The Real Story Behind the Great Recession: Debt

 

A Zimbabwean man carrying money to purchase something.  The annual rate of inflation in Zimbabwe is 100,000% 

Above all else, the level of debt is the biggest problem behind the economic malaise we find ourselves in.  The debt problems are everywhere—mortgages, government debt, credit cards, auto loans and etc.  The basic problem is that there’s way too much of it and much of it won’t be paid back owing mainly to less income for individuals, businesses and governments.  It’s normal to have a few people and businesses run into difficulties and default on their obligations in even the best economic conditions and the system can handle that, but the financial system can not handle the potential situations we have coming up on the horizon where significant numbers of  people, private and public entities default.  Government defaults generally result in paper money being basically worthless as governments try to print their way out of the problem in a desperate bid to save themselves.  The picture of the Zimbabwean man above shows the result of what can happen when they do this—hyperinflation. 

Printing money is what our federal reserve has been doing along with central banks around the world and there’s been a lot of talk here lately about how the crisis has been averted.  That only applies to the short-term crisis, the intermediate and long term crises have not been dealt with nor have they been communicated to most people.

There are now predictions that many governments, including the US,  will default on their debts.  With respect to governments, as long as tax revenues were buoyed by asset bubbles the politicians kept making promises and spending.  In the case of the federal government, the politicians have engaged in deficit spending to such an extent that it’s an open question whether it can keep the promises it made, but beyond that is the more serious question regarding whether or not the government will default on it’s debt obligations like an option ARM mortgagor. There are some who think that will occur with our government within the next 5-10 years just about the time when the bulk of baby boomers expect that they’re going to draw down on social security.  The first problem is the money isn’t there because it’s been borrowed to fund other government operations.  The second problem is there won’t be enough of it to pay everyone even if the money was to miraculously reappear. 

These risks are fully known by those who have access to better information than the rest of us do and there’s no question that they’ve positioned themselves for the unwinding of debt that is upcoming.   I think some of this positioning is evidenced by the global race to secure natural resources.  Natural resources are tangible things and if no one is accepting fiat currency in exchange for them, the only option is to control them outright.

Anyway, these two short clips represents one man’s view (Marc Faber) of the situation.  They don’t leave one with a warm and cozy feeling about where we may be headed. 

  • http://crisismaven.wordpress.com crisismaven

    Nice to find kindred spirits …
    When these “excess reserves” start flooding the economy there’ll be a paper crunch. After all, Zimbabwe was considerably smaller than the US.

  • Greg L

    Yep.

    At one point, it looked as if the Euro might replace the USD as the world’s reserve currency, but now that doesn’t look so certain with all the problems they’re having. At some point something will come along to replace it and if that happens, we might as well “stick a fork in it”, because we’re “done”. The only good thing is we won’t need wheelbarrows…we’ll all have plastic instead. That will make hyperinflation physically less burdensome :-)

Page 1 of 11