October 22, 2014
Everyone Wants a Free Pony
One true measure of a sovereign’s ability to service its debt is Total Debt to Total Revenues. In the last dozen years, Total US Public Outstanding Debt to Total US Treasury Revenues has doubled from 3.25X to 6.50X. Even after 4 years of ZIRP and a Nationalized Yield Curve, US Treasury Debt to Revenues remains at historically high levels. And these debt figures don’t even include Fannie and Freddie debt which together would add another $5 trillion to the tab. The administrators of this country simply spend too much. This addiction to spending started a long time ago, and has continued unabated for decades.
We continue to hear arguments that rising debt inhibits economic growth, retards inflation, and thus pushes down interest rates. Although rising debt levels inhibit growth and retards inflation, at a certain point rising debt levels will no longer result in lower interest rates. It is illogical and unsustainable to assume that debt levels can continue to climb without an eventual exhaustion of a sovereign nation’s balance sheet. At a certain level, new debt created to service old debt and “create growth”, is simply ineffective. Furthermore, it is also unreasonable to assume that the cost to service this debt will remain low forever, due to current artificially low interest rates.
The following chart characterizes this addiction to debt, and the urgent need to address this issue before we fall into the footsteps of Greece and other sovereign nations who simply spent more than they earned.
Respectfully yours,
Editor@EmersonLetter.com
October 15, 2014
The End of Monetary Inflation & Kicking the Debt Addiction
SHOT ACROSS THE BOW
The recent financial crisis is a shot across the bow; a warning for us to get our personal, corporate and governmental financial houses in order.
QE1: NECESSARY, QE2: SUSPECT, QE INFINITY: BEYOND OVERKILL
Although QE1 was necessary in order for financial markets to avoid spiraling into an abyss, the excessive money creation that has followed (QE2 & QE Infinity), has only enriched the net worth of the wealthiest households. This money creation is not flowing into Main Street, but rather it has benefited primarily those who own financial assets. According to a recent Pew Research report, during the 2009-2011 period, the mean net worth of households in the upper 7% of the wealth distribution rose by approximately 28%, while the mean net worth of households in the lower 93% dropped by 4%. QE2 & QE Infinity is a rich man’s medicine.
During the past three decades, government solutions to each financial crisis have been to lower interest rates, increase the ease and availability of money, and increase debt levels. This is a form of can kicking the problem down the road. You can only paint over paint for so long, before all of the coats simply fall off. It is one thing to open the money spigot to stem a financial panic, but yet another to attempt to create prosperity through central banking models. Central bankers are addicted to debt creation, and are indeed no different from a drug addict who is unwilling to admit his addiction. Unfortunately, we have now arrived at a point where the creation of incremental debt is no longer producing the desired effect on our already heavily indebted nation. We need to address this “tsunami” of debt, or spiral into financial chaos.
Failed or non-existent budgets and policy are both being supported and subsidized by global central bank purchases of government debt and de facto nationalizations of yield curves. These actions are nothing more than a broad debasement of fiat currencies, a tax on savers, and a free pass to politicians who mask fiscal policy failures and continue to spend way beyond their countries’ means.
We have had six years of Zero Interest Rates, and Trillions of Dollars of Monetary Bribery. Due to these central bank policies and actions, bubbles have been created in real estate, bond & equity markets, and private equity markets. Debt supporting these policies has been piled onto global sovereign balance sheets. This debt must be repaid or extinguished at some point in time. Since almost no public authority has come to explain exactly how we will address this debt issue, as a nation the time has come for an honest conversation on the efficacy of these central banking policies, and their true costs-both long-term and short-term.
Below, you will find various charts showing the addition to debt by the US Government.
Respectfully yours,
Editor@EmersonLetter.com
