Friday, December 07, 2012

Why the world is doomed Part Two

Economy. The economy of the world is inexorably tied to credit. That isn't necessarily bad. Borrowing money to purchase something too expensive to afford otherwise is a good thing, providing you are able to pay for it in a reasonable time. The obvious example, borrowing money to pay for a house. In twenty, or thirty years, you have the house, the Bank has made some money to pay the investors and those who saved some money and expected to be paid interest for that savings.

The obvious catch to credit is the ability to pay it back before the end of life of the purchase. A car for example. A good car can reasonably be expected to last for 100,000 miles barring an accident or damage to the car with minor repairs. Minor being defined as a few small parts or wearable items like tires. Major being defined as an entire engine. So the car, if paid off in five years, would still be drivable assuming 10,000 miles per year at the end of the credit term.

At some point however, credit becomes a problem. For houses, that point is where the term is so long you'll never pay it off. As an example, before the housing collapse, the lenders were writing terms of sixty years. There is no way you can reasonably expect to live long enough to pay the house off. So you have little or no hope of ever getting out of debt. The interest payments are triple what the house is worth, and you aren't even paying anything but a token amount on the principal for the first half of the loan, that's thirty years for the sixty year loan.

The modern economy calls for money to be in motion. The consumer buys, so the producer can produce, and employ people. The producer buys materials to make the product, which creates more jobs, which also means more buyers of products and services. In other words, you buy a TV set, the store has to have someone employed to sell it to you, and to restock another TV set. A trucker has to carry the TV to the store, a warehouse worker has to load it on the truck. You see the pattern right? A dozen jobs just to sell you your TV set. Granted, those dozen people may spend only a few seconds on your TV, but you are but one of thousands doing much the same thing.

All of those workers are buying things too. Thus money keeps circulating like blood in your body. The recent collapse of Hostess is a good example. Not only are the 18,500 company jobs affected. But thousands more around the factory are affected too. Diners that catered to the employees of the bakery will be closed due to lack of business. Nobody is working there, nobody is going to be going to lunch nearby.

This slowing is like a blood clot in your leg. The circulation slows, and stops. The economy is slowing, and will stop unless a way can be found to increase the circulation of the money. That means more jobs, more people working, and more money circulating.

For the last several generations. We have been operating our nation on credit. We borrow money to operate, that is to say we sell T-Bills, or Bonds to get money. Those bonds are for a set term, five, ten, even twenty years. People who buy them obviously expect to be paid back, with interest, at the end of the term. Like buying your house, this is on its face, not a bad thing. But when you are borrowing money like that constantly, you end up in  a position where you can never get out of debt. Right now, our national debt is over sixteen trillion dollars, and climbing.

When an individual is living on credit, eventually the bank realizes the problem, and won't lend you any more money. The same thing happens to corporations, and the same thing happens to Governments. When an individual or company runs out of money, and can't get more credit, they go bankrupt. When a government does it, they tend to collapse, and in a rather spectacular manner.

There are a finite number of rich people to buy those T-Bills. Even if those finite numbers of rich took all their money, they could not buy all the T-Bills offered to fund the Government. To that end, the Federal Reserve has been buying the Treasury Bonds. Now even the Federal Reserve does not have enough money to do that. So they've been borrowing money from the Treasury, to buy bonds from the Treasury, and this way fund the Government. In other words, they are printing the money, creating it out of thin air. We call this technique Quantitative Easing also known as QE.

Eventually, the Treasury will have to pay off on those T-Bills, and in the case of QE that is so the Federal Reserve can pay back the money they borrowed from the Treasury to balance the books. The United States Government can't pay back $16 trillion with a annual budget of roughly $3 trillion. There simply put, just isn't enough money. The Gross Domestic Product, which means every single dollar made by every individual, business, and government in 2011 was $15 Trillion. So even if we taxed every single person, place, or thing at 100% we could not pay off our debt.

So we can't pay the money back. It is impossible. So what will happen in the future? Eventually the Government will have to raise interest rates to try and make some of the money up, in other words, inflate their way out of the disaster. That will lead to more slowing of the economy, which will lead to more Quantitative Easing, and more creating money out of thin air. This was what happened to the Weimar Republic and Zimbabwe.

History tells us of people in the Weimar Republic using wheelbarrows to carry a pile of worthless money to the store to buy a loaf of bread. In this picture, you can see a man jotting on the million mark notes. Think about that for a moment. It was cheaper to write on the money, than to use it to buy paper.

The monetary experts swear that they can control this by removing the QE from the economy at just the right moment to prevent hyperinflation. Despite the fact that it has never been done that way in history, they're convinced of their own genius. Historically, anytime man declares he is in absolute control of anything, it bites him in the behind.

So one day, perhaps soon, it will be cheaper to wipe your behind with the dollars, than to buy toilet paper as evidenced by this picture from Zimbabwe during the early days of the hyperinflation. This man is not buying a house, but merely buying dinner. That is roughly 6 million Zimbabwe Dollars. That was in 2008, with the compounded inflation, that same stack of money wouldn't pay for the toothpick today.

The economy is doomed, because Government can't learn what you and I already know. You can't spend more then you bring in indefinitely.

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