The Coming Financial Crisis – by Vasko Kohlmayer


uncle-sam-broke

The Associated Press noted last week that the federal deficit reached a record $1.42 trillion for the fiscal year that ended September 30. Up until now, most of the mainstream media have either ignored the exploding deficits or declared them a good thing, since they were supposed to lift us out of the recession. But now that the full figures have come in even some Obama-friendly media stalwarts are struck by their enormity.

This awakening is heartening. The AP report does a good job of putting the deficit number against some other figures to give a sense of scale. The government’s shortfall last year, AP notes, is larger than the whole economy of India and more than the combined deficits during this country’s first two hundred years. It is, in fact, almost as large as the yearly economic output of Canada. AP quoted Kenneth Rogoff, former chief economist for the International Monetary Fund, who pointed out that “The rudderless U.S. fiscal policy is the biggest long-term risk to the U.S. economy.”

Rogoff only states the obvious. The gravest threat to this country’s economic well-being is the policies of this government. A Harvard professor and a Keynesian through and through, Rogoff is no right-wing conservative. But after surveying the grim economic picture, even liberals must recognize that the reckless spending of the Obama administration is taking us toward fiscal Armageddon.

An encouraging sign though it may be, the AP report leaves much to be desired. It asserts, for example, that the $1.42 trillion deficit “includes the cost of the government’s financial sector bailout and the economic stimulus program passed in February.” This is flat out false. Less than $200 billion was spent from the stimulus authorization in fiscal 2009. If the stimulus allotment had been tapped in full, the deficit would have been close to $2 trillion. Needless to say, most of the remainder will be spent in the current fiscal cycle, which will push up the 2010 deficit figure accordingly.

Further, despite its newfound concern about Washington’s overspending, AP exhibits striking fiscal naïveté when it maintains that the huge deficit could itself “be the seeds of another economic crisis.” Here is a newsflash for AP: The $1.42 trillion deficit is a crisis. There is simply no other way to describe our government’s unconscionable fiscal profligacy.

So bad things have become that, when asked about it, Senator Judd Gregg told CNN that “we’re basically on the path to a banana-republic-type of financial situation in this country.” Disturbing as it is to admit, Gregg is largely right. Saddled with more than $65 trillion in obligations, there is simply no way our government can make good on its debts.

The only reason things have not yet fallen apart is the dollar’s status as the global reserve currency. But this too is coming to an end. In recent months we have seen holders of our national debt grow increasingly alarmed about the integrity of their investment, with many openly voicing their desire to decouple themselves from the dollar regime. Their problem is that they have not yet figured out an alternative, so they have to stick with the dollar for the time being. But once they figure it out, the floor will fall out from under the once-mighty greenback and all fiscal hell will break loose.

In another sign of impending trouble, Sheila Bair – the nation’s top financial regulator – has testified before Congress that the Federal Deposit Insurance Corporation (FDIC) is running a shortfall. According to Bair, the fund – which is designed to protect consumer bank deposits – will have a negative balance at least through 2012. The reason for this is the mounting number of bank failures. As of Friday last week the tally for this year was 106 banks. This is most in a single year since the end of the savings-and-loan crisis in the 1980s. There are many more bank failures expected in the months ahead, with more than 400 banks currently flagged as being at risk.

This should be a warning to those who think that their bank accounts are safe, because they are “insured” by the government through the FDIC. This is a false assurance. Mired in debts it cannot pay, the U.S. government will be in no position to bail out anyone should another massive wave of bank failures take place.

Operating under permanent structural deficits, our government has no stash of real dollars to draw upon. Because of this, it can only replenish the sinking FDIC fund in one of two ways: It can either borrow more or it can simply print new money. Since there is every indication that the era of low bond yields is coming to an end, the money the FDIC will dish out during the next crisis will likely be of the printed sort. It will be inflationary diluted money whose value will be less than it was at the time when those “insured” deposits were made. In the last six months alone the dollar lost 10 percent of its value. Two hundred thousand fifty dollars of, let’s say, 2002 will be worth appreciably less in 2012. If things continue this way and if the government is forced to pump up freshly-printed billions into the FDIC, most depositors – especially those who put their money in the bank some time ago – will walk away with only a fraction of their original value.

The idea that a government that is itself in need of a bail out can come to anyone’s rescue is becoming increasingly untenable. Even the administration’s once-loyal supporters in the mainstream media no longer believe it.

  • Jon

    So, how can a financial collapse affect our military forces deployed overseas? What scenarios could occur with them getting trapped or bogged down with no way home? Or could their paychecks be stopped or their supplies cut off?

  • Fong

    It would not be a sudden systems failure. It would be a gradual depletion of stored supplies and incoming personnel to the point we would have to withdraw. The disaster could come if we were unable to properly cover the retreat. There would be the possibility of a Bataan type of situation happening to the rear guard. Overall we would see the same decline of our Armed Forces that the UK experienced as the British Empire declined except at quicker rate. The British Army of the Rhine became the best trained and worst equipped force in NATO. Modern battlefield technology is very expensive and our military relies heavily on it to fight many times outnumbered. Once the technology edge wastes away our military becomes much more vulnerable on the battlefield.

  • USMCSniper

    Alan Greenspan weote this before he sold his soul to the FED

    Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.

    Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited.

    The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which-through a complex series of steps-the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets.

    The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

    In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

    This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the “hidden” confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

  • Jon

    I think you are right Fong.

    So, if the Leftists in America were worried about the military blocking their path to Marxism, and if they were able to successfully place a Marxist in the Oval Office…

    … how might they go about neutralizing the United States military?

    … and isn't Afghanistan a very convenient place to be right now?

  • rtk_51

    The US is probably going to be in a major depression by this time next year, and like the Great Depression the coming one will be ended by a major war, the only problem is that this time the enemy will hit us on the American mainland and the left will try and surrender.

  • 1uncle

    How can people think that some future generation(congress) will stop passing the debt on to the next generation( congress)? Why would any next congress feel any different than the current and past congresses? Unless states(citizens) pass amendments to the constitution controlling congressional spending, the debt will pass on until the dollar is so worthless that it will used in furnaces to create heart

  • LindaRivera

    Jon

    We have absolutely NO money whatsoever to fight ANY wars. America is bankrupt. But instead of dealing with the alarming crisis in a responsible, sane manner, the administration has gone on the wildest and biggest spending spree the world has ever known. It is very frightening.

  • Fong

    Nothing eats at the morale of a military more than a long and protracted war that appears to have no end in sight without any sign of victory or there is a belief that victory is not even an objective of the national leadership. The financial drawdown of our military actually began under Bush #1 almost right after Desert Storm ended. The US Navy has gradually decreased from the Reagan 600 ship navy to now less than 300. There have been similiar severe cutbacks to our ground and air forces. It amazes me that nobody questioned why we had to call up National Guard and reserve units to conduct the campaigns in Iraq and Afghanistan.

    The regime in the White House is committed to implementing a Socialist system of expensive domestic programs regardless to any danger it poses to national security or to the future viability of the American system of government. There are those who suspect the aim of the regime is to bring down the Constitutional Republic by sheer weight of financial debt. It was disgusting to see on TV our Sec. of State almost on her hands and knees over in Beijing begging an enemy of the United States to please buy more of our debt.

  • Jon

    Well said.

    The only thing that can interfere with the plans of the Marxists now is if there were to be a military coup staged by loyalists to the Constitution. The Marxists have almost certainly taken the military into account and made plans for it.

    I do not believe the US military could be counted on by the Marxists. They are too much a part of the public fabric and not conditioned to viewing the people with the sort of detached hostility that politicians are. Therefore, they must be dealt with carefully.

    On the other hand, cultural Marxism is affecting the military as much as anyone. Something to watch and study.