The United States economy will overinflate. The USD will decline as a fundamental store of value; thereby leading to a deleterious effect on the purchasing power of the average American. I predicted this would happen the day Congress passed The Chula Vista Dog Walk Act of…Oops I Mean Stimulus Package.
Up until now and into the foreseeable, near-term future, I missed on that one. The USD has not collapsed, because people have been scarping them up to pay off debts and repopulate destroyed pensions and savings accounts. In other words, the money has been yanked out of circulation slightly faster than the fed can invent more of it. Therefore, the economy is deflationary – not inflationary. There are, however, signs that this will change.
This will have to change because of the growing public debt. The US government is spending like literally never before in US history. Even if you pick a base year dollar and normalize all USG budgets to the base year, we are breaking the piggy bank, emptying the ATM and pawning all the consumer electronics to pay for our stimulus fix.
On top of that wonderful news, tax receipts have fallen off a cliff. Corporate tax revenues have declined by $100Bn since 2007. Individual payroll taxes are off $40Bn and Capital Gains taxes are bringing in $60Bn less than in 2007. This, plus the $400Bn they spent above the 2007 budget in 2009, leaves the USG $600Bn that has to be commandeered in other ways.
The normal recourse involves the sale of US Treasury Bonds. These are primarily sold to individuals and investment funds within the United States and to the central banks of foreign governments. $3.38Tr worth of US Bonds are held by foreigners. Approximately 45% of this consists of Chinese and Japanese holdings. This is out of approximately $5Tr in total publically held US Debt.
However, the US isn’t selling as well in the Far East. China has actually reduced the amount of its US Treasury holdings and is introducing Reminbi (“People’s Money”) backed securities. This suggests that they are seeking to borrow, rather than lend, cash reserves.
Japan has recently elected a government that promised to invest less in the United States and diversify Japan’s diplomatic and economic relationships. This would immediately suggest that they will either stop buying or start selling US debt. With Japan and China backing out of US Treasury auctions, we lose two major customers and now have a harder time financing government expenditures beyond our shrinking tax receipts.
Once the IRS has failed to collect revenues to offset expenditures, and once the US Treasury has failed to finance the public debt on favorable terms, the US has a problem. Inflation helps the US government solve that problem. Debtors benefit when money loses value over time. It strongly behooves both Congress and The White House to encourage the US Fed to print more and more money.
A declining currency allows a debtor to pay back a creditor in a medium of exchange that has lost significant value. To intentionally engineer this situation is a form of fraud. Yet it remains a popular remedy and has had at least some level of support in the United States ever since William Jennings Bryan hawked bimetallic currency as a way of helping debt-holders by institutionalizing a gradient debasement of the national currency.
While anything that colossally stupid would lead to the US having to monetize huge amounts of its foreign holdings in a very short period of time, the policy bias of our government will always be in favor of inflation. Deflation kills the economy of a debtor nation. Congress, The Fed and The Treasury cannot allow deflation to continue.
They also are ideologically indisposed to reducing the level of government involvement in the marketplace. Yet even a strong state actor will eventually run afoul of The Gus Grissom Law of Astrophysics – “No bucks, no Buck Rogers”.
Therefore, the USG will print more money than we are willing to consume for the specific purpose of currency debasement. This will happen as a function of the extent to which government expenditures exceed revenues and debt sales. It will undermine the wealth of American consumers who are trying to buy real products with debased, pseudo-counterfeit currency.
I’ve been wrong on this so far. I would really prefer to continue being wrong on this going forward. Root against my prognostication on this. They more I’m off base here, the better your life will remain going forward. It’s a genuine shame I won’t be wrong about this too much longer.