The U.S. Is in Real Trouble

 

The U.S. Is in Real Trouble

by IWB

by DOUG CASEY

First, the Economy

That point—economic bankruptcy accompanied by financial chaos—is quickly approaching for the U.S. government. With deficits over a trillion dollars per year for as far as the eye can see, the U.S. Treasury will very soon be unable to roll over its maturing debt at anything near current interest rates. The only reliable buyer will be the Federal Reserve, which can buy only by creating new dollars.

Within the next 24 months, the dollar is likely to start losing value rapidly and noticeably. Foreigners, who own over 6 trillion of them (including T-bills and other IOUs), will start panicking to dump them. So will Americans. The dollar bond market, today worth $40 trillion, will be devastated by much higher interest rates, a rapidly depreciating dollar, and an epidemic of defaults.

And that will be just the start of the trouble. Since the U.S. property market floats on a sea of debt (and is easy to tax), it’s also going to be hit very hard, again, this time by stifling mortgage rates. The next step is up for interest rates. Forget about property owners paying their existing mortgages; many won’t be able to pay their taxes and utilities, and maintenance will be out of the question.

The pain will spread. Insurance companies are invested mostly in bonds and real estate; many will go bankrupt. The same is true of most pension funds. If the stock market doesn’t collapse, it will only be because money is looking for a place to hide from inflation. The payout for Social Security will drop significantly in real terms, if not in dollars. The standard of living of most Americans will fall.

This rough sequence of events has happened in many countries in recent decades, and they’ve survived the tough times. But it has the potential, at least in relative terms, to be more serious in the U.S. than it was in Argentina, Brazil, Serbia, Russia, Mozambique, or Zimbabwe for two main reasons.

First, many people in those countries knew they couldn’t trust their government and acted accordingly, even in contravention of the law, by accumulating assets elsewhere. So, there was a significant pool of capital available for rebuilding. Americans, on the other hand, tend to be much more insular, law-abiding, and trusting in their government. When they lose their U.S. assets, they’ll have lost everything.

Second, those societies were significantly more rural than the U.S. is today. As in the America of 100 years ago, much of the population lived quite close to the land and had practical skills and habits that helped them get through the tough times. For 21st-century Americans, it’s a different story. Shortages and disorder are going to hit commuters who live in suburbs, and urban dwellers who think milk appears in cartons magically, like a ton of bricks.

One thing you can absolutely count on is that everyone will look to the government to “do something.” Americans really do think governments control the way the world works. Another certainty is that the U.S. government will “step in” massively, because everyone will want them to, and the politicians themselves believe they should. This will greatly aggravate the crisis and make it last much longer than necessary.

Then It Gets Serious

But that’s just over the short run. The long run is much more serious because the next chapter of the Greater Depression has every chance of radically, and at least semi-permanently, overturning the basic character of American life. Ice turned to water—suddenly and unexpectedly—in Russia in 1918, Germany in 1933, China in 1949, Vietnam in 1954, Cambodia in 1975, and Rwanda in 1995. Those are just the first examples that come to mind. There are scores more.

The economic events I’ve outlined are going to mean serious hardship and unpleasantness for many people. But that doesn’t concern me nearly as much as the social and political reaction.

Everybody gets hurt in a serious depression, but if you understand what’s going on and prepare for it, you can do well enough. Of course, political and social change always follow economic and financial upheaval, but I think it’s going to be much more drastic this time because the U.S. has been on the road to becoming a police state for quite a while. The trend was supercharged by the so-called War on Terror, starting in 2001. And it’s likely to go into hyperdrive in the months to come as the economy emerges from the eye of the storm. I know it seems asynchronous to think of a police state in a suburban country dotted with shopping malls. But not really…..More Here

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