Please reflect on the following facts:
- US GDP is about $16 trillion dollars.
- The total assets of all US residents and corporations are about $200 trillion.
- Unfunded Medicare liability is about $27 trillion.
- Unfunded Social Security liability is about $20 trillion (see page 25)
- US Federal Debt is about $16 trillion dollars
- The US budget deficit is bout $1 trillion per year
- Interest payments on the debt are $360 billion per year
- US Military spending is around $685 billion per year
- The Federal Reserve Discount Rate is near 0%
- The economy is growing at about the same rate as the population (i.e. net zero growth)
- The Trade Deficit is running about $40 billion per month
- The Actual Rate of Inflation is around 10%
- Real Unemployment is around 22%
- Workforce participation is down to 63%
- The US trails 25 nations in Science and Math rankings
Does the above look like data that portends a positive future? Or does it look like data that predicts disaster? Let’s look at a few things that can be derived from the above:
- It takes around 2.25% of our GDP just to pay the interest on the debt;
- It takes about 4.3% of our GDP to pay for military spending;
- Social Security and Medicare unfunded debts are 3x our GDP and 25% of the total assets of citizens and businesses;
- Even nominal inflation (around 2%) is greater than the interest rate paid on savings (less than .5%);
- Less than 2/3 of the adult population is working, meaning that the remaining 1/3 must be supported by them or live off their savings/investments;
- There have been no realistic plans submitted by Republicans or Democrats to address the deficit;
- The trade deficit means that their is a continual flow of capital out of out the US making it easier for our trading partners to grow their economy;
- Our students are falling seriously behind in important skills;
I can only see disaster coming from this. We are in an unsustainable situation. We cannot continue with this. A collapse of the monetary system is inevitable unless massive changes in spending occur. Tax revenues cannot solve the problem; just to cover the annual budget deficit, an additional 6.5% of GDP would need to be collected. Note that this is from gross income, not net income. In other words, 6.5% from your paycheck without any deductions and 6.5% from the gross receipts of every business. Business would have to pass this cost on to the consumer, meaning that the entire amount really must come from the public. Since personal income is about $12 trillion, that means additional taxes or spending equalling at least 8%. This is over and above current taxation levels. This kind of tax increase would destroy the economy. Remember, this money is already being spent, so collecting the taxes would reduce overall public spending by over a trillion dollars, causing GDP to drop by at least 6%. In other words, a massive recession. And these taxes would have to be permanent. And would have to rise as expenditures on Social Security and Medicare rise.
If taxes cannot solve the problem, then spending cuts are necessary. One trillion dollars in spending cuts. Entire programs will have to be cut, significant reductions in all government programs, including the so-called ‘entitlement’ programs. I don’t see this as politically possible given the current Congress and President. The public does not appear to be inclined to massively cut Social Security or Medicare. (Note well that massive reductions like this would cause, at least in the short term, a similar economic dislocation, since the money being spent now is being created out of thin air by the Federal Reserve [via Quantitative Easing].) Long term, significant cuts would be positive, but the economic pain in the near term would be so great that political pressure to not make such cuts would be overwhelming, and the kinds of cuts necessary could never be implemented. What options are left? There are two available: inflation and default/repudiation.
One way to ‘solve’ the problem of impossible deficits and debt is to inflate it away. Effectively, by causing significant inflation in prices and wages, the existing debt becomes a much smaller part of GDP. If inflation is at 10% (and wages keep up with prices), then after 7 years, GDP would be around $32 trillion but outstanding debt would still be $16 trillion. In other words, only half of what it was before in real terms. Of course, this also wipes out savings and investment, impoverishing the populace, but it does ‘solve’ the problem of paying off the debt. Inflation at 20% means that the effective debt halves every 3.5 years. In ten years, the debt to GDP ratio would go from 100% to 12.5%.
The other way to ‘solve’ the problem is to simply default on the debt or repudiate it. In other words, simply stop paying interest and principal on the debt (default) for some period of time or simply state that such payments will never be made (repudiation). In both cases, the holders of debt are left holding the bag. Debt holders include foreign governments, foreign and domestic banks, foreign and US citizens and the Federal Reserve System. Either of these two options would push the global economy over a cliff. Banks would instantly become insolvent, central banks would be insolvent, and governments would see their reserves disappear overnight.
Does anyone think that our creditors will really sit still for either of these options? I sure don’t! If either of these two options looked imminent, dollar-based global trade would stop, global foreign exchange would stop, and our trading partners would demand gold or other tangible goods for trade. Import prices would rise dramatically. Exports prices would drop dramatically. The net outflow of capital from the US would accelerate, leaving less capital for US business. The US government would no longer be able to borrow and would be in default almost immediately unless there was an immediate, massive expansion of the money supply (i.e. printing money). But this would lead to hyper-inflation and only exacerbate the problem.
So, what’s the solution? How do we get out of this? The answer, unfortunately, is that I do not foresee any way to do so; there is no way to solve this problem at this point that does not result in economic chaos and massive political unrest. History shows us what will happen. Rome suffered a collapse of fiat currency. China suffered a collapse of fiat currency. Every fiat currency eventually collapses. Modern central bankers and finance ministers are not so much smarter than everyone in history that they can make it work. It can not. Eventually, runaway inflation destroys the economy or the government defaults on the debt, creating a slightly different form of economic disaster.
When the collapse comes, the government will resort to physical force to try to keep order. It will seize control of agricultural production in order to try to feed the populace, but history shows this will fail and given that most Americans are city dwellers who have no skills in growing food even if they had the land, supplying food to the cities will be a priority for the government. To keep civil unrest under control, a massive expansion of police forces and the military will be deployed domestically. Goods and services will become more and more scarce and will only be available for barter or hard currency (e.g. gold or silver). As things get worse, civil rights will be suspended and a totalitarian state will evolve. If the military supports the President, he will become, in effect, a dictator. The Constitution will not even be given lip service.
The only thing you can do is prepare. What you do right now will be far more important that what you do when the inevitable comes to pass because by then it will be too late. Once the government admits to itself that this is coming, they will take preparatory steps that will make it much harder for you to do the things you need to do. We don’t know when this will happen or how long the governments of the world can string this along. It could be months, or it could be decades. I think it will be less than 20 years.
Here are some things to think about:
- Learn a skill that will be useful after the collapse. Things that will be important are agriculture-related, as well as carpentry, mechanical and plumbing skills. To survive, you will need to be able to trade your work for goods (especially food) and services.
- Plant a garden and learn how to care for it. You might not keep the garden you plant after a collapse, but learning how to grow some food is key.
- Acquire a firearm for each family member and learn how to use them. Stockpile a reasonable amount of ammunition. Do not create a massive armory; you are not arming yourself for war but for hunting and self-defense. Your family selection of firearms should include a pistol, a rifle, and a shotgun. It might not be a bad idea to acquire a crossbow or other similar weapon.
- Cash out your IRA and/or 401k, pay the penalty (10%) and the taxes. Create an emergency fund for short-term issues and use the remainder to purchase gold or silver coins. I prefer silver since it’s about $35 per coin and easier to use for small exchanges than gold. You should not try to save or invest for the long term since inflation will destroy your dollar-denominated ‘savings’ even if the collapse is decades away.
- Purchase some basic equipment so you can survive if you lose your home or have to migrate for work or food. A decent tent, sleeping bags, flint and steel, hand-cranked light, hand-cranked radio, hand-cranked flashlight, tool kit, and other basic gear. Ensure you have appropriate clothing, including boots and rain gear.
- Keep a rotating stock of emergency food supplies. 30 days of food is a good idea. Until it becomes essential, simply use it before it goes out of date and replace it with new.
- Ensure you have good paper maps. Your GPS or mobile phone or computer are not going to be reliable, especially if you are displaced and living in a tent.
Each person will need to make the plan that seems best to them. There are so many possible outcomes (including a complete breakdown of society, civil war or global war) that it’s impossible to account for every eventuality. Do not create a massive stockpile of food, guns, or supplies; you want just enough to tide you through the initial chaos so you can develop a plan based on events as they occur. If you have to move, you won’t be able to take much with you anyway. And the more you have, especially if people know about it, the more likely they are to try to take it from you whether individually, as a group, or with the government’s help.
I know this might sound like a paranoid delusion, but as a student of history, I do not know of a single precedent where a society recovered from the abuse of a fiat currency, monetization of debt, or a repudiation of their obligations. Recovery has never happened. Unless you are naïve, you will listen to the wisdom of George Santayana who said, “Those who cannot learn from history are doomed to repeat it.” Our political class and the masses who demand uncontrolled government spending have refused to learn from history. That tells me that we are doomed.