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Friday, May 7, 2010

On the Brink of a Financial Storm…

It is too much to hope that world leaders, especially in the United States, realize that Greece’s current predicament will not only spread to other parts of Europe, but the same circumstance will happen in the United States if the current economic policies remain the status quo. It is indeed possible for the United States to go bankrupt. I don’t enjoy writing attention getting “gloom and doom” columns, but I haven’t sharply criticized and warned about absurd economic policy for the past decade and a half to get attention. It is a harsh reality that people had better wake up and recognize.

First, one must ask how Greece found itself in the current situation. It’s no secret that Greece’s economic policies mirror the socialist Western European policies. Politicians are elected, and they promise the world to people…healthcare for everyone, generous retirement benefits and lavish salaries/retirement plans for public sector workers. Top that off with a strong pro-union environment, and we have the perfect recipe for disaster. There are no policies that encourage business to grow and expand, which would yield the production necessary to sustain robust economic growth. If that were the case, then people wouldn’t need the politicians to survive. There’s no better way to sew up votes than to have everyone work for the government and depend on government programs!

Years go by and the anti-growth, high tax policies have brought Greece to its knees. Rather than pursue growth policies, nations seem to think that borrowing money to pay for all of the promised entitlement programs is the way to go. Now, the problem is that Greece is out of money and cannot meet its financial obligations. The PRODUCING nations, such as Germany, are expected to help out. What does this say about the future of Europe and the Euro? Are producing nations going to be expected to bail out irresponsible nations? Are Spain, Italy and Iceland next in line? Moves of this nature will be devastating to the Euro, and inflation will rear its ugly head.

For those applauding the recent appreciation of the U.S. dollar, please don’t be so naïve. The short-term shelter seeking will not last. The dollar is still falling against REAL money – gold. The only thing that is happening now is that the Euro has a bleaker near-term outlook. It certainly doesn’t mean that the medicine that the United States will eventually have to swallow will taste any better.

The United States has been following Greece’s footsteps. Economic policies in the United States have been of a statist nature since the New Deal. Bailouts for irresponsible companies; quasi-public companies that encouraged and guaranteed reckless lending practices; heavy regulation that creates barriers to entry and impedes competition; the creation of new entitlement programs when the existing ones cannot be paid for; and a printing press that runs 24/7 are very anti-capitalist in nature. Greece’s debt as a percentage of GDP is projected to be 149 percent by 2013. The United States current debt to GDP is nearing 90 percent. Government spending over the last decade has increased more than 80 percent. Our very large budget deficit is currently 9.9 percent of GDP (compared to Greece’s 13.6 percent) and continues to grow. If the status quo is kept, debt as a percent of GDP will easily surpass 100 percent during President Obama’s term and will exceed 200 percent within the next 20 years.

There are some who make the argument that since the dollar is the world’s reserve currency, it is impossible for the United States to go bankrupt. Nothing could be further from the truth. The Federal Reserve could just continue to print money, and even if there are no buyers, monetization is always an option. However, what will the state of the economy be if the currency has no worth?! The only key here is that the United States has the back-door, less obvious path to bankruptcy as it gets to create hyperinflation.

The longer the world’s borrow and spend spree continues, the more severe the correction will be. It is comical that news reports state that Greece’s situation threatens the global financial recovery. There was no recovery. The only thing that has grown since the 2008 crash is GOVERNMENT. Stimulus plans that focus on politically connected industries in which money is borrowed to generate growth is not real growth. If you borrow money on your line of credit or credit card, is that money income to you? Has your net wealth increased? Of course not. Once government induced growth is backed out of the recent positive GDP numbers, it winds up negative.

Iceland is bankrupt and Spain, Italy and Portugal are not far behind. America is headed towards the same political paralysis. Regardless of which party is in power, government continues to grow. The ties between lobbyists and government strengthen, which creates impossible obstacles for new investors. The recent healthcare bill will destroy many small businesses, which means the larger, connected corporate competitors will not have any challenge. Statism is alive and well. As far as entitlement programs are concerned, no one will dare touch them. George W. Bush’s pathetic attempt to “reform” social security was over before it began because it’s political suicide.

There is going to come a time, which will be sooner than later, when investors investing in America are going to demand a higher return. Inevitable inflation will demand it. Then, the Federal Reserve will either be forced to raise interest rates or buy the bonds. The latter will create an inflationary environment that will make the 1970’s look mild. If the status quo is kept, the United States will feel the effects of the ugly truth within the next five years. The crash in 2008 was simply a preview of coming attractions, as the real financial storm has yet to strike.


Libertarian Advocate said...

Jordan: This is one of your finest pieces. KUDOS! I'm linking you on this.

Libertarian Advocate said...

Ooops sorry Michelle. The Kudos are yours! Bravo!

Michelle S said...

Thanks so much for the plug and for reading. I understand the confusion thinking it was Jordan's piece. It's been too long since I posted one of my rants! Thanks again.