For the past eight months I've been talking about an economic storm coming and with each passing week the evidence of this storm has been growing. Well everyone, the storm is here and soon those of you who have not been paying attention will become painfully aware.
This chart clearly shows that the number of jobs being created cannot keep up with population growth
This chart shows that the number of people on state unemployment is again near record highs
The official unemployment number released today came in at 9.8%. While this may seem high, if they calculated the number the way they did in the 1930s it would be closer to 20%. As far as employment goes we are now in as bad a shape as we were in the depths of the Great Depression.
The reason that things don't feel as bad as the bread lines and tents cities of the depression is we have drugged ourselves with a massive amount of debt spending to maintain a degree of normalcy. How bad is it?
In 2007 the Gross Domestic Production of the US was 14.4 trillion, the federal budget was 2.78 trillion, the federal deficit for the year was 162 billion and we had 138 million people working.
In 2010 the GDP will be 14.63 trillion, the federal budget 3.48 trillion, the deficit 1.38 trillion and we have 130.5 million people working.
If you consider the massive inflation of 2008 our GDP is considerable less now than in 2007 but even if you forget about inflation how are 7.5 million less workers generating 230 billion more in GDP?
The simple answer is they are not. While GDP grew about 1.6% from 2007 to now federal spending grew by 25% in the same period and when the government spends money it is counted as part of our GDP. The government has increased spending by 700 billion dollars a year and yet our GDP is only up around 200 billion meaning that the real economy is still down nearly a half a trillion dollars a year from 2007.
Since January of 2007 we have added 5 trillion dollars to our national debt and the monthly interest payment on that debt now sits at 30 billion a month, more than annual budgets of many federal agencies. This is despite the fact that the government pays record low interest rates on that debt.
How is it that we are able to sell record quantities of new debt at record low rates despite the fact that there are less people working and foreign countries have essentially stopped buying more of our bonds? The Federal Reserve has been buying the very debt it issues. They are now for the first time doing it through direct and open purchases of US Treasury bonds. They had been doing it the past using a legal scam to launder their purchases through banks and major corporations.
Here's how the scam works. The Fed loans money to banks and companies like Verizon and GE nearly for free, 0.25% to be exact. These companies then turn around and buy US Treasury bonds paying anywhere from 0.5-4.0% depending on the bond term. The companies get to keep the interest differential as profit and the government can claim that people are still interested in buying US debt. If you've wondered how these large corporations have managed to show such great profits despite pitiful sales then you've just got your answer. If you've also heard that companies are sitting on record amounts of cash this also debunks that assertion. When they talk about the trillions companies are hoarding the leave out the fact that this is in fact borrowed money. Due to the ridiculously low borrowing rates companies have chosen to issue their own bonds and hold the cash. When they calculate all this cash hoarding they don't factor in how much debt they owe.
We are faced with two choices and neither of them is pleasant. If we continue this process our money supply will inflate while our wages will stay stagnant. They call this stagflation, just ask Jimmy Carter.
If we pull the plug on the Fed and have to cut federal spending and sell our debt on the open market we will pay much higher interest rates on the debt and our GDP will tank with less government support.
In the short term this is a no win situation. In the long term if we continue to conjure money out of thin air eventually or foreign trade partners will stop taking dollars as a form of payment. This would be truly catastrophic as our ability to buy oil or any of the things we no longer make would be in serious jeopardy. Instead of dollars they could demand hard commodities like food, wood and coal. The result would be food and energy shortages like we have never seen in America. This is the storm that is beginning to lash at our coasts. Recently China and Russia abandoned the dollar for trade between these nations. The dollar is being destroyed and along with it our prosperity. We must act to restore the value of the dollar despite the short term cost to our economy or the end game may be a world to bleak to imagine.