams data is accurate, then since 1999 we have been, depending on the specific time period cited, either in a severe recession or depression.
Agree with you, buy gold. Would stay away from EFTs, and any storage of physical gold. Why? The FED has full control of all securities. NO ONE has title to their investments which are held by CEDE and company (a subsidiary of the FED). People will wake up one day to find their wealth has been confiscated and replaced by worthless government bonds.
Oh, one other thing. Start a garden and learn to grow your own food!
How about Option 5?
How is it that some states trim costs (Wisconsin for example) by reducing the services to the communities like teachers, police, firemen etc by reducing benefits, employees, or salaries, and yet the state and/or federal legislators for that matter feel free to increase their salaries and benefits, go unnoticed when they far exceed expense allowances, and spend freely without control for their staff needs?
Now is it true they also benefit with free medical, income for life like a retirement plan, and many other arrays of income not so visible? How come they don’t fall under similar salary/benefit cuts as what they legislate for other state/fed employees? If they cut social services, Medicare or SS, shouldn’t they also be subjected to proportional cut backs?
Is it fair to taxpayers when elected legislators fail to meet certain deadlines like for a balanced budget causing the state government to be threatened with a shut down and then they get paid overtime for extra sessions like in Minnesota. They spent much time looking at a new stadium for the Vikings when critical issues of state government set on the side lines.
I think the out of control spending of our legislative structure needs to be investigated by outsiders and brought under reasonable control. No more free lunches and unrestricted expense allowances.
The average American works a lifetime getting paid for services as rendered. When they quit or retire they do not get paid any more. How do the services of legislators differ from services of the average American whereas they get free for life so many extra benefits?
Why are there so many fools believing that simply raising taxes on the “evil” rich and corporations would solve all our problems with no bad side effects.Welfare programs, such as Medicare, cause excess demand for healthcare,resulting in raising of prices by hospitals,doctors,insurance companies,etc.The rich and corps seeing higher taxes aren’t going to just sit by and accept it.They will do all kinds of things to minimize the theft.There will be tax avoidance,evasion,less investment and all kinds of other negative consequences for the economy.Think what you would do if you were rich,driving your Mercedes and some Democrat car jacked you,kept 50% for his overhead and gave the other 50% to someone he liked.Would you change your behavior in the future?I’m sure you would.The rich and corporations have the knowledge or can pay for it to avoid being ripped off.Best would be to have an honest tax system.Greatly simplified with few deductions.It should be fair,flat tax,with a fixed 15% for all incomes.No envy taxes that divide the country and encourage so much inefficient tax avoidance and evasion.
If Congress was really serious about lowering our debt, they wouldn’t have just passed a budget that lowers the top tax rate to 25%, AND increases the “Dept of Wars” budget.
Nope, the Congressional House is interested in one thing; funneling as much of the nations “money” to their contributors, before the complete collapse of this nation, at which point the top 1%, and the heads of the defense industries, can sail off to their private islands.
How about none of the above? How about monetary reform where the US government issues its own non-debt based dollar bills to pay off our debts and ends the Federal Reserve? Why does no one even talk about this option? The indoctrination runs deep and apparently is hopelessly ingrained.
Sigh. Its going to be a painful, painful crash…..
That doesn’t make sense. Printing money will only make it worse.
David,
I think you missed the point entirely. If the government issues its own currency, there would not be a debt to the FED, which is how it works currently! Read, “The Creature from Jekyll Island – The Fed Is Born.” or listen to the author give a synopsis of the book. It will knock you over!
http://radio.goldseek.com/edwardgriffingronvall.php
David,
Contrary to common perception, under the current system money is not printed into existance, it is loaned into existance. Everytime you or government borrows money from a bank, the money is created out of thin air by fractional reserve banking. The principal of the loan goes into the economy, but the principal plus interest does not so all the debts in existance are ultimately not mathematically payable. So the government after the collapse of the sub-prime lending markets and the mortgage industry had to borrow more money into existance to keep the money supply from collapsing. When the money supply goes down, the economy goes down. Keep in mind our money supply is debt. That is what the US government is maintaining. The are maintaining the money supply by filling in the gaping hole left by the collapse of the sub-prime market.
Look at the current dollar bill. It says at the top “Federal Reserve Note”. This represents a loan from the Federal Reserve to the US government. The solution then is to quit borrowing money into existance. The solution is for the government to print its own dollar bills to pay off our debt. It would in fact be inflationary if done without ending the practice of fractional reserve banking which would take that money and loan it out and create >10X’s the face amount on the bills. Of course the last President to issue non-Federal Reserve notes was JFK. About 5 or 6 months after he issued his Executive Order 11110 (http://www.john-f-kennedy.net/executiveorder11110.htm) he got capped and then his assassin got capped and then his killer died. Interesting isn’t it?
Monetary reformers usually end up dead. There is hope though. Andrew Jackson in the 1830’s was the last President to successfully shutdown the bankers responsible for this predicament. That lasted until Lincolns Republicans enacted fractional reserve banking laws and a bunch of small national banks after the pro-Jackson Southerners bailed out of the Union. There’s a lot of history we weren’t taught in High School.
Your homework – watch these two videos:
Money as Debt 2 Promises Unleashed: http://www.youtube.com/watch?v=_doYllBk5No
The Money Masters: http://www.youtube.com/watch?v=lXb-LrVkuwM
What we should consider is to use this most powerful military machine on the planet to rape and pillage whatever we need; Energy, minerals, food etc. Why do we not discuss or even about this option?
I know this solution would not be politically or even morally correct, but my point is that we are partially in this mess because of our allocation of resources (materially and social) to what Dwight Eisenhower called the Military Industrial Complex (MIC). This institution is so powerful it controls both political parties, Tea Party included. It control most mainstream media and may even our educational institutions.
I bet it influences most of what you think in one way or the other. Consider what the result would be if we changed course in 1960s starting with the Vietnam escapade that cost a trillion (or two) in today’s dollars and 50,000 US personnel. Now think about the cost of our most recent wars in Afghanistan and Iraq. With the net savings from a sound and balanced military, we could have invested in education, alternative energy, capital for small business, infrastructure for efficient transportation, universal health care etc, etc, etc. We would not be in the pit of a deficit with the potential to default.
So what do we do now? Keep on doing the same thing by pouring more into the MIC and cutting back on investment in the future.
Don’t think this is coming from a pacifist because at 1/4 of the current budget, we could still have the most powerful military on the planet which equates to all the fire power to keep MAD and have the special forces to take care of terrorist (like extracting Osama from Pakistan).
Proponents of the idea that America can tax itself out of financial duress should look at Greece where there exists an income tax of 40% for those earning 75,000 Euro per annum plus a 16% social security tax (employers kick in another 28%) PLUS a vat tax of 23% (less for essentials). Yet, Greece is failing. The trouble with taxation is that it gives the politicos more money to hand out to non-taxpaying citizens who then use the power of the voting booth to ensure the continuance of a system that leads to the destruction of payers and non-payers alike.
Claus: There are two other options you didn’t mention (probably because they won’t work) but I think it would be informative if you could address these:
1) Raise taxes to balance the budget, or a combination of taxes and cuts.
2) Grow our way out and pay off the debt over time. It happened once before after WWII.
Interesting how established views of austerity focus the conversation on the “public”. True that those least to defend themselves usually suffer the most, however, private capital often faces significant losses and again those in the middle with little ability to defend the extraction of their wealth. I’m afraid that is the group you are writing to. Wars, insurrections and moments of anarchy usually destroy middle class wealth.
Look for corporations to relocate out of the U.S. to a country with stable currency, good infrastructure, and a favorable business climate. Look for the rich to to first, move their money out of country, or hide it, then they will move themselves, or hide their wealth. That’s what the rich do during ‘The People’s Revolution’ of socialism and communism. Starved for funds, governments turn to nationalizing corporations, confiscating assets ( like 401k ) then make wealth ( like gold ) illegal. May be time to brush up on Portuguese or Spanish, or head to Australia, if you’re rich enough to move.
What’s missing from the analysis is the possibility of growing the economy. I think that would take a Republican administration. But if it happens we could hold onto the debt and just pay the interest for the next hundred years. The British did that after the Napoleonic wars which left them with a debt of 300% of the GDP. Durig the 19th century the British economy grew substantially. The debt/GDP ration fell to about 25%. In the meantime we are inflating away the debt at something close to a trillion dollars a year. That can’t go on much longer I don’t think. But can free-market forces be unleashed?
You have it right ….Nationalize the Fed now!!
War is the great equalizer of civilization according to the war-makers. Mankind never learn history.
Give Yahweh the chance to prove His government and you will be called wise. Peace.