Kleptocracy

Can you win if you play this game? 

The Economic Black Hole

This interview is a little more difficult than most of the interviews I share here. We may be headed into a "debt trap" in the economy like the one that has plagued Japan for the last 20 years. A debt trap is "the situation in which the national debt continues to grow faster than national income so that more and more of the government’s budget has to be devoted to interest payments." Steve Keen's proposal of a debt jubilee is one of the more interesting solutions being advocated. 

Cut Now

It is better to cut a lot now. If we don't, we will have to make Draconian cuts later. As is mentioned in this video, the market will force the cuts eventually.

If Greece had gotten its' financial house in order 3 years ago, the cost would have been much less–both for the creditors and the people of Greece.  The United States is in the same situation. 

Voters need to be told the truth. We are headed for a big crisis, but we are blind to it. This is an example of the meme I have been pushing here of “templates.” We all have ways we look at the world. If we are not careful, these ways of looking at the world make us blind to the obvious.

It does not matter that people need their social security checks; it does not matter that we need a national defense that is bigger than the rest of the world combined; it does not matter that Aunt Haddie needs a new hip. We cannot afford it. It is that simple. 

Right now we are borrowing 43% of every dollar the federal government spends. Sooner or later the market will refuse to buy new bonds. At that point either the government cuts everything about 50%, or prints lots of money. This will involve a lot more printing than is realized as not only will the deficit be monetized, but all the deficits of the last 50 years will be monetized as the debt matures gradually over the next few years. No one will ever loan money to the United States–not for a generation. 

It is that serious. 

Get out of debt. Consider downsizing your living arraignments. Drive that car for a few years longer. Get Ready. We have 3 to 7 years. 

Hyperinflation?

There are two viewpoints in the "hard money" school of economics—one predicts inflation, the other predicts depression. I think they are both right, and wrong. I think stagflation is the most likely outcome. But as Yogi Berra said, "The future is hard to predict because it has not happened yet." When the crisis comes in 3 to 7 years, I cannot begin to predict which option the "powers that be" will choose. 

The blog post for today is an interview I saw from a member of the hyperinflation school—John Williams from shadowstats.com. He points out in this clip that while inflation is currently calculated at 2%, if the same method was used today as was used in 1990, the inflation rate would be 5%. If the same method that was used in 1980 was used today, inflation would be 7%. There is an almost constant pressure on the average person as their income is not going up by 7% a year. 

Personally I expect "modest" inflation in the 10 to 20% range while unemployment goes up. I know this is supposed to be impossible based on the Phillips Curve, but I think it will happen. 

Yes there are people who are more pessimistic than me! Here is one:

Ya Gotta Have Faith

Barclays recently admitted to '"fixing" interest rates illegally. Faith is usually a religious term, or a phrase from a George Michael song. But actually, our whole economic system is based on faith.

While a roofer will ask for a portion of the fee before beginning the job, it is the last payment that holds all the profit for the contractor. He has to have faith that the final payment will be made. And the home owner who gives the initial payment has to have faith that the roofer will not disappear before the job is done. 

Here in Idyllwild a few years ago we had a contractor who was promising to build log homes at a very competitive price—too competitive. One customer came to my retail lumber business. We told him the competitor’s price was too low—but the customer had faith. That was a mistake. He lost his 25% deposit—and we ended up with the contract to supply the lumber for the house. 

If we lose faith in each other and in the system, the system will collapse. 

I mentioned before a game my boys and I played on the Shoney kids’ meal menu. You flipped a coin to move. Heads you went one space, tails you went two. There was one spot on the map where you could not progress unless you could move three spaces. We had no three sided coin. We quit playing the game when we understood that the game was unplayable. 

Our faith in the system, like the unfortunate customer I mentioned, may be is misplaced.

The show “Capital Account” talks about this.