FIVE CORE ECONOMIC FACTS
Scores of economic figures go screaming across our screens every day, many of them contradicting yesterday’s figures, and perhaps half of them based upon lies. On top of that, we have dozens of economic theorists arguing back and forth. In the end, it’s all too muddled for most of us to make out. We each have our guesses, but none of them are terribly certain.
So, this week I’d like to point out the central economic facts of the moment, five fundamental conditions that we should all be clear on.
Obviously I’m not a fan of any of this, but it I think it’s crucial that we see what really is. Later, we can consider what we’d like to be.
Fact #1: We have debt-burdened money.
Dollars are created in tandem with T-bills, and T-bills pay interest. So, creating a dollar always creates an obligation to pay interest beyond the dollar amount.
But where do those extra dollars to pay interest come from?
Well, from more newly created dollars of course – but dollars that have interest requirements of their own.
What this means is that unless more and more dollars are made all the time, all the debts that are spun can’t be covered. Such a system cannot resolve unless there are debt-free dollars that can cover the gaps. And presently there are none.
So, the dollar system can run effectively in one direction only. It can operate smoothly while creating ever-more currency, but if the system starts to contract, there will be a currency shortage. And that leads directly to trouble.
Fact #2: We have unpayable debt.
Official US government debt is now about $20 trillion, and forward promises are probably north of $200 trillion. This will never be repaid under any typical scenario. And other countries are worse.
Right now, the central banks are buying up all sorts of bad loans to keep things going, but eventually, this problem will resolve in one of two ways:
- Debasement, aka inflation. Print up enough currency units to drive a burger to $1,000, and all those loans can be paid back pretty easily. There would be disastrous effects, but the debts would be covered.
- The nations could simply say, “Tough luck, we’re not gonna pay you back. Have a nice day.” That, however, would create a lot of bad feelings, so a default needs an excuse. And for a major nation, about the only excuse strong enough is war.
There are a few exotic possibilities, such as central banks printing money to buy the national debts then forgiving them, but those are problematic as well.
So, when reality can no longer be evaded, the solutions look pretty grim.
Fact #3: Stock and bond prices are maintained by the central banks.
The Federal Reserve itself has bought many trillions of dollars of stocks and bonds since 2008. This is being done to keep the (critical) upper middle class happy and paying taxes.
Without central bank buying and other tricks like stock buy-backs, the various investment markets would have crashed deeply. Trillions of dollars pumped into a fixed-size pond created a lot of liquidity.
If this wild buying stopped, the markets would lose their perennial backstop, and millions of supremely reliable subjects would be screaming in the streets.