Copyright 2012 by John T. Reed
I have written on a number of occasions that the national debt-to-GDP ratio is by far the economic story of the day and that unemployment, growth, and all that are almost footnotes in comparison. Yet the campaigns and media focus on jobs.
Wessel’s 10/5/12 Wall Street Journal Capital column does an excellent job of cutting through to that truth. Here are its second and third paragraphs about Romney’s and Obama’s common message to voters:
This isn’t going to hurt—or at least it isn’t going to hurt you.
That is a promise that will be hard for the winner to keep, if, as each candidate professes, he is serious about reducing the deficit.
That is exactly correct. Romney will be better, but he is not seeking a mandate to do what needs to be done. What needs to be done is about a 45% cut in federal spending. There is no other solution. As seems to be getting said a lot lately, this is arithmetic, not my opinion.
In the first edition of my book How to Protect your Life Savings from Hyperinflation & Depression,
I said there were only five possible solutions:
A. Raise taxes by orders of magnitude
B. Cut spending by amounts in the 50% range
C. Default on the national debt
D. Hyperinflate the dollar
E. Impose financial repression
A is impossible both politically and financially. The rich already pay about 50% of their income in various income taxes. How do you double or triple that?
C is nice. I said it actually makes a lot of sense in a separate web article. But on an operating basis, it is small potatoes. Defaulting on the national debt wipes out the annual interest payments the federal government makes. But those are only $255 billion a year.
But Wessel did not mention defaulting on the national debt. There is zero political will to do that. If we did it, the countries whose money we stole would retaliate in ways that would be painful and hard to predict. So it will not be done—initially.
D is what I say they will do. Wessel did not mention inflation.
E is something they are already doing. Financial repression means passing a bunch of laws that force Americans and U.S. entities to put their money in banks and force banks to buy U.S. government bonds with those deposits. The bonds that Americas will be forced to buy directly or indirectly will be overpriced because the real market value will be lower because of low interest rates and high risk. The government will force you to buy the bonds because no one will buy them unless they are forced. In 1966, when I was on an internship to the 101st Airborne Division, they were forcing U.S. military personnel, and I have been told, civilian contractors and employees of the government, to buy U.S. savings bonds that had a below-market interest rate.
I don’t know how much money financial repression can generate, but I expect not much. People don’t have to save and they absolutely do not when there is an inadequate real rate of return on the savings accounts which is the case when they have to force you to save. Plus, the financial repression is already going on. Wessel said nothing about financial repression.
Some think there are other solutions like we can always sell national parks, technological innovation will bail us out, growth will bail us out, illegal aliens will pay for our deficit spending, and so on. The book The Coming Generational Storm shows how those don’t work. I have shown that growing out of it does not work in a number of web articles (the debt is too big).
So Wessel’s column is fine as far as it goes, but it does not get to the consequences. He, like most of the other housebroken guys who appear on C-Span and serve on commissions and receive awards and are regular columnists or guests in mainstream media, all say it’s unsustainable. Even Obama says that. But they rarely if ever answer the question so what does that mean?
You are not supposed to yell “Fire” in a crowded theater—UNLESS THERE IS ACTUALLY A FIRE!
Wessel and the rest of the “unsustainable” crowd are, in effect, quietly saying the air-conditioning is not adequate in a burning theater.
I, and others outside the mainstream media are yelling that the crowded theater appears to be about to burst into flame.
I have been warned that I could be risking part of my investment analysis career by warning against hyperinflation, because predicting it is not an exact science. Why not just talk like one of the housebroken crowd? Get yourself on the record as warning about the danger, but don’t get out ahead of the crowd of pundits.
I have also been told I am a “calls it like he sees it guy.” I’m going with that. I’m not going to protect my career by pulling my punches. I’m going to protect my readers’ life savings like the title of my book promises.
Also, I am scared for myself and for my readers. And I am concerned about those who do not follow my advice? If they have never heard of it, yes. If they have read it and reject it and have not shown me my error or omission in facts or logic, to hell with them.
I have written 35 how-to books; 96 if you count editions, over 34 years. I also wrote over 5,000 how-to articles.
Those of you who have not done that probably would not expect this aspect of it. First, writing how-to articles and books is scary because the main market for such books and articles is the biggest experts in the field. Reading everything in their field is part of how they got to be experts to begin with.
If you don’t get it right, they will tell you, or other people. Early in my newsletter writing career, I was sort of normal college guy with regard to checking facts. Ooops. Not good enough. I had 55,000 subscribers then. Every time I made a mistake because of not checking something, I heard about it. That is why journalists are more careful than regular people about getting it right. They got stung when they failed to early in their careers.
I have sold hundreds of thousands of how-to books and articles. I hear from my readers by phone, email, fax, letter, and in person when I make speeches. Some point out mistakes. Almost all of my book web pages link to an errata page for the book in question, generally the entries on those pages were triggered by readers. Some were triggered by my sons or wife. Some I discovered on my own.
That gets me to the new edition of my book How to Protect Your Life Savings from Hyperinflation & Depression. The first edition had 320 pages. I sold out the whole press run. I also wrote a bunch of web articles about the same subject. I have gotten some criticism that was simply incorrect. I always do. Some was correct. Those caused me to post corrections on the errata page for the book. One of the things I do to create new editions is to make sure the errors on the errata page are fixed.
My point is thousands of copies of that 320-page book were sold—many to experts in the field—and there was essentially no substantial fault found. Except by me. I changed my mind completely about the usefulness foreign currency after reading books about what happened in Austria and Germany during their early 1920s hyperinflation. I also made some substantial improvements that were not refutations of the first edition, just correcting important omissions that I learned about since the first edition came out.
So the reason guys like Wessel do not go into the consequences of our unsustainable course, is not because they disagree with my analysis. If they did, I would have heard about it—at least second-hand from mutual readers if not directly from the pundit in question. Rather, I think they do not go into the high probability of hyperinflation and how horrible that is because they do not want to seem extreme or go unnecessarily out on a limb careerwise.
To put it another way, selling thousands of copies of a 320-page book to customers around the world over two years vets it to a very large extent. If you see differences between what guys like Wessel say and what I say, I believe you will find upon further review, that the only difference is I carry the analysis farther into what will happen to the country if we continue to borrow and “print” money and how to protect yourself from those consequences as an individual. I suspect the housebroken ones simply don’t want to get into the weeds of how unspeakably horrible hyperinflation is and I don’t think they give much thought to what individuals can do to protect themselves and their families. They tend only to think about the issue at a national policy level. What should the federal government do?
I cover the problem then I explain the national policy solution but only to show you there is no chance the politicians will do the right thing so you’d better take care of yourself before you get run over by the federal government train. Lately, I find myself writing emails to guys like Wessel (I did not send one to him because he does not put his email at the end of the article) complaining about their stopping before they explain the consequences and telling readers what they as individuals should do.
Yelling fire in a crowded theater when there is no fire is bad.
Not yelling fire in a crowded theater that is, in fact, on fire, is worse.
The fact that my fellow pundits who understand the unsustainability of our current course, but do not give adequate and appropriate warning about the consequences and tell readers how to save themselves, is starting to piss me off.
The last paragraph of Wessel’s column, refers to a CBO director comment about whether the nation will live within its means:
Neither Mr. Obama nor Mr. Romney wanted to talk about that.
True, but it is also true that neither Mr. Wessel nor a ton of other mainstream pundits want to talk about the details of what not living within our national means will do to us or how to avoid it as individuals since the federal government is not going to avoid it.
I read Wessel’s book In Fed We Trust, quoted him in my book, attended one of his speeches in San Francisco, and spoke to him briefly.
For the record, here is what I say will happen.
1. As a result of the Fed “printing” too many dollars, trust in the U.S. dollar will collapse probably after some shocking news but maybe just because of one final straw on the camel’s back. That will cause a worldwide run on the dollar—everyone on earth who owns dollar-denominated assets frantically trying to trade them for hard goods or foreign currencies. Most likely, this will happen betwen tomorrow and the next four years.
2. The federal government will immediately enact capital controls, finanical repression, wage and price controls, rationing, and anti-hoarding laws to prevent you from getting out of the U.S. dollar. This will render the U.S. uninhabitable because of shortages of food, fuel, and other necessities like soap and medicine.
3. The American people and the people of the world will refuse to accept U.S. dollars for any goods or services. Everyone including the Secret Service guys who guard the president will stop getting out of bed in the morning to go to work because their pay cannot buy anything. This will be worse than the Great Depression. This will probably come at point about six months to two years after the hyperinflation starts.
4. Once they cannot get anyone in the U.S. or around the world to sell them any goods or services for U.S. dollars, the U.S. government will announce there is a new U.S. currency which will not be inflated. It may take a couple of new currencies to convince the public, but eventually there will be a new U.S. currency that is not “printed” excessively that will function properly as the old dollar once did. When this happens, it will happen overnight. There will be hyperinflation one day and no inflation at all the next. That will also be very difficult to deal with and will cost some people the fortunes that they saved from the hyperinflation.
5. The U.S. government will not be able to borrow any money from anyone or “print” money any more. That means they have to live within their means, i.e., cut federal spending—now $3.6T—to the same level as annual tax revenue—now $2.4T. That is a $3.6T - $2.6T = $1T cut which is $1T ÷ $3.6T = a 28% cut plus however much is needed to pay off maturing federal bonds. You have to pay off maturing federal bonds before you pay other federal bills like Social Security checks or military payroll.
6. People who got screwed by the U.S. dollar hyperinflation in the U.S. and around the world will scream bloody murder and the U.S. government will enact some token laws to try to claw back profits made by borrowers and to give U.S. bond holders and pensioners some token restoration of their lost purchasing power.
Wouldn’t you like people who know about this to warn you about it?
You want details on how I concluded all this and what to do about it? Read my second edition. Want a little more proof that the current course is unsustainable and that neither Obama nor Romney is promising to do anything serious about it from a mainstream guy? Read Wessel’s column.
John T. Reed