The recent astounding debt crisis is now beyond economics; it is more complicated now with figures casting an impending catastrophe. Moving on, the debt plague takes precedence over elections or policies, predicting hard outcomes.
A time will come when the real debt is not affected by growth and taxes; it cannot be covered up easily. Debt comprises contingent liabilities and bonds; in the US, it is translated as social security, housing obligations and health-care which is costing the nation more than $60 trillion. This figure does not include state pension obligations that are unfunded but which assume 8% growth to generate contributions. Pension debt tends to grow exponentially with a slew of increased benefits, anemic performance and contribution shortfalls combined.
Simply speaking, money is debt; any paper currency is just a contract between its government and its citizens. As on each U.S. bill, it is embossed ‘Federal Reserve Note’. Each greenback is a liability. If every mortgaged asset of the Fed were put on the market, the Fed government would be bankrupt. Wealth is deceptive if it is claimed against the greenback as it is claiming against a central bank that is already bankrupt but which can print more greenbacks that is considered as more debt.
It is worse in certain countries like UK, Japan and Europe. The whole financial system has turned to be sinking sand.
How can something deceptive prosper in the past? The truth of the matter is that governments had been running on surpluses for many years with hardly any debt. Robust growth supported the tax base. Governments used trust bonds to roll over obligations that were maturing. With a little tinkering here and there, it seemed that there was more wealth creation than debt creation.
Paper money in the past was supported by fixed exchange rates of gold. Today, the four fundamentals of the financial system – surpluses, trust, gold and growth are either damaged or no longer exist. Surpluses are a thing of the past for most governments; nations panic when a 3% deficit is recorded against the GDP. Growth prospects too proved unlikely with current policies.
Obama increased spending based on the theory of ‘feeding the beast’ that pushes taxes up to match expenses; otherwise deficits will overflow to disastrous level. With his policy in place, growth is stifled by taxes as one cannot use tax to generate surpluses when growth is already struggling with low compound interest.
With trust bonds, there is always a limit to purchases if the factors are not right as bond buyers are usually very panicky and jump at the very slight unfavorable economic news.
If the individual threshold of panic is high, there will be less market panic; a stampede will cause a domino effect on other market thresholds.
Individual market thresholds can be quite complex with factors of scale, adaptability and interdependence making a greater impact than before.
Gold, on the other hand, is on another platform of standards. Money supply cannot be increased easily but at modest levels according to the Keynesian remedy. But even this Keynesian multiplier is empirically proven to be small and hence is more a wealth destroyer. There is just not enough of gold to warrant its support on money supply. But it is not a matter of quantity but price.
U.S. has always maintained a gold reserve of 20% greenback, which is considered a respectable ratio. If gold price can shoot to $5,500 an ounce, it would play an excellent role in a 1:1 ratio to secure the confidence in the US dollar and sovereign debt.
The exit would be the use of hyperinflation before re-denomination of the paper money or reverting to a currency system that is backed by gold at a price that is non-deflationary.
It is a choice between frank talk and denial. Sound money will lead to sound growth; creation of wealth will then be real and not illusory.
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