The 21st Century Economic Breakdown
This crisis is the most challenging and dangerous in US history.
Political leaders and the mainstream media have been blindsided by the country's sudden mood shift in the last few years. The reason is because they believe world history is linear. These people think the world only progresses. The facts indicate otherwise. History is cyclical. History is replete with grand empires like Rome, Spain, and Britain. It's also replete with dark ages, depressions, and wars.
Politicians have voted for bailouts of criminal banks run by Boomers, voted for hundreds of billions of dollars in pork projects for their corporate constituents, delegated their constitutional duty of declaring war to the executive branch, voted for the Patriot Act and creation of a Department of Homeland Security, which have stolen freedoms and liberties from the citizens, and have deferred the critical cuts that must be made to entitlement promises they've made to the American public in order to get elected.
These politicians have doubled the national debt of the United States to $12.4 trillion in less than eight years. It took 213 years to accumulate $6 trillion of debt ($5.6 trillion added since 1971) and only eight years to add another $6.4 trillion. These same politicians have approved current budgets that will add $1.5 trillion to $2 trillion per year to the national debt for the next 10 years. Progressives put forth the preposterous idea that piling on more debt will solve a problem created by too much debt. They've pressed the accelerator to the floor as we approach a turn on a mountain road.
The current millennial crisis that we're attempting to grasp was commenced by the combination of a housing collapse caused by loose Federal Reserve monetary policy, no regulation of financial institutions, and corrupt greedy bankers on Wall Street. The depth and breadth of this financial disaster is being exacerbated by government borrow and spend policies and the free-market globalism mantra of big business being sold to the American public. This fraudulent economy has been supported by a world awash in cheap oil. The American people have been scammed. Free-market globalism didn't benefit the middle class and the era of cheap oil is running out.
We've sold out America for cheap Chinese hair dryers, inexpensive Mexican apparel, economy packs of Fruit of the Loom from Indonesia, and yellow smiley face stickers for our kids. As reward for gutting the American economy by shipping jobs overseas, American CEOs have enriched themselves at a rate 500 times higher than the average worker's pay.
Wall Street bankers were paying close attention to how corporate CEOs were able to reap ungodly profits while socializing the costs. With a clear signal from Alan Greenspan that the Federal Reserve would save anyone on Wall Street who got in trouble, the gluttonous MBAs created exotic financial products and convinced the world they could spin gold from straw.
The CEOs of the five biggest investment banks (including Goldman Sachs' (GS) Hank Paulson) convinced the SEC to waive their 12-to-1 leverage ratio and leveraged their Wall Street gambling casinos at 40 to 1. This excessive leverage, combined with financial products designed to confuse and bamboozle investors, generated billions in profits for these banks and hundreds of millions in pay and bonuses for their Boomer leaders.
When the crooked house of cards collapsed under the weight of lies and fraud, these banks were essentially insolvent. At that point, Paulson, who was now Treasury Secretary, and Ben Bernanke decided to socialize their losses by having the US taxpayer pick up the tab. Middle class Americans lost 8 million jobs and Wall Street bankers used the taxpayer bailout to generate billions in fake profits while paying themselves hundreds of millions in pay again. The resentment of average Americans is boiling over and will play a main role in the unfolding crisis.
The anger and disillusionment of the population are seen as worrisome and disturbing by those who believe history is linear. The entrenched ruling elite should be apprehensive. During a crisis existing institutions are torn down as the social fabric of the country undergoes wrenching changes. Those in power are rightfully fearful of the masses they have screwed for decades. President Barack Obama, Bernanke, Timothy Geithner, and the majority of economists and TV pundits are convinced the crisis has passed and they have successfully maneuvered the country through the worst, avoiding a second Great Depression.
History suggests otherwise. We have yet to experience the nastiest part of the crisis. We can expect to encounter private and civic choices analogous to the cruelest ever confronted by ancestral generations. The recently submitted Obama budget, adjusted for reality, will add at least $12 trillion to the national debt in the next 10 years. That would bring the national debt to $24 trillion in 2019. At a modest interest rate of 5%, the country would be paying $1.2 trillion per year in interest. The more likely scenario would be a 10% interest rate, resulting in annual interest costs of $2.4 trillion. The entire spending of the Federal government was only $1.2 trillion in 1990.
Mr. Progressive, Paul Krugman, insists that worries about the debt are overblown. Despite the fact that our economy isn't capable of growing more than 2.5% over the long term, he sees no problem growing our national debt by 10% per year. Perhaps Nobel Prize-winning Krugman, who argues that doubling our debt will solve a crisis caused by too much debt, wants to become the Irving Fisher of his time. One week prior to the Stock Market Crash of 1929 Fisher famously pronounced:
Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon, if ever, a 50- or 60-point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months.
The truth is our lenders won't allow our national debt to reach $24 trillion by 2019. The US dollar has already lost more than 80% of its purchasing power since Nixon closed the gold window in 1971.
The amount of currency in circulation since that time has gone up by a factor of 16, to $800 billion. The result has been a stagnation of real wages for the middle class, while the ruling elite have seen their wealth soar to astronomical levels.
The correlation between printing more of something and its relative value is clear as day. Bernanke is attempting to print his way out of this financial crisis. He's playing a game of chicken with our foreign lenders. He wants to devalue the US dollar slowly to reduce the unbearable weight of US debt.
Foreign lenders from China, Japan, and the Middle East know what he's doing. They'll be the long-term losers in this scenario. At some point in the next few years they will balk at buying more US debt. A "Weimar Moment" will strike the United States like a sledgehammer. The veil of financial stability will be revealed to be a fallacy and the worldwide reserve currency will revert to its intrinsic value of zero. The chaos that would ensue as people's life savings are wiped out would test the mettle of our country's citizens, government, and military.
The dollar is likely to collapse just based on current spending and borrowing trends. The unsustainable entitlement promises made by politicians over decades would have guaranteed a dollar collapse by 2030 anyway. Not one politician has the courage to stand in front of the American people and tell them they won't receive the Social Security and Medicare benefits they were promised. Not one politician is even willing to discuss the fact that these promises can't be honored.
This train has been headed down the track since the 1960s, picking up speed, and no one is willing to apply the brakes. The Baby Boomers have sold their children and grandchildren into slavery. Their unwillingness to sacrifice entitlement benefits guarantees a vastly lower standard of living for their descendents. Their generation would rather crash the economic system than make any personal sacrifice for future generations. The $106.8 trillion of unfunded promises will not be paid because there will be nothing left to pay. The country is bankrupt today. By 2030, half of all tax revenue would be needed to fund these programs. The Boomers will be forced to accept much less than they expected. The delusion of getting something for nothing will be put to rest during this crisis.
The wild card within the current crisis is cheap, easily accessible petroleum. Progressives and those who only view the world in a linear way fail to recognize that easily accessible oil only came onto the scene 150 years ago and we have depleted the easiest to reach 50%.
The implication of these facts is beyond the comprehension of linear thinkers. They trust our ingenuity and brilliance to solve the problem. A new form of energy will magically appear on the scene and save our industrial world.
Brain power and human resourcefulness played only a small part in the economic boom of the last 150 years, produced by cheap oil. The industrial revolution began more like Jed Clampett shooting at some food and getting bubbling crude. The world benefited from a positive Black Swan event. In other words, we got lucky.
Now the luck is running out. There's a finite amount of petroleum on the planet. Most of the remaining supply is trapped beneath deep oceans, within tar sands, in shale rock, and in inhospitable countries. Cheap, sweet crude is running out. New oil discoveries peaked in 1964. Worldwide oil production peaked between 2005 and 2010.
As supply enters terminal decline and demand continues its relentless rise, prices will soar and the world will be transformed forever. This could even put a creak in America's military machine that consumes more than 150 million barrels of oil per year.
The deniers believe that technology will save the day. They don't step back and think that their technology couldn't function without cheap oil because the hardware and software are made in factories run by fossil fuel.
The amount of energy that exists on the planet is a closed-loop system. The sun's energy created fossil fuels. The population of the planet has converted 50% of these fossil fuels back into CO2 and other byproducts. This is the process of entropy. Entropy is the movement of energy from complex, higher states to simple, lower states. Energy can't be created or destroyed, only changed -- entropy dictates that energy flows in only one direction, from being concentrated in one place to becoming diffused or dispersed and spread out; from being ordered to being disordered.
After 150 years of profligate use of oil, we are within a few years of experiencing an unsolvable oil shortage that will affect transportation, industry, heating, plastics, fertilizers, pharmaceuticals, and all the myriad products essential to our contemporary lives. Our energy-devouring civilization has been accelerating entropy.
The combination of debt, dollar devaluation, delusion, and depletion will make this crisis the most challenging and dangerous in US history.
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