How out of Control is the Debt Problem?

How bad is our financial situation?

Former Reagan adviser David Stockman thinks the Federal Reserve policies will condemn the United States to 10 or 20 years of substandard economic performance.

Historically nations carry about 1.6 times their GDP in debt. If we are looking at today’s economy that would be $24 trillion for all public and private debt. Our actual debt is $54.6 trillion or 3.64 times our GDP. Wall Street assumes a country will go bankrupt when the debt to GDP ratio exceeds 250%.
What will happen?
Since WWII history shows that episodes of deleveraging fit into one of four types:
1) Austerity, or ‘belt-tightening’, in which credit growth lags behind GDP growth for many years; typically 6 to 7 years.
2) Massive defaults; the US defaulted on WWI Liberty Bonds, paying out less than 50 cents on the dollar to redeem the bonds. It is expected that Greece will agree to pay around 40% of the value of their bonds, which are essentially in default with yields of over 100% on one year bills.
3) High inflation; Zimbabwe 2011, 1920s Germany, and Argentina 1999-2002, are examples of severe inflation.

From $18.92 an ounce for gold to $1621 and ounce. 8,468% increase or the dollar is worth 1.1% of what is was when the Federal Reserve was created in 1913.

4) Growing out of debt through very rapid real GDP growth caused by
a. A war effort. War economies generally consume 37% to 50% of nations GDP. The standard of living can fall dramatically in a short period of time but you most certainly will have a job.
b. A ‘peace dividend’ following war. Bill Clinton took advantage, with the Republican congress, of the collapse of the USSR and cut the federal government consumption as a percent of the GDP from 22.1% to 18.2%. A remarkable accomplishment.
c. An oil boom for oil-producing countries. Technological change related to energy, such as an efficient way to replace gasoline with natural gas, alternative energy breakthroughs, and other productivity gains.
An example would be when the worlds economy switched from a paper society to a computer society.
How did we get here?

Printing money does have consequences

The first step was the creation of the Federal Reserve in 1913. Before the creation of the Federal Reserve prices, and inflation, was virtually zero or negative, with the exception of the civil war period. From 1833 to 1913 gold was $18.92 an ounce.
On April 5, 1933, Roosevelt signed Executive Order 6102, declaring that under the threat of imprisonment for 10 years, a $10,000 fine or both, everyone in America was required to turn in all gold bullion to the U.S. Treasury at payment of $20.67 per ounce. Essentially robbing the public of what little wealth they had left.
The Federal Reserve maintained an informal gold standard from 1933 to 1944 between Europe and America until the Bretton Woods agreement was formally signed allowing an official exchange rate and redemption of dollars for gold by select European central banks. The agreement lasted to 1971.
What happened when we were on the gold standard?

When money dies

The wholesale price index went from 151 to 81 between 1869 to 1889, deflation, gold standard.
The CPI went from 138 to 93 from 1869 to 1889, gold standard.
Wages went from 77 to 72 (urban), 96 to 78 (farm), and 87 to 75 (combined) from 1869 to 1889, gold standard.
Interest rates went from 6.45% to 4.43%, 1878 to 1889.
The GDP (1958 dollars) 1869-78 = 23.2 bn, (1958) $42.4 bn, 1879-88, and $49.1 bn (1958) 1889-98. Pretty impressive 112% growth rate.
Multiply by 7.551 for 2011 GDP numbers if desired.
And here is the key statistic, for the people, per capita income (PCI),
PCI 1869-78, $531 (1958 dollars), 1878-88 $774 (1958), and $795. Did you get that!
Let’s put that into today’s money.
1869-78 an average person’s income was $4,009
1879-88 an average persona income was $5,844, a 45.8% increase.
1889-98 an average person’s income was $6,003, a 2.7% increase.

Monetarist economist Milton Friedman, Nobel Prize winner in 1976, would be flabbergasted at the actions of Alan Greenspan and Ben Bernanke

Labor productivity increased, equipment purchases, capital formation, all on a gold standard. In other words, the bottom line, wages went up and prices went down on a stable gold standard.
Inflation? Why is it bad and who benefits?
From 1913 to 1971 when the United States was on one form or another of a gold standard the Consumer Price Index (1982-84 dollars) increased at an annual rate of 5.3%. From 1971 to 2011 the increase has been 11.7%. Removing the gold standard and having a 100% fiat currency more than double the annual price increases. The goal of the elites, Rockefeller (Democrats) and Morgan (Republicans), of inflating the currency was achieve with spectacular success.
Why do the elites want inflation?
Originally the elites like Rockefeller and Morgan wanted cheap, easy credit for expansion and cheap, devaluing paper money they could pay back the loans with. Paying back loans with devalued dollars would save millions for industrialist borrowing billions. Paying workers in cheap dollars, giving a raise once a year, and having the ability to increase prices many times a year for products shifts the income distribution in favor of the elites.
In recent times the bottom 20% of the populations share of the GDP has declined from 5.3% in 1980 to 3.4% in 2010. The second fifth from 11.6% to 8.6%. The third fifth from 17.6% to 14.6%. The fourth from 24.4% to 23.2 and the richest 20% have increased their wealth from 41.4% to 50.3%.
The standard response from the left is Ronald Reagan caused this when he cut taxes. Democrats perpetuate this lie to divert attention away from the truth and the real culprit, inflation. Since the income tax was instituted tax collections have never exceeded 20.6%, under Bill Clinton in 2000, despite tax rates of 90% or higher. The whole “tax the rich” debate is a dog and pony show. Democrats know their elite friends will never pay 90%. It’s all a scam to divert attention away from the real culprit, the Federal Reserve.
When Nixon reneged on the Bretton Woods gold standard system in 1971, the monetary base and bank reserves in the United States, the part of the overall money supply that the Federal Reserve controls directly, was $69.8 billion. Ten years later it was $147 billion, another ten years later it was $319.7 billion, another ten years later it was $645.1 billion, and last month, exactly 40 years after the dollar was “freed” from gold, it was $2,684 billion. An increase of 3,745% or 93.6% annually. Gold prices have increased 3,891% or 97.3% in that time.
So how bad is it?
Today we have exported an estimated $6 to $7 trillion dollars overseas. We have exported our deficits and inflation overseas. The central banks of Korea, Japan, and China have allowed our politicians to live beyond their means for several decades. It will end, soon.
There is $1.577 trillion in reserves parked at the Federal Reserve today potentially representing $15 trillion in loans in an economy of $14.99 trillion.
Federal Reserve Chairman Ben Bernanke and former Chairman Alan Greenspan have destroyed the capital markets first with cheap housing money and now when saving and investment is most desperately needed, with more cheap money creating massive misallocation of resources by the only player in town to gobble up all that cash, the federal government. A colossal misallocation of resources on special interest groups that will make the eventual crash even harder. Some economist like former US Representative and Director of the Office of Management and Budget under Reagan, estimate stagnant growth for 10 to 20 years.
The problem is that right now we are in the “good days” of this depression. Nothing has occurred other than the massive loss of jobs. When interest rates climb, and they will climb, the federal government will move towards insolvency, inflation will pick up, state and local governments will be squeezed, and there is a very good possibility we will revolt or end up in a world war similar to WWII that ended the Great Depression.
It does not have to end up in violence. If we understand the basic economics we can overcome this monetary disaster in a few years, not decades. We as a nation have to acknowledge that we will go bankrupt. that is the first step. We have to acknowledge that we need to eliminate the Federal reserve bank and return to free banking that existed from 1833 to 1862. We have to acknowledge that we can no longer be the worlds policeman. We have to acknowledge that the proper role of the federal government should be no more than 11% of the GDP, not 25.3% like today.
The first step towards recovery is to acknowledge that yes, we do, have a debt and income inequality problem. This is not a Democrat or Republican issue. It is a issue that desperately needs to be addressed. In the absence of leadership the best we can do is educate people, one person at a time, as to the true nature of our economic demise.