United States of America

In the footsteps of the Roman Empire?

 

Japan-USA Revisited

 Part 2

 

daan joubert

 

 

In the second century of the Christian era, the empire of Rome comprehended the fairest part of the earth, and the most civilized portion of mankind. The frontiers of that extensive monarchy were guarded by ancient renown and disciplined valour. The gentle, but powerful, influence of laws and manners had gradually cemented the union of the provinces. Their peaceful inhabitants enjoyed or abused the advantages of wealth and luxury. The image of a free constitution was preserved with decent reverence.   [Gibbon: Fall and decline of the Roman Empire. Vol 1, Ch 1]

 

 

2.   The stage is being set

 

A momentous transition is taking place on the global stage. The scales of influence and power are tipping again, as they did to a lesser degree when the iron curtain came down and the US assumed a position of uncontested supremacy. Now the scales are rising on the side of China, and to a lesser extent India, while starting to descend on the side of the US and its close (trading) allies.

 

The above passage from Edward Gibbon would be seen by a vast majority of Americans as allegorically descriptive of the United States, even though to, perhaps, a minority the validity of the final sentence on the ‘decent reverence’ for the  constitution might by now appear rather tattered and worse for wear. (Unless, ‘. . . image of a free constitution . . .’ carries more than a whiff of satire, which would apply equally well today.)

 

However, the same paragraph describing Rome in the second century would be equally acceptable to the Roman citizens of the second and third centuries, at which time wider reality, again to quote Gibbon, differed substantially from life style and perceptions:

 

In their dress, their table, their houses, and their furniture, the favourites of fortune united every refinement of conveniency, of elegance, and of splendour, whatever could soothe their pride or gratify their sensuality. Such refinements, under the odious name of luxury, have been severely arraigned by the moralists of every age; and it might perhaps be more conducive to the virtue, as well as happiness of mankind, if all possessed the necessities, and none of the superfluities, of life.  [Gibbon: Fall and decline of the Roman Empire. Vol 1, Ch 2]

 

The upper class Romans had become addicted to the pursuit of pleasure and luxuries, while the plebs were in effect bribed by the State, with food, various hand-outs and the distraction of the circuses, into a contented state where the thought of revolt against the ruling class would not materialise.

 

To the dispassionate and objective observer, perhaps a modern day Gibbon, this latter quoted paragraph would be considered more true of the America of today than the first one, at the head of this section. Today, though, a revolt would happen without swords and bloodshed, at the voting booth.

 

It would seem that America is starting down a path similar to how Gibbon described Rome during its centuries of decline, even though, at that time, most Romans were still living high on the hog. The question, of course, is how far that path will be followed by the US in years to come.

 

The analogy with a Rome in decline can be carried one step further.

 

A symptom of the decline and fall of Rome, if not a contributing factor, was that the Roman Empire came to rely largely on mercenaries to man their Legions. It surely is a warning that an Empire is close to collapse once its citizens are no longer willing to make any personal contribution and sacrifice for the good of the Empire; when the pleasures and luxuries of their privileged state as Roman citizens weigh heavier than to answer a call to service by the State. “Why risk life and limb in fighting barbarians if the Empire has the money to pay others to go to war in our place”, seems to  have been the prevalent Roman attitude.

 

So far, the US has not relied on others to actively fight its wars, or at least not too much, since there are still many American men and women prepared to offer their services in defense of the home country. However, unlike as it was in the time of Rome, today there is no need for large standing armies to defend physical borders against barbarians from outside, or to put down revolts in the colonies. Today, strife between large powers is not so much about land or colonial possessions and more about less material factors such as global power and influence, international trade and the economic substance to ensure that power and influence can be retained.

 

So far, the US has been pre-eminent in its ability to wield power and influence, as it had done for many decades, largely because it has been the dominant player on the stage of global finance and economic power – today’s conflicts are no longer contested with the swords and javelins of the Roman Legions, but with dollars and exports and economic might. 2000 years ago Rome, employed mercenaries to fight its wars; today, the US has been reduced to asking foreigners to provide funds and material goods that Americans rely on to sustain their hedonistic household and national life styles. Without foreigners to manufacture the goods Americans want, combined with their willingness to bankroll the American spendthrift lifestyle, the American dream must become a nightmare.

 

With similar reliance on foreigners – and other similarities contained in the quotes from Gibbon – it can be strongly suggested that the US itself is now in economic decline, and more than likely to lose its position as the global superpower in years to come. Sure, this is not going to happen this year or next, but just as it took 7 to 8 years for the warning in 1999 about a trend in household finances that was bound to have serious adverse effects on the US economy to finally manifest itself in a series of shocks to the credit system, so too will the expected decline of the US Empire require many years to have full effect. It could even extend to a reduced ability of the US to wield the uncontested military power it currently enjoys, supported by record military budgets – while these can be afforded.

 

Ancient Rome fell to the barbarians who had realised their age-old nemesis and enemy had become vulnerable and that the time was right to bring her down. At the moment and for as long as the US still wears the cloak of a superpower, the ‘barbarians’ of today have wait and watch and bide their time while the US stumbles along the Roman path.

 

In due course, if current trends continue, as seems almost certain, the time will come when that cloak becomes threadbare and ragged; when the US, too, is deemed to have become so vulnerable that an attempt to sack it would stand a good chance of success. This time, though, the assault it will not be with spears or guns, or bombs or missiles, but with weapons from financial and economic arsenals – it will not be by invasion and pillage and the slitting of throats, the physical destruction of the enemy, but through the bankruptcy of the US in a global sense.

 

 

3. Key factors in the decline

 

The 1999 warning of a trend that would run into disaster if not changed, has now been realised. The trend did not change. That trend was not the only one with more than a smell of risk, but in the writing of that essay it was seen as defining the behaviour most likely to run into a wall – after all, household expenditure at 70% of GDP has become the corner stone of the US economy. When people either decide to stop making new credit or are compelled by circumstances to do so, firstly the economy suffers and secondly,  households become greater credit risks in a climate of rising interest rates.

 

When we discuss the reasons for the pessimism about the future of the US, we begin again with household debt. The decline in manufacturing over the years reduced its contribution to GDP, thus increasing the relative contribution of households. However, at the same time an increase in the activity of the financial sector off-set the decrease in manufacturing, so that the household contribution remained relatively stable. Now, in the wake of the whole credit mess, we are bound to see some decline in the shuffling of dollar notes, which would make consumer spending more critical to the US economy.

 

This time, though, household spending is not the only dark cloud streaming in from the horizon; some of these others also warrant mention. 

 

 

3a.  The tapped out household

 

At the end of Part 1, the reason why so many US households are in a financial bind was discussed. That reason, the lack of household purchasing power because increases in income lag behind real inflation , still exists. Until it is resolved, no long term solution to the crisis is possible. The situation is as simple as that, even if the possible solutions – increase household income and/or reduce prices of consumer goods – may not be palatable. Normally, adjustments can be made gradually, over a period of time. Today that luxury is not available; the crisis is too immediate.

 

The powers that be now have to weigh up a continuation and likely exacerbation of the problems they are trying to treat against the unpalatability of either or both the solutions and then decide which taste is the more bitter; more severe and longer lasting problems, or drastic solutions of a daring and innovative kind, but also with high risk. 

 

Figure 2 of Part 1,  up to date to October, 2007 and shown here again.

 

 

The chart shows there has been a marked slowdown since early in 2007 in the increase of spending relative to household income. Time will tell whether this is the start of a new trend or only a hiccup in the old  rising trend.

 

The problem for the US is that if the trend does reverse, US GDP will take a knock. Yet, if increased spending resumes, the 1999 warning is still active and the end result is likely to be a much worse melt down than what has happened so far. Yet restarting the rising trend is exactly what the Fed is pursuing with its dramatic lowering of interest rates and priming the economy with massive liquidity.

 

Success for the Fed will put a gloss on the economy for the near term, but has to result in an even greater disaster at a later time.

 

If spending relative to (still quite stagnant) incomes declines even further, which is what the author expects, perhaps even to where households use part of their income to start paying off their debt, the US economy will almost certainly take a nosedive deep into recession territory.

 

Perhaps even deeper.

 

The reasons for thinking so?

 

These are twofold. Firstly, from the statistics it is clear that when the US consumers could no longer use the house as an ATM, and when other forms of credit became less easy to obtain, American consumers turned to those convenient pieces of plastic that were marketed with such vim and vigour not too long ago; credit cards. In three years from February 2002 to February 2005 total revolving credit increased from $714.0 billion to $802.8 billion – an increase of $88.8 billion. Then in the next three years, to February 2008, the increase was $147.0 billion(65% greater increase), for a total of $949.8 billion.

 

Over the same two periods, consumer loans at banks increased first by $140 billion and then by $109 billion – a decline in the increase of $31 billion – which shows that it had become more difficult to borrow money from the banks. The shortfall on home budgets from bank loans was off-set by the use of credit cards, to an amount double the decline in bank loans; probably to compensate for reduced use of the house as an ATM.

 

When credit cards have been used to the limit, two significant things can be expected to happen: consumers will be compelled to tighten belts and spend less, while the default rate on the now useless plastic cards will rise steeply – the latter trend will start a new down leg in the credit saga.

 

Secondly, the household is at the bottom of quite a food chain; that whole food chain is going to move into deep trouble, with spill-over into other areas, because the tapped out household is compelled to cut spending, as noted above. When money was plentiful and the shopping centres and the restaurants were crowded and customers had to wait to get service in furniture stores and in motor showrooms – and with interest rates low and bankers aquiver from excitement as they watch the queues of people waiting to borrow money – it was not only houses and condominiums that were constructed at a frantic pace; new commercial developments of all kinds were shooting up all over the place, opening their doors to eager customers with lots of money in their pockets.

 

What will the owners of these shops and malls and restaurants do when the stream of customers dry up to a trickle? How many of them will drop the keys off at the bank, or the developer or whoever financed the development, saying, “Thanks, but no thanks.’

 

In other words, it is not only the home mortgage market that is sinking into a deep hole, but soon – when consumers’ credit cards run out – the commercial property market will start looking for a deep hole of its own.

 

The squeeze between a rock and a hard place, mentioned earlier, is going to get worse.

 

 

3b.  The tapped out Government

 

Enron has done the Federal Government the world of good through the example it had set by moving embarrassing items off-balance sheet; or off-budget, as is happening with war expenses in the case of the Bush administration. 

 

Enough has been written on the budget problems and the rising US real debt, now on its way to $10 trillion, to omit repetition of largely well known facts. The main point is that the Federal Government – be it Republican or Democratic – has very limited flexibility to throw money at the worsening GDP problem. Of course Government will try something –  it would cost too many votes if nothing is done. But the rhetoric to be unleashed on the American public, explaining how concerned the administration is and how much is being done to improve the situation, will far outweigh the amount of actual dollars to be spent in this cause.

 

Then, since tax revenues are bound to fall in months and years to come, with households battling for financial survival, corporations with low profits, and little or no capital gains to tax, Government will have two options: either reduce spending enough to reduce the budget deficit, including a scaling down of the dear entitlements, or, alternatively, it can increase the deficit. The relative bitterness of these unpalatable options are likely to be close enough to make a choice between them very difficult, yet a middle of the road solution is unlikely to be really viable for the longer term as neither half-hearted option will satisfy the affected parties.

 

The implications of a tapped out Government spread wide and far; as Government finds that it has no option but to decrease spending – increasing taxes is a no-no in the kind of environment in which the US finds itself and a higher rate of borrowing risk frightening off foreign investors – the effects will be felt by all Americans. At the low end of the income scale, many people will find that their Government handout has shrunk, either by edict or though more statistical legerdemain of the CPI variety. This is bound to have a negative effect on consumer spending, thereby exacerbating the problem.

 

At the upper end of the scale, people who have income and reserves enough not to have to rely on a Government subsidy of some kind, will discover that the infrastructure on which they rely for comfort and safety is deteriorating, because there are insufficient funds to ensure adequate maintenance. [Think roads – and bridges, in particular.]

 

Those that can afford it least will suffer the most, as will be evident when entitlements come to the chopping block. Not too long from today the Baby-boomers will queue up for their Social Security and when the ready cash run dry, the SS piggy bank will only contain US IOU’s, which will then be presented to the Government for payment.

 

Many people who are currently paying their share of the taxes, are soon due to find themselves in another queue hoping to get a return on all the contributions they have made to the pension system. If they do not receive as much as they were consistently told they would get, much embarrassing noise will ensue. Finally, the voting booth will be where their revolt will manifest itself, when voters turn up in droves to show their dissatisfaction with Government in the form of the ruling Administration. 

 

One could make a prediction that quite soon it is going to be real tough to get re-elected to public office in almost any capacity. Perhaps Bernanke’s helicopters could be used to gather support for the Administration in the same way Postumus obtained the loyalty of his troops.

 

At around this time, Postumus' coinage apparently underwent a sudden debasement. There is speculation that he needed to dramatically increase the number of coins minted in order to buy the loyalty of his troops. [Commentary on Gibbon; Fall and Decline of the Roma Empire – Book 2 Ch 11]

 

The increase in the number of coins, using inferior alloys, must have had the same effect – high inflation – that the current explosion in the M3 money supply (now over 20%) is bound to bring about.

 

In the next section is a discussion of the debasement of currency that would fit in equally well at this point.

 

 

3c.  The tapped out US of A

 

In 2004  the following appeared in an article at the Economic Policy Institute:

 

The United States is currently borrowing $665 billion annually from foreign lenders to finance the gap between payments to and receipts from the rest of the world, an amount equivalent to $5,500 per American household. This borrowing entails serious costs for the U.S. economy. However, these costs have been hidden for the past few years, predominantly by the historically low interest rates, which resulted from the Federal Reserve’s attempts to spur economic recovery after the 2001 recession and from a downturn in domestic investment. This happy scenario will not persist indefinitely, and when interest rates rise, the costs of U.S. borrowing will have serious economic consequences: [L. Josh Bivens]

 

Since then the annual amount that has to be funded by foreigners has climbed to more than $800 billion and no end is in sight for the rising trend – even if a decline in imports can be engineered, which would very difficult to do with a rising oil price and foreigners increasingly the only suppliers of US consumer items, the falling dollar will continue to boost the deficit. The falling dollar should boost exports, perhaps only in nominal terms though the higher export dollar prices, since US industrial capacity is still being scaled down, with loss of employment, and a large increase in export volume may not happen.

 

Keep in mind that the funding of the deficits by foreigners do not come without cost; for every dollar that is invested from outside the US a certain number of cents flow out on a regular basis to pay for the loan. At the end of 2005 the total US foreign debt was $13.6 trillion. The cost of this to the country is described thus:

 

Over the past several years, Americans and their government enjoyed one of the best deals in international finance: They borrowed trillions of dollars from abroad to buy flat-panel TVs, build homes and fight wars, but as those borrowings mounted, the nation's payments on its net foreign debt barely budged.

Now, however, the easy money is coming to an end. As interest rates rise, America's debt payments are starting to climb -- so much so that for the first time in at least 90 years, the U.S. is paying noticeably more to its foreign creditors than it receives from its investments abroad. The gap reached $2.5 billion in the second quarter of 2006. In effect, the U.S. made a quarterly debt payment of about $22 for each American household, a turnaround from the $31 in net investment income per household it received a year earlier.

 

The running cost of servicing the loans is not the only liability of being reliant on foreign funding. This from the Brookings Institute:

June 26, 2007 —

With the United States running a current account deficit at 6 percent of national income, foreign nationals have been accumulating U.S. assets at a spectacular rate. Taking into account recent stock market gains, foreigners now hold well over $14 trillion of U.S. assets, more than a 100 percent of U.S. gross domestic product. Foreigners, mainly foreign central banks and government investment funds, hold more than $2.5 trillion in U.S. Treasury securities alone. Incredibly, the United States absorbs roughly 70 percent of all net saving produced by the world's current account surplus countries, including China, Japan, Germany and the oil exporting countries. Borrowing on this scale by any large country, much less the world's pre-eminent economy is unprecedented in modern world history.

           

Many observers are asking whether U.S. indebtedness to foreigners might pose any subtle hidden threats to the U.S. economy or even to U.S. national security. With China alone holding $1.2 trillion in reserve assets and foreigners collectively holding more than twice that in U.S. Treasury securities, is there any risk that the United States might be subject to economic blackmail?

 

By 2007 foreigners owned more than $14 trillion of US assets. Fourteen trillion dollars!

 

How long before the US belong, lock stock and barrel, to China, Japan, Germany and the oil exporting countries?

 

Again, we are speaking not so much of the current already deplorable, if not critical, situation, but about what the future holds. 9 years ago a trend in household spending was evident and it could be predicted that unless the trend reversed, or at least leveled off, very serious problems would erupt in the US economy. Which they now are doing and will continue to do in a steadily worsening situation.

 

By how much will US foreign debt increase over the next 5 or 7 or 9 years, and what proportion of total US material assets then will belong to foreigners, unless the ruling trend is changed? The rate of annual increases in foreign debt has itself been increasing rapidly and only a brave economist would put any credible figure on what the debt will be 9 years from now – if a rising trend remains in place.

 

The odds that the US will end its reliance on foreign imports – primarily oil and a wide range of consumer goods – are very slim. The story of the decline in US manufacturing has been told often enough that there are ample sources to read up on and that trend is not going to reverse soon. US oil imports will remain high and with the possibility that more and more oil countries will price in euro’s to avoid the dollar’s near free-fall will make the effect on the trade deficit much worse. 

 

Finally, anyone who believes the US Federal budget will be balanced in the foreseeable future – with the economy in the dumps and households hanging on grimly to financial survival, and no more capital gains tax – is surely living in cloud cuckoo land.

 

This means that both deficits are in for the long haul and should remain in an up-trend that will  make it under ruling circumstances practically impossible to escape the fate of becoming a slave state – a state that in effect belongs to other states, therefore not too different from what colonies used to be.

 

 

3d. Hyperinflation

 

What can the US do to avoid that fate?

 

History has precedent in the case of the German Weimar Republic. The reparations that the Allies exacted from Germany after WWI were so onerous that the Germans decided the only way they could manage the payments – which, by some wondrous stroke they had managed to get denominated in marks – was to follow examples set by kings and emperors through the ages: debasement of the currency.

 

This they proceeded to do with typical German enthusiasm, and achieved great success. Too great a success.

 

Once the debasement was well under way and the war reparations became much easier to fund, they discovered that Frankenstein’s monster was a little kitten compared to the monster they had spawned. They found themselves on a treadmill with the printing of ever more money as the only way to avoid falling off.

 

 

Wikipedia’s entry on hyperinflation begins with:

 

The main cause of hyperinflation is a massive and rapid increase in the amount of money, which is not supported by growth in the output of goods and services. This results in an imbalance between the supply and demand for the money (including currency and bank deposits), accompanied by a complete loss of confidence in the money, similar to a bank run. Enactment of legal tender laws and price controls to prevent discounting the value of paper money relative to gold, silver, hard currency, or commodities, fails to force acceptance of a paper money which lacks intrinsic value. If the entity responsible for printing a currency promotes excessive money printing, with other factors contributing a reinforcing effect, hyperinflation usually continues. Often the body responsible for printing the currency cannot physically print paper currency faster than the rate at which it is devaluing, thus neutralising their attempts to stimulate the economy.^[2]

 

and is a good read, with a Google search offering much more on the process and effects of hyperinflation; not only in Weimar Germany, but also in many other countries, such as (also from Wikipedia):

 

  Germany in 1923 when the rate of inflation hit 3.25 × 10⁶ percent per month (prices double every two days).

 

The story of the mark  during 1923 reads as follows:

 

The mark soon falls to 17,000 to the dollar, it drops to 160,000 to the dollar by July, and unemployment combines with inflation to create social unrest; 1.5 million are unemployed, 4.5 million employed only part time, yet prices continue to rise, and by July 30 the mark has depreciated to 1 million to the dollar. The mark falls to 13 million to the dollar in September, to 130 million to the dollar by November 1, and to 4.2 billion to the dollar by the end of November. Many Germans have never accepted the legitimacy of the Weimar Republic, and 1,783 printing presses churn out bills. Prices rise so fast in the disastrous hyperinflation that workers are paid daily—and then several times a day. Middle-class savers and pensioners are wiped out, formerly affluent Germans dispose of their possessions in order to eat, German peasants refuse to part with their eggs, milk, butter, or potatoes except in exchange for articles of tangible value, and they fill their houses with pianos, sewing machines, Persian rugs, even Rembrandts (see 1924).

 

Other episodes of hyperinflation apart from Weimar Germany are:

 

  Greece during its occupation by Nazi Germany in 1941-1944, when the rate of inflation hit 8.55 × 10⁹ percent per month (prices double every 28 hours).

  Yugoslavia's rate of inflation hit 5 × 10¹⁵ percent inflation between 1 October 1993 and 24 January 1994 (prices double every 16 hours).

  The most severe known incident of inflation was in Hungary after the end of World War II, peaking at 4.19 × 10¹⁶ percent per month (prices double every 15 hours)

 

These figures look ridiculously high; one instinctively thinks something even remotely as bad as this can never ever happen in the US. However, the fact to remember, just as it applied to Weimar Germany, is that once on the treadmill it is near impossible to get off again; better not ever to even take the first tiny step on it. 

 

One wonders whether Bernanke has studied the Weimar history and similar events with the same dedication he has applied to the Great US Depression. The believes the Federal Reserve of the day failed to prevent the great Depression because they were too slow to add the necessary liquidity. He is putting his theory to the test at this moment; it will be very interesting to see whether he can achieve his objective of steering the economy into calm waters and away from the Niagara of hyperinflation.

 

The root of the matter is that without significant debasement of the dollar, the US will  never be able to escape the debt trap it has been digging for itself; a very deep trap if one includes the unfounded liabilities. The risk is that if successful,  many foreign holders of dollar assets may start a fire sale – an act that would achieve all the debasement of the US currency that Bernanke could wish for, and more.

 

The previously quoted Brookings article argues:

 

For example, were China to suddenly reallocate a large share of its predominantly dollar portfolio into Euros, the ensuing dollar decline would inflict a massive capital loss on the Central Bank of China. A 20 percent drop in the dollar against the Yuan would cost the Chinese Central Bank well over a hundred billion dollars. Fundamentally, when a debtor owes the bank a large enough amount, the debt becomes the bank's problem. China, whose reserves amount to 50 percent of its GDP, faces risks far to[o] great to ever seriously consider this option. Of course, over time, one can expect China to significantly diversify out of dollar assets, but the time frame will be one that markets can easily accommodate.

 

Makes sense on the surface, but would this reasoning still apply should Bernanke begin to use fleets of helicopters to sow the land with dollars note, as he had said – not entirely in jest, I believe? An obvious attempt to ruin the value of the dollar might be sufficient cause for foreign holders of US assets to reason that if they keep the investments their value will approach zero over time and that an immediate fire sale while the dollar still has some value would at least recoup some of the money.

 

 

The drivers of the decline in the US economy are not difficult to identify, even if many observers today still believe that the situation can be rectified; believe, with Bush, that the budget can be balanced in a few years time and so too for the trade deficit. This is not to say that such objectives are impossible to achieve, but IMHO the political will to take the hard, and painful for many, decisions needed to do so is sadly lacking. Perhaps totally absent would be the better way to express it.

 

As it was in 1999, with the rising household expenses, it is not so much the current state of the situation that one should explore, but where the trend will take the US in 5 or 7 or 9 years if the trend remains intact. Secondly, if the trend is to be changed, one has to consider two things: what brought the trend about and what has to be done to change it.

 

At the end of Part 1, answers to these two questions were provided for the case of the household credit situation. More elaborate treatment of the key drivers mentioned in this installment is not necessary – enough has been said to make it clear that the trends that are in place now are steering the US to a disaster; unless they are changed, which is not going to be easy and, even worse, it is unlikely that a proper attempt will be made.

 

 

4 Conclusion

 

In “The March of Folly” Barbara Tuchman presents the thesis that The Powers That Be, be they the King or elected Parliament, tend to set out on a path that is clearly going to end in some form of disaster. The choice of path is not made while unaware of what the destination is going to be; that would not be folly, only lack of foresight and knowledge.

No, the March of Folly dictates that TPTB willingly, even eagerly, sets out on a course of action that will bring calamity and then remain committed to that path come what may.

 

It was clear to the author in 1999 and even more so today, that there are trends in the US economy that cannot be sustained. Herb Stein framed the law that bears his name. It states: “If something cannot go on forever, it must stop.”  This was exactly the thesis of the 1999 essay that warned about the trend in household expenses. The law sounds so simple and pure common sense, yet many intelligent people get swept into a trend that basic common sense dictates cannot go on forever, while holding fast onto the belief that it won’t stop. Any rational person will admit that one cannot indefinitely spend more money than one earns. Fine, taking on more and more debt can sustain such a trend for some time; even many years; it is impossible beforehand to say when the trend will stop, but stop it will. Even if it takes a mortgage derivative debacle to do so.

 

Stein also said that nothing in particular has to be done to stop an unsustainable trend; it will do so at a suitable time with no intervention. The effect, whether good or bad – and mostly bad – tends to be worse if circumstances force an end to the trend than when the trend just tapered off of itself.

Enumerated here are some of the trends that will dictate the future of the US and of the global community as well – be it near term or longer term; the time frame is unknown. Suffice it to say that with official authority behind most if not all of these trends, it will require some compelling event or development to change their course; these will not merely peter out and stop of themselves. This fact also excludes to a great degree the probability that some purposeful action will be launched to end and reverse the trends before they reach their full destination, however mild or calamitous that turns out to be.

 

In final review, the reader can consider the pertinent trends to reach a personal decision on whether Stein’s Law will kick in sooner or later – and if later, what kind of damage to the economy and the financial system of the US wil result:

 

• Excessive spending by US households – this trend may have turned, based on data to October 2007. Consider the effects of the new trend of reduced spending by comparison to income, should this new trend be sustained
• The long term trend to larger trade deficits, irrespective of near term fluctuations
• The long term trend to larger budget deficits; not as per official announcement, but with due regard to off-budget items and other shenanigans
•  The escalating increase in the rate of US money supply growth, as shown in the chart below, and its effect on the dollar and on future inflation and interest rates:

 

 

 

Source: http://www.nowandfutures.com

 

Also think of ways and means to end – and perhaps reverse? – these trends before they start to cause irreparable harm and without thereby precipitating a major crisis.

 

In the final analysis, the pivot on which it all hinges has to do with a credit expansion – perhaps one of the greatest credit expansions in economic history. According to Ludwig von Mises, as quoted in more detail at the beginning of Part 5 of the “Japan 1990 – USA 2006” series,

 

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

 

From the discussion it is not clear whether ‘. . . voluntary abandonment of further credit expansion.’ , is still a viable option; this despite an early indication that households are tightening their belts. At the national and governmental levels, the ‘credit expansion’ is alive and well in the form of budget and trade deficits.

 

Therefore, unless these trends can be turned around without doing as much harm as one is trying to avoid, they have to result in what von Mises called the  ‘  . . final collapse of a boom brought about by credit expansion.‘. The ongoing mortgage mess, with the Bear Stearns implosion as main event so far, might have been the trigger that may result in a cascade of more and perhaps even greater problems to prove von Mises correct

 

Whichever way it turns out, interesting times lie ahead.

 

 

© 2008 daan joubert

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