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The U.S. Debt-Trap

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In many previous commentaries, I have stressed that the issues (and crises) sitting right before our eyes are so large, and so obvious that you don't need a “background in economics” to understand what is occurring – merely an understanding of basic arithmetic...and there lies the problem. The vast majority of adults in our society have no understanding of arithmetic, or numbers in general – the product of decades of dependence upon the lowly calculator.


I don't have the space to go into this issue in detail. For those interested in this aspect of human devolution, I will refer readers to a previous commentary. The bottom-line is that we are now a society of mathematical 'illiterates': people who are incapable of evaluating any calculations or “statistics” with which they are presented, because they have stunted any intuitive grasp of numbers which they once possessed.


Nowhere is this issue clearer than with respect to the subject of interest on debt. The easiest way to illustrate we are a society of arithmetic ignoramuses is to point to credit-card balances. Simply put: anyone who pays interest on unpaid credit-card balances has absolutely no understanding of arithmetic. There can be no “justification” for incurring interest on credit-card balances.


Everyone knows that credit card interest rates are set to usurious levels, several percent higher than any other kind of debt. Every penny of credit card interest paid by consumers is no different than flushing money down the toilet.


We would all react in shock and ridicule if we saw someone flushing money down the toilet. However, why isn't anyone laughing at the American consumer: who carries $1 trillion of credit-card debt, and thus “flushes” somewhere around $200 billion of their own money – every year? Since I know that most people are not able to put such a number into perspective (for the reasons previously mentioned) let me help them out. During 2009, only about $250 billion of the Obama “stimulus package” was actually deployed in 2009. This means that 80% of that “stimulus” did nothing more than replace the credit-card dollars which Americans flushed down the toilet (i.e. paid to bankers) last year.


When the most-massive U.S. “stimulus package” ever enacted in the U.S. does little more than pay people's credit-card interest (for one year), it should be obvious to everyone that this is a serious problem. It's not. Paying-down that $1 trillion credit-card balance should be the #1 economic priority of Americans – as they obviously cannot afford to continue to flush $200 billion down the toilet every year.


Arithmetic ignoramuses are not only found in American (and Canadian) households. They are also extremely abundant amongst our government “leaders”. This raises the obvious question: how can you “lead” an economy, when you don't understand numbers? We know that most (if not all) Western governments have no understanding of numbers (including the “finance ministers” of these governments) not only through their actions, but through the economic nonsense which they rely upon to “guide” them.


This nonsense is generally referred to as “Keynesian economics”, in deference to the economic charlatan which originated this suicidal doctrine. John Keynes, along with a herd of devoted, economic sheep pioneered the ridiculous proposition that “debt to infinity” is the optimal strategy for any and every economy. Specifically, Keynes proposed that governments should incur debt – in order to “juice” the economy. The caveat to this idiocy is that governments must always keep their borrowing below the level of real, economic growth (the economic equivalent of expecting our governments to permanently walk on a tight-rope).


Let me begin to make a list of all the dubious assumptions and responsibilities which must accompany the Keynesian caveat, just to make this doctrine theoretically legitimate. First, it requires governments to exercise strict discipline in its borrowing/finances. This is something which has never existed in any government, for any extended period of time – either in the thousands of years before Keynes published his tripe, nor in the near-century since.


Even if governments had such “discipline”, to maintain the fine, Keynesian line between an amount of borrowing which was “just right” and economic suicide, governments are also required to be honest about how much they are spending today, how much they are taking-in in revenues, and how much they expect to need tomorrow. O.K., so to make Keynesian policies work, all we need are governments with iron-discipline and perfect honesty. Does anyone see any potential problems here, so far?


Assuming that we could actually find a government (somewhere, some time) with iron discipline and perfect honesty, Keynes' nonsense suffers from the same deficiency of most capitalist dogma: it has a static, completely short-sighted perspective. Specifically, the entire capitalist “model” is inherently unsustainable. Retiring the enormous, and growing mountains of debt which are inevitably accumulated by a capitalist system (and exacerbated by Keynes' debt-loving insanity) requires perpetual, infinite growth – in a finite system.


A simple metaphor for capitalism is that it is a system which insists it is capable of building a “ladder” to the Moon. In other words, to accept capitalism as a viable, long-term economic model, we must accept the model of infinite growth (and infinite debt) in a closed and finite system. Much like gravity and various other principles of physics prevents us from building a ladder to the Moon, the simplest principles of arithmetic (and common sense) tell us that perpetual growth and infinite debt are not sustainable in a closed system. Literally, our capitalist economies are all Ponzi-schemes – which can only be temporarily sustained through permanently injecting ever-larger amounts of “money” (i.e. debt) into the system (the definition of a Ponzi-scheme).


There was a wonderful essay on the subject of debt, and compounding interest on a blog to which I have referred to in the past: “FOFOA”. The particular aspect of Keynesian fraud which that essay addressed were the horrors of “compound interest”. With simple arithmetic, the author demonstrated how any level of debt is unsustainable over the long-term – because if such debt is not retired, then the 'magic' of compound interest is guaranteed to bankrupt any/every economy (unless you believe the capitalist myth of infinite growth, in a closed system).


However, I understand that (in our modern society) people don't have the attention-spans to ponder our fates over the long term. Rather, our instant-gratification, sound-bite societies are generally only interested in how these issues affect us today. In that respect, the chart below should be enough to reach the devolved minds of 21st century humanity. As we can see, every new dollar of U.S. debt reduces U.S. economic output by nearly 50 cents. This situation has never before existed in the history of the U.S. economy. Indeed, until this current crisis/collapse, taking on additional U.S. debt had always generated positive growth.

 

Thus, throughout U.S. economic history, new debt has always been capable of being 'justified' (at least partially) on the basis that the added “economic growth” offset the detriment of increasing debt. That argument no longer exists. In plain (and extremely obvious) fact, every dollar of new debt created by the U.S. governments shrinks the U.S. economy, while adding to debt: a 100% lose/lose scenario.


Given that nothing has been “solved” by the U.S. governments “bail-outs” and “stimulus packages”, we can think of the U.S. economy as a swimmer. All that was accomplished by the stimulus and bail-outs is that the swimmer has been able to 'tread water'. However, as the above chart demonstrates, the added debt taken on by the U.S. government is like hanging a new weight around the neck of the swimmer every second.


This is the U.S. economy: a tiring swimmer trying desperately to tread water, while more and more weight is piled on top of him. The bail-outs of Wall Street cannot be justified, nor can the “stimulus package”, which did nothing more than postpone “Armageddon” (and intensified it).


More specifically, with the U.S. government claiming that it has both economic “growth” and jobs “growth”, then the numbers of that chart make it clear what the Obama regime must do today: eliminate every penny of the U.S. deficit immediately – because every penny of new debt shrinks the U.S. economy, and gets that tired swimmer much closer to drowning.


However, in the real world, there is no U.S. “economic growth”, nor is there any U.S. “jobs-growth”. Such numbers are just as farcical as the “profits” which the Treasury Department is reporting on the debt it took on for that program. As the chart above illustrates, it is simply not possible to “turn a profit” by piling new debt on old debt – nor is it possible for the U.S. to go from a “shrinking” economy to a “growing” economy, through adding more debt (i.e. the “stimulus package”). In other words, the previous chart also demonstrates conclusively that the “economic growth” reported by the U.S. government is 100% fraud – since all that the government can accomplish with new debt is to shrink the economy.


Unfortunately, as that previous chart also indicates, the economic damage caused by each, new dollar of U.S. debt is increasing exponentially. This means that in the very near future, adding new U.S. debt will cause the U.S. economy to shrink so rapidly that each new “stimulus” package would instantly require an additional, new “stimulus package”: just to partially negate the damage of the last stimulus package.


Contrary to capitalist myth, infinite growth is not even remotely feasible in a closed system. Sadly (thanks to capitalism) infinite debt requires nothing more than for the same intellectually bankrupt governments to continue to do what they are doing today.

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Jeff Nielson
...
written by Jeff Nielson, May 14, 2010
Hi Breezer.

I think we ALL know that feeling. There are friends and family in my own circle who are totally disinterested in this subject - so I don't even waste my breath.

Keep in mind that we have been subjected to the most-massive brainwashing campaign in the history of our "free" societies (lol). It is a scientific fact that most brainwash victims are incapable of seeing past their conditioning - unless/until some dramatic event occurs which shocks them out of their 'trance'.

All we can do is WAIT until such individuals show signs of resisting that conditioning, and THEN approach such individuals with the facts/truth.
breezer1
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written by breezer1, May 14, 2010
typo in that last post. my mother in law pays almost 0 on her credit card.
breezer1
...
written by breezer1, May 14, 2010
jeff, when i speak to people about what is going on with debt and interest rates etc, i feel like they see me as a lunatic. i think many just don't want to know because their situation is so bad. My mother in law pays almost 0 on a credit card and when i suggest she just pay it off she says ,"no, i might have an emergency and need the cash".
I feel like the boy scout who trys to help a little old lady across the street only to get beaten over the head with her cane as she says she doesn't want to cross the street. she just wants to stand on the curb feeling the wind from the speeding traffic. and you don't mention gold or silver or you will be seen as wearing paper slippers. i was in the bank a couple of months ago checking a couple of maples for damage and an older gentleman watching me ,when asked by his wife what he was doing said," nothing dear , just watching this man buying an exotic metal. He shook his head when he said it, in a way that displayed his scorn. we live in strange times. great posts jeff.
Jeff Nielson
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written by Jeff Nielson, May 12, 2010
Hi SWS.

Something I should have added is that ALL countries should be looking at these "cost/benefit" analyses of their NEW debt - and any/every country which has a negative return on debt MUST 'turn off the taps', because they can only make things much, much worse (worse than even a debt-default).

And what separates these debt-default scenarios from all other "deflation" scenarios is that NORMALLY in a deflation people move to "cash"...but when the cash is WORTHLESS, then the only choice is to move into "money" (i.e. gold or silver) or "hard assets" (art, commodities, etc).
swsprime
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written by swsprime, May 12, 2010
Thanks Jeff,

I would suggest what you say here is a live commentary of the Fiat economy ship of the world as it is sinking.

The printing paper money, which is really debt creation, has reached incredible volumes. As Central Bank's have monetized this new paper, these huge funds have started splosh around the world economy like seawater in a sinking ship, moving away from one risky monetary asset to another and rocking the world economic boat, making the steering of the economy harder and harder. And many passengers aboard this ship,(we are all passengers,) have begun to realize that the boat must sink have started to do anything they can to save themselves by grabbing any asset of real value as a life raft, (real value assets include rare art, gold, silver, platinum and diamonds).

This is happening right now: record prices for art, (a record $104 million last week for a Picasso portrait), Record Platinum prices, and $1200+ Gold.

Don't get left on the deck of this sinking wreck, sell paper assets now and grab physical Gold and Silver....

....the end is nigh!

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