August is the most volatile month in the global financial market since the GFC. We had a near default of the US government (see What will happen if Uncle Sam does not raise the debt ceiling?), followed by the downgrade of the US government debt by S&P. On top of that, there’s worries about a double dip recession in the US and fears that the Europe sovereign debt crisis can cause a financial earthquake that can rival the panic triggered by the fall of Lehman Brothers in 2008.
Regarding the raising of the US debt ceiling, we have some things to say. President Obama said that if the US government’s debt ceiling is not raised, the US government will default on its debt. Dear readers, do you see what message the US is sending with this simple statement? Basically, he is saying that if the US is not allowed to borrow more money, they are going to default on the money already owed. In other words, they need to borrow more money to repay the monies (plus interests) that they are currently owing. As China is the biggest lender to the US, this is basically telling them that if they don’t lend more money to the US, they can kiss their existing money goodbye.
If a private citizen comes to the point that he has to borrow more money to repay the ones already owed, it is no-brainer that he is on his way to bankruptcy! As we wrote back in October 2008 at America’s balance sheet,
To make it easier for you to understand these colossal numbers, imagine owing $200,000 and earning $3640 per year on your job (that is, optimistically assuming that the economy can grow at 2% per year)! In other words, the earnings per year are only 1.82% of the total outstanding debt, which is far below the rate of price inflation. Based on market rate of interests (i.e. the long-term bond yield), the earnings will not be enough to even cover the interest payments.
So, the US government is in the same situation! Unless the US can somehow create miraculous economic growth that will result in miraculous growth in tax receipts of the US government, the amount that the US government is going to owe will go up exponentially! And no, unlike private citizens, austerity measures will not solve the problem. Why? Thanks to the GFC, the government spent BIG on bailouts and ‘stimulus’ that does not stimulate, resulting in the government becoming a big part of the economy. So, slashing government spending will shrink the economy, which in turn will shrink tax receipts. As we wrote in August 2009 at Will governments be forced to exit from ’stimulus?’,
In fact, the word ’stimulus’ is the most misleading word in economics lexicon because it conveys the idea of a surgeon ’stimulating’ a heart into self-sustained beating. In reality, what government interventions did was to put the economy on a crutch. The longer the economy leans on the government crutch, the more dependent it will be on the government. Eventually, the government will become the economy. For those who haven’t already, we encourage you to read Preserving jobs at all costs leads to economic stagnation and Are governments mad with ’stimulating?’.
Do you see why we oppose ‘stimulus’ spending and bailouts in 2008? The government is going to have a colossal funding challenge in the first place (see Is the GFC the final crisis?). Spending big money in bailouts and ‘stimulus’ crutch is going to make the government the economy. Once the government becomes the economy, austerity measures becomes out of question. If austerity is out of question, then debt repayment becomes out of question. If debt repayment becomes out of question (i.e. default), then printing money is the only option. Yes, the US government can print money because the debt that they owe is denominated in their own currency.
Now, back to the real world. What are we hearing about the US economy today? We are hearing market chatter about a double-dip recession in the US. Bernanke had announced that he is going to keep short-term interest rates at zero for the next two years. There are talk about the coming lost-decade for the US where the economy will stagnate for the next 10 years.
Do you see the implication for this dismal forecast?
If we are right, the 2008 GFC is nothing compared to the coming US government debt crisis. That is why the message in our book, How to buy and invest in physical gold and silver bullion is so urgent and important.