"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Saturday, January 15, 2011

Happy 14 Trillion Dollars!

From Yahoo!/Associated Press:
US debt passes $14 trillion, Congress weighs caps
WASHINGTON – The United States just passed a dubious milestone:Government debt surged to an all-time high, more than $14 trillion. 
That means Congress soon will have to lift the legal debt limit to give the nearly maxed-out government an even higher credit limit or dramatically cut spending to stay within the current cap. Either way, a fight is ahead on Capitol Hill, inflamed by the passions of tea partyactivists and deficit hawks. 
Today's debt level represents a $45,300 tab for each and everyone in the country.

Keep in mind, this is just Federal Debt, it does not include private debt, corporate debt, financial sector debt, or even state and local municipal debt and pension obligation.  But what is more worrying to me than the number 14 Trillion, which in itself means nothing without context, is this:

The national debt is the accumulation of years of deficit spending going back to the days of George Washington. The debt usually advances in times of war and retreats in peace. 
Remarkably, nearly half of today's national debt was run up in just the past six years. It soared from $7.6 trillion in January 2005 as President George W. Bush began his second term to $10.6 trillion the day Obama was inaugurated and to $14.02 trillion now. The period has seen two major wars and the deepest economic downturn since the 1930s. 
With a $1.7 trillion deficit in budget year 2010 alone, and the government on track to spend $1.3 trillion more this year than it takes in, annual budget deficits are adding roughly $4 billion a day to the national debt. Put another way, the government is borrowing 41 cents for every dollar it spends.

Can you imagine?  Nearly half of today's national debt was run up in just the past six years!  The US Economy, as measured in GDP has not grown at that same accelerated rate - no where near it.

Now those that are aware of MMT understand that the US Government is not revenue constrained.  However, the US economy, and the US currency, the Dollar, exist in  an interdependent world.  There is this thing called the market that arguably is bigger than the Federal Reserve, and it gets to vote every day on the value of the dollar.  Trading partners too, get to "calibrate" the value of their currency using various means such as trade regulations and capital controls, against the US Dollar.

So what will the market and trading partners eventually do in the face of this growing, yet perversely necessary debt?  Will they put up with this "free lunch" of massive deficit spending by the US?  How will they react to a devaluing dollar?  Those question are hard to answer.  We live in a very complex world, and there are so many moving parts, it is difficult to forecast how this debt will affect the world economy, or the US dollar.

But if we look at the past few years, we see a trend.  We see a growing currency war evident in the implementation of capital controls by many countries, central bank interest rate manipulations, trade restrictions, and a breakdown in agreements during G20 conferences.

Eventually, the cognitive dissonance that exists between business as usual and basic math will disappear.  More and more people will understand that when the economy's growth is vastly outpaced by the debt growth required to keep that economy sluggishly growing, that an endgame is unavoidable.  The math no longer makes sense, and the farce that constitutes our paper debt based fiat monetary system becomes understood by all.

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