The World is Broke

By Alan Caruba

Every time I go to get gasoline or to the supermarket, my dollar buys less and less as the price of everything goes up. It is not the fault of banks, speculators, or any of the usual suspects. It is the fault of the U.S. government and the Federal Reserve. It isn’t just a U.S. problem, it is a worldwide problem.

We all know this in general terms, but Edmund Contoski, the author of “The Impending Monetary Revolution, the Dollar and Gold”, explains the complete mess the world is in and how we got there. Sneering at the Greeks may be satisfying, but we too are the Greeks. So is the rest of the world.

Uncertainties about the value of money have led to a growing market in derivatives. These are contracts for insuring against loss of value from unreliable currencies and they impose gigantic costs on the world’s economy. “As of June 2008, the notional amounts (face value) of financial derivatives, according to the Bank for International Settlements, totaled $673 trillion—over twelve times the world’s nominal gross domestic product,” says Contoski.

The value of all goods and services produced in the world doesn’t even come close to the value of derivatives. The recession in the U.S. and the Euro-zone countries ended in 2009, but that didn’t cure worries about the value of money. As of June 2011, the derivatives had increased to $708 trillion.

Contoski has 45 years of experience in international markets and has lectured widely on international monetary issues, conducted investment seminars in precious metals and foreign currencies, in addition to having held various positions in economic research and world trade.

A recent Wall Street Journal article, “Banks Left FeelingQEeaey by Fed’s Efforts”, by David Reilly referred to the impact of the most recent QE or quantitative easing, a fancy term for the Federal Reserve’s policy of keeping interest rates at near zero while at the same time pumping fiat money into the economy. By “fiat” I mean money backed by nothing more than the government’s credit and, in case you haven’t noticed, the ratings firms that judge such matters have been lowering our credit rating. It is far from junk bond status, but the failures of the European Union members threaten the Euro and the failure of our government to address our $16 trillion debt and our trillion dollar annual deficits could have us all in a national soup line.

The nation’s largest banks have tons of cash, but they make their money lending it. As Reilly noted, “With rates set to stay lower for longer, the pressure is on banks’ net interest margins, or the difference between what they earn from borrowing money and lending or investing it…banks have limited room to further lower their cost of funding.”

The banker’s problem is that “each quarter banks see higher-yielding loans and securities mature, only to replace them with ones that yield significantly less.” This is a very bad place to be because “They could invest money in longer-dated securities or riskier ones. But that could open them up to big losses if rates rise.”  They are, in short, between a rock and a hard place. Since we all depend on banks to make loans necessary for purchasing a home, starting or expanding a business, or any other transaction, this means our lives are getting more stressful and less rewarding.

Time and again, Contoski comes back to the government as the source of our current problems. “No nation ever spent itself into prosperity. Greater borrowing is no solution for either Europe or America. Governments can borrow and create debt, but they cannot create wealth. If they could, inflation would be unnecessary. So would taxation.”

In addition to the “entitlement” programs such as Social Security in the 1930s and Medicare/Medicaid in the 1960s, the U.S. has steadily expanded them and now we are prisoners of the government as it takes over the entire health care system of the nation via Obamacare. Liberals think the government can always access money to pay for everything and thus “take care” of everyone, but it doesn’t. That’s why it taxes working citizens and has countless hidden taxes on gasoline, telephone use, and other things including a tax on dying. It must borrow the rest of the money it is spending and right now that amounts to forty cents of every dollar. That is unsustainable.

Contoski points out that “The United States has been spending far beyond its means, borrowing and piling up debt just like Greece and others. The International Monetary Fund said the U.S. debt-to-GDP ratio would reach 100 percent by the end of 2011. It reach that figure by July 2011.”

“The U.S. situation is much worse than it appears. Unlike a private corporation, which would have to report liabilities such as Medicare and Social Security as they are taken on, Congress doesn’t record them until it writes a check.” What most Americans don’t know is that half the U.S. budget is already allocated to these programs before a single dollar is spent on anything and everything else from aircraft carriers to paper clips.

One observer calculated federal finances based on standard accounting rules since 2004, using data from Medicare and Social Security annual reports and the little-known audited financial report of the federal government. He concluded that the federal government has $145.5 trillion in unfunded obligations, based on data from the Fed and U.S. Treasury, compared to the $14 trillion “officially” reported as federal debt.

Near-zero Federal Reserve interest rates may sound great, but the reality is far different. Contoski says, “It makes life difficult for tens of millions of elderly Americans who depend on the interest from their savings accounts for their basic living expenses. It also destroys the incentive for younger workers to save for their retirement. That, in turn, destroys the accumulation of capital for investment that would provide economic growth.”

My late father was a certified public accountant. I rely on my bank to tell me how much money I have in my checking and savings accounts, neither of which generate enough interest to justify them except for the need to pay bills. I am, therefore, not an expert on economic and monetary matters, but I pay attention to people who are. You should too.

Unless the voters have a death wish, they will elect a former governor and a very successful venture capitalist to set in motion the difficult job of reducing our debt, restoring our nation’s credit rating, and  stopping the insane congressional spending.

© Alan Caruba, 2012