Charles Hugh Smith is one of the smartest bloggers and authors writing about the economy out there today. If you haven’t yet read his newest book Resistance, Revolution, Liberation: A Model for Positive Change, you should.
What Smith brilliantly lays out is an America that is in a slow motion economic death spiral caused by the massive and now almost total financialization of the economy.
Smith says our Federal government and the financial economy now face an irresolvable dilemma: Over reliance on the creation of vast quantities of newly printed money and debt to sustain the Status Quo privilege of political and financial elites have created positive feedback loops that will consume the entire economy.
Due to the massive leverage in the mortgage market to create phantom assets during the last decade, and now rapidly expanding government, consumer and student debt, an increasing percentage of our national income is now diverted to debt service (principal and interest.)
This is hugely unproductive as it’s income that can’t be used to grow the real economy through investment and the creation of real goods and services.
The Federal Reserve’s solution to our debt addiction is to lower interest rates to zero so insolvent Wall Street banks, the government and consumers can all borrow more or mask their insolvency by refinancing at lower rates.
The hope is that rising debt and interest payments will again become manageable once we goose the economy to expand faster than our debt and interest.
The problem is that creating credit and printing money is simple. Increasing production of goods and services in the real economy is not.
If you want a glimpse of how insane Federal Reserve policy is, consider this: Right now the Fed is loaning billions of dollars to banks at zero interest.
The banks are then turning around and depositing this newly minted money back at the Fed, which then pays the very same banks interest on the free money they just gave them.
In a nutshell, debt is skyrocketing (in Obama’s first 39 months the national debt has expanded by more than $5 trillion), but not only has the income needed to leverage that debt remained stagnant, the costs of servicing the debt now exceed the value of economic activity generated by the debt.
In fact, as Smith points out, $1 of new debt today actually reduces GDP. In other words, it actually results in a negative yield.
So, if the Fed’s monetary policy sounds reckless and insane, why are they pursuing it?
Because in the short term it gives us the illusion of wealth and economic growth. Oh, and it also allows for the continued stupendous growth of government and massive Wall Street profits.
Remember… Whether debt can ultimately be serviced or not is irrelevant to Wall Street. For them, profits are made on the front end with the creation, packaging and selling of debt. What happens afterwards is of little concern.
As Smith correctly points out, today both Wall Street and government are fundamentally parasites that contribute little productive value to the real economy.
Wall Street make enormous profits cashing in on the financialization of the economy, and the government and political class grows like a cancer feeding off of their increasing wealth.
What about us? Well, we get hosed…Repeatedly.
First, through the offloading of Wall Street’s bad debts and risky bets to the taxpayers (TARP).
Then, through the Fed’s massive money printing which causes inflation, disincents saving and investment, and pushes us even deeper into even more speculative investments.
And finally, through the inevitability of higher taxes to fund both the government’s higher interest costs as well as the bribes that now have to be paid to increasingly restive citizens in the form of entitlements to keep them from grabbing the pitchforks (SNAP cards, 99 weeks of unemployment, disability insurance, Medicare, etc.)
What a deal!
Our political elites know we’re in an economic death spiral, although they will never tell you this outright. But watch what they do… Carefully.
The “Moving Ahead for Progress in the 21st Century Act”, which unconstitutionally revokes the passports and denies travel rights to U.S. citizens whom the IRS claims owe delinquent taxes is just one example.
The HIRE Act, which intimidates foreign banks into no longer accepting American depositors is another.
Both are essentially capital controls to keep your dollars and assets from fleeing the country.
This charade can continue for a while longer before it finally implodes on itself like a Super Nova, but implode it eventually will.
Ask yourself what’s riskier… Continued faith that in the end this will all work itself out because our political elites and Wall Street have our best interests at heart?
Or taking matters into your own hands today to begin internationalizing your assets. At least some of them. A foreign bank account, foreign real estate and even establishing residency abroad make more sense than ever.
And there’s still time, but the clock’s ticking.