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Sunday, August 5, 2012

US Debt, Money, and Future growth

The US National debt is now on AVERAGE 139,747 dollars per taxpayer, and over 50K per person.
I think its pretty clear by now, this debt based money system is doomed to fail.
Back in the 40s through 1980, wages grew for general americans, and disposable income rose.  Savings per person also grew.  Since 1980, all of that has reversed or at a minimum flatlined.

Per person, people are not experiencing increase wealth or prosperity, overall.  This is not the baby boomer go-go years, we are in the baby boomer retiring years.

There are only a few end games to the debt based system the US and by extension most of the world is on.

Currency Devaluation - Basically we borrow money for 10 dollars that can buy 20 apples, and pay back 10 dollars that can buy 1 apple.  If this manages to occur, there is much political volitility going to happen, not to mention possible currency collapse.  Also historically Wars are started over such gaming of the system.

Economic Growth - The idea basically is the US and other debt based countries (think most of europe) reverse course and start to grow well.  Salaries grow, disposable income rises, and more taxes are collected.   This time around the politicians won't do what they did in the 90's to 2012, and that is increase spending.  Instead they curb spending AND pay back the debt AND the country continues to prosper economically.   While a great outlook for the next 30 years, I highly doubt it.

Indefinite Debt - the idea basically is interest rates can fluctuate, but yet the countries manage to refinance debt indefinitely.  This is problematic, simply look at Ireland, Portugal, Greece, Spain, etc.

Default - Basically do a Greece thing, and tell the world they can't have money back for their US bonds.  Not a pleasant aftermath.

Pay It Back without significant growth - Basically all services would need to be cut to near zero in the US government on Federal, State, and Local levels.  The money collected redirected to pay off the national debt over 10-20 years.  While possible, the effect on society may lead to revolution, as basic services cut to zero.  Not to mention the army of jobs lost between government layoffs, and the jobs related to those employees. (restaurants, taxi, air, lawn guy, landlords, etc - whatever employed people spend money on)

Change the Monetary System - At the heart of what I see happening is two elements.  Lack of law enforcement and a debt based money creation system. The lack of law enforcement I'll leave aside, but it is a critical component to changing the monetary system.

Every Dollar the US government creates currently is done so with banks buying US government bonds, that once purchased, allows the US government to create new money to pay bills.   In essence, the government if forbidden to create money unless a bank buys a Bond, and assigns a rate of interest.

Granted, these bonds can be bought by anyone, but the broker-dealer system has the bonds primarily passing through the Banking system.

What if the government didnt need to sell a debt-based interest bearing bond to gain "permission" to create new money?  What if, it simply created new money?  Most equate this to currency collapse, and in some ways cheating.  Perhaps.  I think that the government should be able to simply print new cash.

For forcing an interest rate onto the government to create new money is not sustainable.  Also it smacks of why does the government need someone else's permission and a tax-rate assest to it to print new money?  How does that make it more legitimate?

The current debt system is now so deep, I think its time to realize it is impossible to pay back.  Us can default, which i think may bring down the entire system.  Indefinite debt won't work if rates rise.  Economic growth of significant magnitude while possible, is unlikely.  A new boom such as biotech will lift only the most educated, not the masses.

That lease a system change.   I dont think any major shift can be done to prevent a crisis.  It is ONLY in a crisis will people accept basic sweeping change.  If raw printing is decided, and currency does not collapse, we will enter a new era of money creation without debt.

Then, the only thing left is to enforce the law and ensure the currency faith is kept.

What does this have to do with investing?  Well, people keep worrying about the US debt.  At this point it is almost irrelevant.  The end game is known, the debt cannot be paid back under the current situation.

People think that growth, indefinite debt, etc will be the answer.  I say we are headed for a radical shift, and a debt based system being modified is the path of least resistance.

I would expect for the years ahead, gold, silver, and other "backward' money systems will gain in value significantly, as countries like China try to become a legitimate option to the USD as currency leader.   Once such a shift is announced, I expect gold will hit the high of this entire bull run.

That will be the time to sell, it will be hard, for everyone will be running to gold afraid of the new system,  Couple this with China/India populous buy gold/silver in huge quantities as their countries grow and I still like precious metals.

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