Tuesday, November 27, 2012

THE REAL CRASH: Surviving America's Bankruptcy

Author and business analyst Peter Shiff was one of the few pundits to predict the 2008 financial crisis. His latest book, "The Real Crash: America's Coming Bankruptcy---How to Save Yourself and Your Country", describes the nature of the crisis yet to come.

The main problem--and where most of the other problems begin--according to Schiff, is the Fed's manipulation of interest rates. By interfering with the free market value of money, and making it cheaper than the market would dictate, the Fed encourages financial bubbles that then necessarily pop. When a bubble pops, the market needs to correct itself; however, over the past 20 years, the Fed has not really allowed this correction to take place, as every time a bubble pops the Fed has lowered the interest rate even further, causing more money to enter the system and a new bubble to form. First it was dot-com stocks, then it was housing, and now it is government spending.

As a matter of fact, while government spending has reached new and mind-boggling heights in the recent past, it has actually been ballooning in this direction for years, spurred on largely by the low-interest rates that the Fed has provided. The government has used this borrowed money to maintain and extend social programs (such as Social Security and Medicare), and, more recently, bailout packages for failing businesses and entire industries. All the while, the government has been going deeper and deeper into debt. A big part of what has allowed the American government to borrow as much as it has (and to keep on borrowing now) is the fact that the American dollar is the world's reserve currency, which means it is always in demand, and hence people and organizations have been willing to act as creditors in order to get it. For Schiff, though, the sheer size of the debt, and the fact that it is running away faster and faster everyday (and has no realistic chance of ever being repaid) will sooner or later turn investors away from considering the American dollar a valuable reserve--at which point it will lose its status as the world's reserve, and investors will stop investing in it.

At this point, the American government will have but two options. It can either declare bankruptcy, or it can print the money it needs to pay its debt. In either case, an enormous crash will result, for in the first case, an astronomical sum of money that the economy had assumed existed will suddenly be wiped away, and in the latter case hyperinflation will set in, and the American dollar will be whittled down to worthless.

...the country will be forced to start over. For Schiff, this may not be such a bad thing, for, according to him, the nation has simply put itself in an unsustainable position, and the sooner it starts over the better. At that time, Schiff argues, America can finally get back to the small government and free-market forces that the country's founding fathers designed the nation around. While much of the book is focused on how the country can do this now, before the crash hits (in such areas as banking & finance, taxation, healthcare, education, the military, et. al.), Schiff very much believes that nothing can actually prevent the crash from coming, and that therefore, most of the rebuilding will have to be done after The Real Crash.

As Chris Cox and Bill Archer -- former members of President Clinton's Commission on Entitlement and Tax Reform -- explain in today's Wall Street Journal, the official national debt figure of $16 trillion is woefully understated.

The real figure is in excess of $87 trillion -- or roughly 550 percent of GDP.

And what do we hear from Democrats and Repubicans in Washington? Nonsense about taxing the top two percent, which wouldn't amount to one-tenth of one percent of the real debt.


Anonymous said...

How come the politicians act like they've never heard this information?

Unknown said...

Because the American public at large doesn't care. The elected officials of both parties have more than demonstrated that they dont care either, although for different reasons. Both D's and R's know what keeps them in power and have no reason to care about anything else. Because they are personally wealthy and members of the power structure, they will be more than fine regardless of what happens. The proletariat (and that IS how they see us) can suck eggs as far as they're concerned.