But most people don't understand that debt backed money in a post industrial economy that relies on ever increasing asset valuations needs a certain level of debt growth to sustain itself. That's the crazy world we live in. And this type of economy has also influenced our trading relationships with other countries - we consume what they produce, and we give them an IOU in return. Thus, if the US were to stay within the debt ceiling, it would trigger an immediate deflationary depression, taking down the rest of the global economy with it. That's the ugly truth. There would be less money in the system to service all existing debts, public and private, and the system would collapse on itself in a deflationary death spiral. So as a politician, I would unfortunately vote for more debt. To do otherwise would be a career ender. Why? Because most people don't understand our monetary system and would think I caused the deflationary collapse on my watch.
So we're stuck in a Ponzi Trap. Get out of the Ponzi, it collapses today. Keep it going, and there is a .0001% chance of getting out of it. Well maybe I'm being optimistic. All Ponzis collapse, no?
Which brings me to David Stockman's recent interview, which I posted the link to earlier this week. Here's something he said that puts the situation in perspective, emphasis mine:
"If we see what's going on carefully, we've reached the final unmasking of the Keynesian illusion, that Keynesianism is really nothing but borrowing, stealing from the future to induce consumption today," he said. "There are no multipliers. Every one of these programs we've had from 'cash for clunkers' to housing purchase credits have disappeared as soon as they expired and simple shifted activities in time by a few months."
Stockman explained that before 1980, it took about $1.50 of new borrowing -- public or private -- to generate $1 of GDP growth. By the mid-1990s, it was $2.50 or $3 of borrowing for a $1 of GDP growth. By 2007, before the big collapse and meltdown finally came, $7 of public and private debt was added to the national balance sheet in order to get $1 of GDP growth.
"When you get to the point of $7 of borrowing to get $1 of income, you're obviously on an unsustainable path and pretty close to hitting the wall, which more or less we have," he said.
"So the addicts in Washington are now unfortunately terrified to stop all this borrowing whether it's for guns or butter for fear of the economy will collapse.... That's why we're just at the beginning of solving this massive financial collapse we had in 2008 and not in the process of healthy recovery as some of the pals in the White House or on Capitol Hill or on Wall Street would have you believe."So there you have it. Another public admission, this time from a former high level White House official, that those in Washington believe the system needs to grow or else face collapse. I think that threat is very real.
So what do you do? I visit many financial sites which have their own "solutions", and I am still not convinced. Some bloggers believe in a combination of solutions. Many harp on what I call the "Morality" issue I recently wrote about. They say that if we prosecute the villains, if we re-regulate the system, all will be solved. Sorry, I don't buy it. And it's not that I am anti morals, or that we shouldn't prosecute fraud - I'm just admitting that mathematically, the system needs immorality and loopholes to function. Ponzi systems, by their nature, are reliant on con men and naive suckers as well as impossible mathematics to function. Unfortunately, Ponzi systems, as Nicole Foss has put it, are "self limiting;" they self destruct.
Other bloggers say we must stop spending. Well, we have just addressed that. Stopping spending now kills the mathematical growth the Ponzi system relies on to exist.
I'm not going to give you a "solution" if by "solution" you expect a return of the status quo - that is, the year 2005 and beyond. Why? It doesn't exist. We are faced with a debt bomb of historic proportions that can not be diffused.
So what can you do? You take care of yourself and your own. You try to get the hell out of the way as best you can, given your own unique circumstances. You adjust your own lifestyle - whatever that means for your situation. You prepare for the worst, yet try to live business as usual. It's a difficult balancing act. That's the best "solution" I can come up with.
I'm not going to say all will be fine if we just "do this." It won't. We are facing a massive correction and global rebalancing that could even involve war. Look, I'm just an anonymous blogger. I'm not some public figure analyst or bank CEO or employee - I don't have to worry if CNBC doesn't invite me back, or if I lose clients, or if what I say affects my career or the stock price of a company. I have none of those worries. I have the freedom to speak my mind in my own little corner of the internet.
Best of luck,