May 25, 2010
Doug McIntosh
© SteveQuayle.com
It was James Carvile, Bill Clinton's resident political advisor/hack who coined the phrase, "It's the economy stupid" way back when. Given the current global economic situation, it is indeed the economy. Buried underneath the headlines, the crisis can be summed up rather easily, at least in my opinion, as follows: debt ratios are out of whack. All debt ratios are out of whack. Further, they are out of whack all over the world and in all segments of the economy. This is a one sentence explanation of our current global economic crisis. I should add that criminal fraud is also a large part of it too. Nor, do I forget simple incompetence. Napoleon said, "Never attribute to malice what can explained by incompetence." Personally, I think we are dealing with both.
The ancient Greeks had a saying that the goal of life was to achieve the "golden mean." By this they meant the balance of all things and in all aspects of life and nature. In our modern economic sphere, I think the proper balance has been completely shattered. We are like a herd of deer which has stripped all the bark off the trees. All that is left is the die off. The reason we have done that is related to two things in my view. The first is the inherent lack of financial discipline in fiat paper money economies, versus precious metal standard economies; the second relates to the fractional reserve banking system. The fractional reserve banking system may be described a magical one. In it, the fairy GodBeing, called the Federal Reserve, simply waves a wand and POOF! money/credit is created. We are now at the point where everybody is trying to get into the act. We not only have banks loaning ten dollars for every one dollar they actually have on deposit, but we have vast amounts of credit being created in the global economic system from all kinds of non bank institutions. A detailed listing would require several essays, although Wall Street has created TRILLIONS in derivatives for instance.
As the global economy staggers from one crisis to another, it is wise to ask what is the carrying capacity of the global economy versus the amount of debt out there. The answer is no one knows. The reason no one knows is simple. NO one has any idea of how much debt there really is out there in the global economic system. It is said there are hundreds of billions, maybe even as much as a 1000 TRILLION, or a Quadrillion, out there in derivatives, but no one really has any true idea. The reason nobody knows is there has been virtually no regulation of them. The result has been a disaster.
What we do know in terms of global debt, at least in the official government figures is bad enough. At this point, government debt is equal to the task of killing our economies. The rest of the massive corporate, consumer and derivative debt is simply icing on the corpse so to speak. After all, once you are dead, you are dead.
The kind of ratios I am talking about include official government yearly deficit to GDP, gross domestic product ratios, as well as the percentage of total government debt to GDP. Greece has been much in the news lately concerning its economic crisis, the popular reaction to that crisis and the European Union's reaction, or non reaction, to that crisis. The EU Constitution requires a government debt to GDP ratio of 60%. In other words, the total of all government debt must equal less than 60% of the total economy expressed in GDP terms. Greece flunks the 60% test by a wide margin. The Greek total debt to GDP ratio is expected to be 120% in 2010 The Greek yearly deficit to GDP ratio is also bad. The EU Constitution requires a 3% ratio on this one. In 2009 Greece ran a 12% ratio; in 2010 it is trying to cut that to a 9% ratio. The plan is to cut it to 3% over the next several years or so, assuming Greece can get the loans it needs to survive till then. The EU battle has been whether to do a direct EU bailout, or bring the IMF, the International Monetary Fund, into the loan pool. The issue is still in doubt, although the EU press releases would lead one to think all is well. The bond vigilantes hold a different view.
Greece is not the only EU member having trouble with its ratios. The so called PIGS, Portugal, Italy, Greece and Spain, along with the United Kingdom and much of Eastern Europe are having ratio issues as well. The EU will either deal with it, or it will not. If it does not, then the EU will simply break apart into a two tier system, with Germany at the top and the PIGS on the bottom. One thing is for sure, Germany is not going to bail out Greece.
It is not wise to think this ratio issue doesn't apply to the United States of America either. Although you would never know it from listening to the domestic US press, both ratios are in crisis mode. The United States total GDP is about 14 Trillion dollars. The current US Federal Government debt is closing in on 13 Trillion dollars. It is 12 Trillion, 750 Billion and change as I write this. Using the EU 60% yardstick, we would get a total of 8.4 Trillion for total US debt, instead of the nearly 13 Trillion, and rising, which we have now. If we apply the 3% federal deficit to GDP rule, we get a federal deficit that is 420 Billion. Obama is likely to run 1.5 Trillion yearly deficits, roughly a 10% ratio, for his entire term. Not only is the USA headed the wrong way, our foot is on the gas pedal. This is why the bond vigilantes are not amused at further US Treasury debt auctions.
The issue of whether the United States will default on its debt requires another essay. I will say this though, the kinds of issues and popular responses happening in Greece right now are headed to the United States over the next few months and years. It is said that Greece is the birthplace of democracy. Let us hope that future generations won't say that Greece was the birthplace of the debt defaults which gutted modern civilization.
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