Great Depression Online Archive Issue:

Salting the Economy with Debt

Great Depression Online
Long Beach, CA
October 20, 2009

Inside This Issue You Will Discover…

*** A New Record
*** Diminishing Confidence in the Dollar
*** Salting the Economy with Debt
*** And More

A New Record

Last Friday it became official: The federal budget deficit for the 2009 fiscal year came in at $1.42 trillion…more than three times the previous record which was set last year. 

Total government spending for the year was $3.52 trillion.  Thus $2.10 trillion was comprised of tax revenue and $1.42 – more than 40 percent – was borrowed from the future. 

We’re in a depression, you know, and everyone except the government is tightening their belt, paying down debt, living within their means, and saving money.  The government, of course, is doing the exact opposite.  For they have the ridiculous belief that spending money they don’t have will somehow, someway, make the world a better place.

~~~~~~Conquer the Crash~~~~~~

Mark Hulbert's Sept. 11, 2009, column for MarketWatch.com says, Robert Prechter “came the closest … to forecasting what was about to take place.”  One thing the noted financial columnist left out was that many of Prechter’s forecasts still lie in the future.  The long-awaited second edition of Prechter’s bestseller, Conquer the Crash, is finally here!  Prudent investors should read his prescient insights, what he believes is still ahead and what you can do to protect your wealth today.

Conquer the Crash, second edition

~~~~~~~~~~~~~~~~~~~~~~~~~

Here’s what we mean… 

“For 2009,” reported AP, “the government collected $2.10 trillion in revenues, a 16.6 percent drop from 2008.  The plunge reflected declining income tax collections as millions of Americans lost their jobs or saw their wages cut.  Corporate taxes also plummeted as the recession squeezed companies’ profit margins.

“Government spending last year jumped to $3.52 trillion, up 18.2 percent over 2008. The $700 billion financial bailout fund and increased spending and tax relief from the $787 billion economic stimulus program that Obama pushed through Congress in February drove the increase.”

So, as you can see, as government revenues dropped they didn’t spend less; they spent more.

Diminishing Confidence in the Dollar

Also on Friday, which was one day after the dollar hit a 14-month low against the euro and the dollar index, Treasury Secretary Timothy Geithner said something astonishing…

“The United States must live within its means once its economy recovers if it is to preserve global confidence in the U.S. dollar’s [reserve currency] status.

“Future deficits are too high, and the president is committed to working with Congress to bring them down to a sustainable level as the economy recovers.”

Regrettable, Geithner didn’t say just what it was that the United States was doing to damage global confidence in the U.S. dollar.  So here we’ll elaborate for him…

There are only two ways for the government to fund its deficits – by borrowing money from lenders or by borrowing money from the Federal Reserve.  The first way is honest, though not always desirable.  The second way is deceptive.  The first way involves an open capital market transaction.  The second way involves printing money up out of thin air.

Where does the Federal Reserve get the money to lend to the U.S. Government?

The answer, sadly, is so unconscionable it’ll make a mob boss blush and an honest man choke on his morning coffee …  It just makes a notation in its ledger and – out of thin air – magically has the money to buy Treasuries.

This, in addition to the record deficit, we imagine, is what’s diminishing global confidence in the U.S. dollar.

Salting the Economy with Debt

Of tragic paradox is that the loose fiscal and monetary policies supporting the economy are those that are ultimately destroying it.  

For example, in the arid southwest vast aqueducts convey water hundreds of miles to irrigate crops and make the desert bloom.  But as surface water’s conveyed, evaporation occurs, and natural salts in the water become more and more concentrated.  Then, as the imported water is applied for irrigation, the salts collect in the soil.

After decades of this, the salt in the soil has built up so that it strangles the roots of the plants.  To combat this, over-watering is required because the irrigation water – while salty – is fresher than the salt encrusted soil. 

By applying excess irrigation water, the soil around the plants is temporarily freshened up so that crops can grow.  Yet, at the same time, this over-watering accelerates the mass quantity of salt in the soil.

In this grand contradiction, the freshness of the excess water that’s keeping the farmland arable is the source of the salt that’s killing it.

So, too, goes the U.S. economy.  After decades of applying excess credit and debt to leapfrog over every economic pitfall, residual debt has now collected into a pitfall the size of the Grand Canyon…a budget deficit of $1.42 trillion and a National Debt over $11.9 trillion.

Simple wisdom says that when you’re in a hole, the first thing you should do is stop digging.  But after years of propping up the economy with ever expanding deficits, to do so would bring an abrupt economic collapse. 

In this grand folly, elaborately constructed by the work of men, the fresh flood of excess credit based liquidity that’s keeping the economy alive is the source of the debt that’s killing it.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  In every disaster, only a very few people prepare themselves beforehand.  Think about investor enthusiasm in 2005-2008, and you’ll realize it’s true.  Even fewer people will be ready for the soon-approaching, next leg down of the unfolding depression.  Prechter warns that the doors to financial safety are closing all over the world.  Prudent people need to act while they still can.

We couldn't agree more.

 

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