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Economic Crisis Pile-Up Worse Than “Kicking the Can Down the Road”

 The pile-up of debt we have created by pushing the economic crisis further down the road is far worse than “kicking the can down the road.” It is more like pushing a snow straight down the road, instead off to the side, so that it becomes a mountain (of debt in this case) that you cannot move. I wrote the following to Stan on April 8th, 2011:

 

For the past two years, we’ve talked of how Fed policy would ultimately create hyper-inflation, but also how the very reason that would happen dictated that it would take quite awhile to happen: banks were hoarding the vast money the Fed was printing so that it created little liquidity in the marketplace, but sooner or later banks would release that money, and it would likely become and unstoppable flow.
I’m still not sure what the Fed intends to do about that when it happens. So far as I know, they don’t have much of a mechanism for taking money out of the economy, other than not printing more as old dollars deteriorate and are turned in. Their usual trick of raising interest rates to curb inflation is not likely to work precisely because they have already loaned the bank tons of cash at zero or near-zero interest. High interest rates may not curb banks from loaning out all the cheap to free money they’ve already received.
The following article, which you can click on for more detail, indicates that gold will continue to rise. Of course, Faber is notoriously big on gold and on doom, but I suspect he’s right that that today’s record in gold prices does NOT indicate a speculative buying bubble but is a real transition in the economy to people hedging against inflation:
Gold Is Still Cheap Despite Record Surge: Marc Faber

[Gold was trading at about $1,500 an ounce then, back when I wrote this letter to Stan, but it went up to nearly $2,000 an ounce by the end of summer.]

Another thing I talked about in my articles for the … small newspapers that took them up was how the Bush (and subsequently Obama) policies were merely pushing the snow straight ahead into what would become a pile so large that it could no longer be plowed ahead. In other words, they could (and did) avoid much of the pain of the fall by pushing it forward. Only thing is, as we discussed, they could not do that for very long as the snow plows were already near their maximum. Now forecasts are coming in that this will be the year where the snow pile becomes immovable and far worse than it would have been, had we not pushed it forward with bailouts and Quantitative Easing that became the policy of the last two years.

A couple of months ago, I was writing to you about how Quantitative Easing had accomplished very little for the huge amount spent in that it had averted almost all of the pain, but it had failed to stimulate a solidly recovered economy. It had merely created an illusion of recovery that the government believed in and preached. Only thing was, I wrote then that the government was nearing the end of its ability to provide QE and could not likely afford a QE III when the present QE II runs out. That, I believed, would happen this year, and that is when it will come time to pay the piper and to see what the real economic damage is going to be.

 

I wrote this letter to Stan in part because of hyper-inflation concerns and also because of the following article about Erskine Bowls testimony before the Senate Budget Committee:

 

Bowles made his forecast in testimony before the Senate Budget Committee last month, stating, “I’m really concerned. I think we face the most predictable economic crisis in history. A lot of us sitting in this room didn’t see this last crisis as it came upon us. But this one is really easy to see. The fiscal path we are on today is simply not sustainable. … This is a problem we’re going to have to face up to in maybe two years, maybe a little less, maybe a little more.” (See: “America Faces ‘Most Predictable Economic Crisis in History’ Within 2 Years“)

 

The only thing I would strongly differ on with Erskine Bowles is when we need to face this. He is wrong that we need to face up to it in maybe two years. Rather we SHALL face it in two years as something we can do nothing about if we do not face it immediately, and so far we are not facing it at all. The Democrats and Republicans are spending enormous time and publicity squabbling over a 60-billion dollar budget difference when the amount we need to trim is TRILLIONS if we are going to avoid complete catastrophe in LESS than two years. Catastrophe is panting at our door right now. While Bowles’s testimony was last month, todays news was of, at least, one Democrat joining in believing that what we are facing really is the biggest economic catastrophe of our history.

 

Davis said, “I do agree with Mr. Bowles and I think the crisis is probably much closer to us than we would want to acknowledge.

 

Indeed, it is much closer than just about any member of Congress has been willing to acknowledge. Rather than plowing our snow [our problems] off to the side (which would be accepting the drop in property prices and other deflation that needed to happen to right the excesses of the past thirty years), we pushed the snow straight ahead. [We] found ways to try to stabilize those prices by creating intense inflationary forces [uber-low interest] to counteract the essential deflation we didn’t want to bear [and piled a mountain of debt ahead of ourselves].

As I was saying two years ago, this was only pushing the snow straight ahead, and that is something you can only do for a short time before you either lose traction or lack power to push it any further, as it only piles up higher and higher when you do that.

Now, we are in the year when we will have to face that reality. We have about pushed our snow pile as far forward as we can because we have no more capacity to do more Quantitative Easing. The old easing has about been spent and has not succeeded in rebuilding a sustainable economy. The fiscal path that the Bush and Obama administrations took did not revive the economy; they only reduced the immediate pain at the cost of a larger problem moving forward.

Nevertheless, neither Davis nor other key players are willing to do what needs to be done — even while acknowledging our present path is not even sustainable for a short time. They are not strong enough to bear the pain or economic correction.

I suspect that Bowles, in saying we will have to face this in two years or less, meant that we will have to live the catastrophe in two years if we do not act now. In his testimony he indicated that it may take two years for our Asian financiers to finally give up on financing our debt because they come to believe we will not be good on our debt. They don’t want to believe that any more than we do, and that is what buys us some time. But, as Bowles points out, just think of the devastation that will happen to our economy at the point where they finally have had enough and the first major sovereign bank refuses to buy U.S. debt — how quickly our interest rates on debt will have to keep those who remain from following the lead of the first major sovereign bank that walks away from us.

What Bowles was not talking about, which we will face much sooner (I’m predicting this summer) is the end of Q.E. II. The Federal Reserve authority and Treasury authority for the bailouts that have been happening are soon to reach the limit of what was approved. We have no capacity to do more of the same with a third round when so many sovereign banks are already deeply concerned about the enormous debt we have taken on. What happens when quantitative easing stops. That is the day the snow plows stop moving forward and we see what the results of pushing the problem straight ahead really are. That day of reckoning will likely happen this year, and I think this summer.

–David

 

[End note: QEII did run out in the summer, and the Fed has been extremely reluctant since to use any more. While we did have a crash at the end of summer, the government found ways to keep pushing the problem ahead, so the crash was not as bad as I thought, though it was quite significant and undid all the gains from earlier in the year. One of the things they did, instead of more Q.E. was “Operation Twist.” Indeed, the government is convoluted with twists these days, as is the economic crisis that we are still plowing ahead.]

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