Effor.com

Here’s a bit from today’s Daily Reckoning that everyone needs to read.  I’ve added emphasis to some parts I think are especially important.

For the last 15 years, the U.S. money supply has grown about twice as fast as GDP. Federal government liabilities, meanwhile, have grown three times as fast. As a result, the USA now has more financial obligations than assets. It is, effectively, broke. Nevertheless, the debit side of its ledgers grow heavier and heavier. This year’s US government deficit will add about half a trillion. The US trade deficit is about $700 billion. The U.S. bailout plan will probably cost at least $1 trillion more.

Where will the government get that kind of money? There are only two possibilities – one honest and depressing, the other corrupt and alarming. Whether it borrows the money, or prints it up, the world enjoys no net increase in financial resources. Borrowing takes resources from projects that might have been worthwhile and diverts them to the losers. Interest rates rise, as a consequence of the extra borrowing; higher rates generally worsen the economic picture. And while the U.S. borrows, long term, at almost 5%, it lends at barely 2%. It’s like a bank that has gotten its business model badly mixed up. The more it borrows and lends, the faster it goes broke.

If, on the other hand, it merely prints the money – or if it creates it “out of thin air,” to use Lord Keynes’ handy phrase – the results are even worse. Inflating the money supply with new currency, a la Argentina or Zimbabwe, wipes out debts. But it destroys faith in the dollar and brings down the whole world’s money system.

Sooner or later, this is just what will probably happen. Not because capitalism doesn’t work – but because it does. Capitalism is doing just what it should do – it is separating fools from their money. But the fools vote. After a big bubble, there are more fools than sages…and, in the United States of America, more debtors than creditors. Sooner or later, Americans will realize that they are better off destroying their own money than preserving it...and that they would prefer to stiff their creditors rather than pay their bills. That is when deflation will gives way to inflation…and the world’s post-’71 dollar-based money system comes to an end.

I think we’re at that point now.  More people are voting to take others money than are voting to preserve their own money.  Because that way they are freed (they think!) from the consequences of their own decisions.  They’re wrong - but we’ll all pay the price for their mistakes.

gk

Pay as you go?  Spend less than you make?  Sounds like a different way of saying “act your wage” to me.   This article is in the NY Times today, and it’s been picked up by a lot of other news sources and newspapers.

Here’s another good story that ran today on TheStreet.com.

Both articles are good, and I recommend reading both of them.  Since it’s election day, I’ll probably be following the news tonight, but (as you can probably tell from my previous posts) I’m sure I’ll talk about this subject again later.  I also want to read more about the market sell off today.  Is this the capitulation that those of us on the sidelines have been waiting for?

gk