Before getting started, I really need to thank several of my readers, because it was their intelligent questions that led me to this article. I hope it serves a useful purpose and helps to shed some light on what may potentially lie in store for our economy/way of life.
Today, with bad new all around, many make attempts to dissect the individual aspects of the myriad of economic problems that influence our problematic US economic situation, but few really try to think ahead and analyze the final end-game. With this post, I hope to do just that, and will attempt to answer the following six questions:
1) What is happening with regard to our economy?
2) Why would our monetary policy-masters want a weaker dollar?
3) Where do we go from here?
4) What long-term exit strategy can we expect to see from our monetary policy masters? 5) How does inflation help the Government and what are the impacts to its people?
6) How will people cope with reduced purchasing power and a much lower standard of living?
So, what is happening with regard to our Economy?
Though I've been talking about it since 05 (and many early on considered me a knucklehead for my non-conformist viewpoint), I think it is now becoming common knowledge that the largest speculative bubble in our world's history (housing bubble) has popped and its reverberations are being felt across the globe:
Hedge funds are collapsing, bank write-downs are growing, toxic waste marked-to-model Commercial Paper (CP) sitting in off-balance sheets cannot be offloaded, credit markets are completely locked up, home foreclosures (the catalyst to all these problems) are growing, consumer spending (70% of our economy) is waning, consumer inflation is raging, construction spending is down, the dollar is falling off a cliff, job losses are increasing, state revenue is falling -- many are slashing budgets, and the list goes on...
The Fed and our Plunge Protection Team (PPT) understand that deflation is taking hold and they are operating in emergency mode... In a brazen attempt to prevent a collapse of the entire banking/financial systems (and hence the US Economy) "Helicopter" Ben Bernanke has officially sacrificed the dollar in the hopes of printing/inflating our way out of this financial mess -- to prevent an economic depression.
Take a look at the US dollar chart below -- NEVER in our country's history has the US Dollar been weaker. Why so low? Our policymakers are covertly demanding a weak dollar.
But why would our monetary policy-masters want a weaker dollar?
Well, as I see I see it, there are several reasons:
A devalued dollar will (over time) allow the United States to 1) eliminate much of its foreign debt through devalued payback 2) pay for future (currently $60 Trillion) in un-funded obligations through cheaper payouts 3) reduce US labor costs in the global marketplace -- making US manufacturing competitive in the world again, and 4) a side effect -- lower the US standard of living through massive inflation -- ultimately stoking a grass roots demand for some relief and opening the doorway for successful implementation of a new "stable" currency to replace the ailing dollar -- The AMERO.
Additionally, somewhere along the way, we will probably experience a new war to: 1) secure natural resources, 2) create US jobs to support the military/industrial complex, and 3) help to take our minds off the economic misery we are all experiencing.
So, where do we go from here?
As previously stated, the PPT is attempting to fight deflation with new inflation and the Fed's monetary printing presses are gearing up to start working overtime. (NOTE: Money=Debt and lack of new consumer/corporate debt means less new money to service older debt, which means declining GDP, defaults and deflation)
Today there are > $13 Trillion Dollars circulating the globe and M3 Growth (expanding US Money Supply) is increasing at an annual 18% rate (see chart below).
M3 -- US Money Supply Growth rate & US Dollars in Circulation
(Note: as an aside, only ~ $400 Billion of this, ~ 3%, is available in cold hard cash in the US -- most of these $13T dollars are 1's & 0's on a computer hard-drive somewhere -- God help us if we experience banking runs...)
Consumer inflation typically lags M3 growth (those with new dollars first can buy more than those who receive dollars later in the game), but we know inflation in the US is currently running ~ 12% today (next chart below -- measuring inflation w/metrics abandoned in the 1980's- abandoned to understate inflation, reduce Gvt. entitlement payouts over time and to overstate GDP).
Annual Consumer Inflation Chart - The red line illustrates what our Gvt wants you to believe (inflation ~ 4%); the blue line is our actual inflation rate (~12%); Remember, consumer inflation lags new monetary creation, so you can be certain (after looking at M3 again -- the 1st chart) that consumer inflation has only one way to go -- UP!
What long-term exit strategy can we expect to see from our monetary policy masters?
Based on what we have just learned above (that monetary growth and consumer inflation are rising, and that the Fed/PPT have officially sacrificed the US dollar to prevent a depression), if we now gaze into our crystal ball and look out at the next 5 years or so, what should/can we expect to see?
Logic reasoning leads us to believe it has now become official Government policy to try to inflate our way out way out of this financial crisis, so lets assume a master plan exists to bail out numerous banks/financial institutions and rescue the bond, housing and various other markets. Let's then go on to assume a plan exists to eventually ramp up numerous government infrastructure and military/industrial projects to promote US job growth (in the midst of our deep/dark recession).
To keep the math easy, and assuming all of the above takes place, let's now presume (being conservative here) M3 Growth averages 20% over the next 5 years to fund all these new government efforts... Therefore, in 5 years time, M3 (worldwide US money supply) will have doubled and M3 will equate to ~ 27 Trillion US Dollars. Note: by that time inflation will be raging and the dollar's purchasing power will be halved (if not more by then; it really depends on foreign dollar holders -- will they cash before then?)
How does this inflationary effect help the Government and what are the impacts to be felt by the people?
By continuing to understate inflation (as you saw in the Inflation graph above) over the next 5 years and more, the US government will be able to pay all its currently un-funded obligations (Social Security, Pension Benefits, Military Pay/retirements, Medicare obligations, even foreign held debt) with significantly devalued dollars -- costing the government far less over time.
In other words (lets use a Social Security recipient as an example): Grandma will still get her entitled (currently unfunded) $1,200-1,400 monthly Social Security Check (w/annual increases tied to Gvt's lower CPI rate), but if her utility bills have doubled and she now pays $8 a gallon for Gas, $7.50 for a gallon of Milk, $5 for a loaf of Bread, $4 for a pound of Chicken and $10 for a "value meal" at McDonalds, her purchasing power has been reduced substantially. The government still pays its obligation, but with devalued dollars and w/severely reduced purchasing power.
Thus: Inflation (monetary growth of printed dollars) has eroded unfunded Gvt debt/obligations, but at the cost of American purchasing power and standard of living -- it will have dropped significantly. Ultimately, over time, the Gvt. actually pays out less than that which it really owes -- through devalued dollars (it's all smoke and mirrors).
So, how will people cope with reduced purchasing power and a much lower standard of living?
With inflation and unemployment raging, tens of millions of Americans will not be able to make ends meet and cutbacks in lifestyle will become the norm.
Americans feeling the pinch will have to eventually downsize (much smaller house or apartment -- to reduce utilities/costs; take on a room mate or rent out a room, purchase a more fuel efficient car; drive MUCH less -- car-pooling will become popular, eating out will stop--it will only be for the well-off; families will eat cheaper foods at home, clothing will be used until completely worn out, churches and aid agencies will become much more involved in the struggling/average American's life, etc...)
Bottom Line: life will become much more expensive/difficult than that which we know today. We could even see oil/fuel shortages due to geopolitical unrest/war, and food shortages could be an issue too -- world food stores are currently at a 50-60 year low with no relief in sight. (Global food crisis -- credit crunch could pale in comparison)
Anyway, you ask: What then happens to society?
If you haven't already done so, read the following links for some thoughts on the issue:
Social Implications of a Significant Economic Downturn
Maslows Hierarchy of Needs and the US Economy
Our long-term way Ahead:
There is however, potentially very good news that will follow this EXTREMELY difficult period in America: Over time, a much lower US standard of living and a significantly devalued US dollar will make it much cheaper to manufacture in the US again, and 15-25 years from now our massive debt loads will have subsided and all those outsourced jobs will eventually come back home. Then we will be able to do more than sell each other cheaply manufactured goods -- we will actually make them again. For more on this subject, read my Jan 06 article: American Wake Up Call
Bottom line to this article:
I think our day of reckoning has finally arrived. We Americans have lived too comfortably for far too long by sucking up 80% of the world's savings and then we wanted more, so we racked up ENORMOUS personal and Gvt Debt loads that must be paid -- paid through Gvt. monetization, massive dollar devaluations and a much lower standard of living.
As stated previously, the PPT is fighting deflation w/inflation, so we will probably experience concurrent deflation and inflation - if/until the deflationary forces are won over.
I expect, over the next 5 years or so, consumer inflation to be completely out of control, but there is nothing the Fed can do about it -- without throwing the economy into a depression.
Ultimately, the US dollar will plummet in value and its fate as the defacto "World Reserve Currency" could soon be brought to question -- but that might be part of our monetary policy master's "master-plan" anyway, as it will allow the Amero to slip right into its place without an American revolt.
I hope this article provided you with some nourishing "food for thought".