I don’t think people who have not studied economics can grasp the magnitude of what’s been done to us, and how swiftly all our modern world-wide extended order can grind to a halt.
I hope everyone understands that the money, including all future earnings of your children and grandchildren, has been spent, and that we are SIXTEEN TRILLION DOLLARS in the hole. (This is but the federal debt: state and local debts may be ten times this.)
Borrowed money represents a promise against future labor.
That means that no labor performed for the next several decades will have any value. The result is the same whether the debt is paid or repudiated: the result in either case is a collapse of the credit market and an end of the holding value of the dollar.
The collapse will happen as suddenly as a run on the bank. Foreign lenders who are currently bankrolling most of our National Debt will suddenly realize that they are unlikely to get repaid. And so they will sell treasury bonds and other loan instruments as fast as they can; and once one debtor sees the other selling, the price will drop precipitously, causing more to sell quickly and below cost.
Do you remember what caused the recession we are in? Since the newspapers bent heaven and earth to hide the causes, perhaps even well informed people do not know, but ask any sober (i.e. non-Keynesian) economist.
The current depression was caused by government interference in the housing loan market. The government in effect forced banks to make loans to would-be homeowners who could not repay. These mortgages were, in effect, IOU’s with little chance of being repaid. The state-run banks known as Freddie and Fanny, cunningly bundled the debt instruments in with other more valuable debts, and short sold them to unwary foreign investors. Because, now, by fiat, everyone could afford a house, the housing market expanded, and people paid for their houses with what was basically brightly colored Monopoly Money. The banks, led by Freddie and Fannie, passed the Monopoly Money to the unwary, and when the debts came due, the same thing that happened during the Great Depression happened again: the market tried to correct, and the government stopped the market correction.
If that is too technical, let me simplify. Money represents work. A dollar in the hand is worth more than a dollar to you tomorrow, and the difference between a dollar in the hand and a hypothetical dollar tomorrow is interest. When people have a lot of money to lend and spend, the law of supply and demand drives the interest rate, the price of borrowing money, down. When the people have little money to lend and spend, the interest rate goes up.
Businessmen know when it is a wise time to borrow and invest by the interest rate. Low interest rate means they can borrow money enough to invest in a factory or start a business, pay wages, hired workmen, make widgets, and, since people have a lot of money to lend and spend, find customers.
When the state interferes with the credit cycle, it creates a low interest rate by fiat. This is like the state commanding you to sell some good or service at a rate or wage lower than it is naturally worth. Business can borrow money from the bank, which is where are the workingmen store their money, to start a business or erect a factory, hire men, make widgets. When it comes time to find customers, however, it turns out there that is not a lot of money to lend and spend after all. The businessman was given a false signal: the red light of the economy was made to flash green, telling him it was safe to go.
Well, not just one or two unwise businessmen are affected by this state-mandated traffic wreck, all businesses that borrow money or sell goods. The whole economy is affected. It is fashionable to blame greedy businessmen, but a moment’s reflection should show that the businessmen are just as greedy before and after a bust, and that if it were caused by unwise investment, the industries where the investment was more cautious would not be effected. No, scientifically speaking, the cause must be proportional to the effect. Only the government has the ability to create malinvestments across all sectors of the economy at once.
So the businessmen who put up factories that they cannot afford built widgets the customers cannot afford. They fire their workers and sell the factory for scrap, at a loss, and cannot repay the banks. The banks are short of funds, and cannot repay their customers, who suddenly realize their money is not secure in the bank. This may cause a run on the bank, or the bank customer may simply find his savings wiped out. Either way, the workingmen find themselves with their savings gone at the same time they are out of a job, and they are surrounded by a pile of useless widgets no one wants and no one can afford.
Stock prices naturally plummet, because factories doomed to fail are no longer good investment. The same logic which causes a run on the bank causes a flight into real values: people with money buy gold or land or other hard good better able to store their value than investment in new factories. The result is widespread unemployment, no new jobs opening up, no new factories being built, and no money for investment.
The market naturally wants to raise the price of interest to have the interest rate reflect the lack of money to invest, and the government, eager to borrow more money to spend its way out of debt (pause a moment, dear reader, to reflect on the utter insanity of the concept of borrowing and spending your way out of debt) commands the banks not to raise interest rates. So the market does not correct, and a one-season market cycle turns into a five or ten year permanent feature.
Wage and price controls, additional regulations, public works boondoggles, and raising taxes all likewise slow the recovery, by evaporating the money supply. When there is no money to lend and spend, no one can borrow money, build a factory, hire hands and make widgets. If the tax man or the regulatory agency takes the money away, or makes it unprofitable to build a factory or invest, then there is no money to lend and spend.
How do you get more money to lend and spend? The popular myth is that the World War solved the Great Depression. That is total bullshit, pardon my language. If wars solved depressions, the same economic effect as a large war could be produced by shooting half your young male workforce, taking all the factories that made guns and bombs and tanks and planes, and putting all the goods produced by those factories into a big pit and blowing it up with a bomb. If you think that lowers the price of goods and services, you are insane, or you are a Keynesian. (Read Bastiat’s essay on what happens when a hoodlum breaks a pane of glass.)
The events of the Great Depression is what happened to us here and now again, except that instead of Hoover style direct interference with the money supply, the government did the same crooked scheme for the same crooked reason with the housing market. Instead of too many widgets, we had too many houses. When the Republicans tried to prevent Freddie and Fannie from making loans to men who could not repay, they were called “racists.” The money was all loaned out and then it was gone.
Gone. Do we understand that word, dear readers? It means that the human labor, your labor, the work you do when you are not reading articles on the internet, was wasted. Your work, instead of being put to productive use, was stored in the form of money, and the value of the money was destroyed by government actions.
Obama’s reaction was far, far more destructive of the economy than FDR’s. He inflated the currency, which lowers its holding value, and makes people want to spent it and consume it before the value is lost, and robs investors and lenders and transfers wealth to borrowers, so that wise investors and lenders stop investing and lending. Obama then dumped countless “Continentals” (worthless paper money) into the hands of certain businesses who were friends and political allies of his, but who had no products their customers wanted. So for the last three years, the factories have been making widgets no one wants, such as GM cars and Solyndra solar panels.
And he borrowed your children’s income for their entire lives to do it, and then your grandchildren’s income. No exaggeration and no metaphor can make the astronomical amount of money wasted real to the reader’s imagination. We borrowed all the money in the world. There is no more to borrow. It’s gone.
I expect to see a fifty percent unemployment rate in the next three years, and a total collapse of the international monetary system. I have heard unsubstantiated rumors that OPEC is demanding payments in gold rather than greenbacks, and I would not be a bit surprised if that turns out to be true. I expect to see a run on the banks, hyperinflation, a repudiation of the national debt, and same thing that happened to the Deutschmark in Germany between the wars will happened to the American greenback.
The only way to get out of debt is to work. The only way to work is to leave the productive people alone, and let the goods pass. This amount of debt will require more than a generation of work to get us back to the level of being broke. How we will pay for food and necessaries in the interim, I cannot imagine.