I'm adding this blog as a reference point in time in relation to the next upcoming financial disaster. I keep hearing things like, "Golly-gee, this could never happen to us." Too many think the US is invincible and above the laws of basic economics. We keep getting this shoved in our faces about how advanced and enlightened we are that we can break the economic laws without any consequences. This will lead to our disaster.
There are basically 2 things I am looking for to trigger this next disaster. The state of the economy and recent history first...
The Federal Reserve Bank (the "FED") has artifically dropped interest rates to near 0%. This creates a very unnatural economic environment. I've heard various fund managers complain about how this destroys their economic models they use to buy and sell for the fund, thus often giving very poor performances for various funds (many used for retirement accounts). The FED has pumped an ungodly amount of "free" money into the markets to make borrowing easy at 0% (greasing the wheels, so much so that we can't stand up anymore). Between 0% rates and free money, the FED has essentially put the markets on life support. No matter how great of a "recovery" the government claims, it means nothing in an artifical environment. Politicians who claim this are morons.
Breaking down the money printing a little more, the FED has had 4 major rounds of this. They have fancy names of Quantitive Easing ("QE") for this. The first 3 had stopping points, but the last one has only vague guidelines. It has been called QE-4ever. QE-4ever is buying bonds and printing money at $85b/month. Divided out, that's about $270/person/month. That may not seem excessive, but that comes out to be around $3200/person/year. With QE1-4, the FED has nearly quadrupled our money supply since this mess started in late 2008.
The FED claims they can pull most of this money back to original levels, but in reality, they probably won't be able to pull back more than half. The left overs will eventually cause an inflation spike that will hit everyone. If my estimated half number holds, that means prices for everything will double and any savings will be cut in half. This will hit the poor the hardest. Anyone claiming sympathies would stop the absurdities right now at this point without even reading any further. Since the elderly have significant money in retirement savings, they will also be hit badly and would probably have to go back to work just to live.
Governments like to inflate out of debt because it is a somewhat simple solution. A problem of this is that it screws over the debt holders badly (research that African country that has a $100t note worth less than $1 in our currency, also see the Weimar Republic). Another problem is that inflation becomes a stealth tax on the people. If my half number holds up, this is suddenly a 50% tax on everyone without any taxation laws being passed.
Since the government is spending like drunken sailors in a whore house, our current national debt as of this writing is $16.7t and rising fast. That averages out to around $53k/person (every man, woman, and child, with some pets, cartoon characters, and dead people). A family of 4 owes $212k of debt to the government. The government can get away with this "right now" because the interest rates are still near 0% and there are no consequences (according to them, that is).
This is part of the reason we're never going to come out of The Great Recession. This amount of debt and potential inflation is a momsterous weight on every person. The math doesn't lie. The economy will not thrive again until the per person levels drop significantly. Going higher will collapse the economy.
Here are the 2 things I am looking for to trigger our next financial disaster: inflation and interest rates going up. One may happen before the other, but both will happen roughly together since they are somewhat linked.
If inflation hits, the interest rates will have to rise to keep it in check. If my estimates of double inflation hold, interest rates will have to rise a lot. This is bad news for borrowers (loans and credit cards) but somewhat good news for people with savings accounts (if any of the population has savings left). In reality, there will still be downward pressure on savings accounts and they will still lose money relative to inflation.
If the economy starts a recovery, the interest rates will have to rise to take the economy off the artifical life support mentioned earlier. Removing the life support will cause a crash again since most of the economic numbers are false. This is a no-win scenario. The economy isn't a raging fire like it used to be. It's barely smouldering. This will be like throwing a wet blanket on it.
The unchecked government spending with no consequences at 0% interest rates suddenly becomes a problem, even if the interest rates only rise a few points. The interest on $16.7t (a 14 digit number) is staggering. A small rate hike will make that even more staggering. A huge portion of the government's intake (around $2.5t) will go to servicing the interest due on the national debt. This is like pissing money in the wind. It does the people nothing positive. Taxes are going to have to be raised even higher, and we're already close to the highest in the world once they are all added up (taking more money from the people will be like throwing another wet blanket on our smouldering economy). The government will no longer be able to borrow and will have to live within its means (finally). Everyone "on the take" will get kicked off simply because there's nothing to pay them with. The massive government labor force will get laid off simply because there's nothing to pay them with. The elderly depending on Socialist inSecurity and MediCare/Caid will get a massive cut simply because there's nothing to pay them with. Military spending will get a massive cut simply because there's nothing to pay them with. Infrastructure requirements will get a massive cut simply because there's nothing to pay them with. See a pattern??? The government will start taking even more and providing practically nothing in services. This is what happens when we spend tomorrow's prosperity today (more like the next 20 year's prosperity). This is why I often use the word "politician" as an insult. This is why people believe that some politicians want to destroy us so they can have the "glory" of rebuilding a new system that's "fairer" to everyone (similar to Fabian Socialism which also failed).
The only way out is through. We should have taken a real crash at the end of 2008 instead of relying on these damned Keynesian Economics principles. They never have worked and they never will. I resent Keysenians as they have already destroyed much of my net wealth and the worst is yet to come. It would have been hard accepting a real crash, but a lot less so when viewed from the long term. It would have been bad for 6-8 months and then the recovery would have started. A real economics model would have had us thriving again by now instead of lingering in recession forever.
I think the saddest thing will be that when the next economic crash hits, the people will beg the government to fix it... when it was the government's fault to begin with. Are we really that stupid as a population??? The principles of being responsible with money and not spending more than you have aren't that difficult.