By John Klar
The Old Testament recounts the repeated abandonment of God by the Jewish people, followed by their return to his protective relationship. A secular parallel is reflected in America’s abandonment of fundamental economic principles in favor of dreamy utopian pursuits. A potential catastrophe hangs over the American landscape that could dwarf both COVID and socio-political rancor: what some economists call “The Greater Depression.”
More than 16% of all FHA loans are over 60 days delinquent, the highest rate ever; 2 million loans are over 90 days delinquent. Commercial and residential rents are also in unprecedented arrears. The (true) unemployment rate is the highest in American history. The CARES Act resulted in trillions of “relief” money, exponentially expanding our nation’s debt (by some 35% and climbing) even as Gross Domestic Product (GDP) plummeted. The federal deficit now exceeds $82,200 per person.
The federal government was printing money like a Mafia counterfeiting operation before COVID-19 struck. So long as voters are distracted, this fiat-currency Ponzi scheme keeps greasing the economic wheels. But when the COVID relief funds run out, America faces hyper-inflation, or even a complete collapse of its badly-abused currency. At a minimum, interest rates could skyrocket. Here’s why.
Money supply and debt are different concepts, but either can destroy a nation’s currency, spark runaway inflation, or quell investment. America faces both. Additionally, America’s “net international investment position” (which reveals how debt is held) has exploded negatively, magnifying the height of the financial precipice from which we dangle.
The United States money supply sharply escalated during the Obama administration’s novel response to the financial crisis of 2007-2008: “Quantitative Easing” (QE). The effect was to allow the Federal Reserve free rein to print money. Once that Pandora’s Box of fiscal destruction was opened, all fiscal hope was lost.
The United States money supply (M1) stood at $1,400 billion on August 25, 2008; it had grown to $4,026.9 billion by 3/2/2020, a 188% increase in 12 years. It then ballooned another 39% through Oct. 12, reflecting the massive infusion of some $7 trillion in “COVID Relief Funds” (thus far). This is money being printed. The Federal Reserve is powerless to preempt the inevitable economic tsunami this will create.
Nearly $7 trillion in COVID-related spending expanded the national debt approximately 35% (exceeding $27 trillion!). As national GDP shrivels, debt as a percentage of GDP has shot further into the economic stratosphere than any greenhouse gas. America’s debt ratio has now expanded far into the danger zone for any nation.
America’s Net International Investment Position (NIIP) is alarming. This dry-sounding measure assesses the amount of debt a nation owes to other nations. In an excellent critique of this phenomenon, one financial scholar has summarized the implications for us:
Back in the 1970’s and 1980’s, the amount of money that the United States government had borrowed from external sources was about 5% of U.S. GDP. The U.S. government borrowing model was still mostly a closed system with just a bit extra foreign capital. By the 1990’s and 2000’s, it increased to 10-15% of GDP. By the 2010’s, it quickly increased to 30-35% of GDP, which is a large amount of foreign borrowing…. And the more we do this, …foreigners own more of our assets than we own of foreign assets.
As shown in the graph accompanying the referenced article, this quiet shift in debt allocation means that America owed foreign nations a whopping 52% of GDP before COVID. Both China and Russia were in positive territory; Mexico was at negative 53%; Spain, minus 73%.
Conclusion: since 2008, if foreign nations won’t buy American debt, the Federal Reserve just prints money, issues Treasury Securities to itself, and the silent death (of the dollar) perpetuates:
In other words, they initiate debt monetization; a country prints money to buy the Treasury securities that it issues. This third model of government financing ventures into alchemy; an attempt to create something out of nothing or transform something without value into something with value. … For investors and citizens in general, that should be a red flag.
Economist Milton Friedman famously proclaimed that “inflation is always and everywhere a monetary phenomenon.” He was cautioning that math cannot be circumvented. Friedman also warned that once a government began monkeying with a fiat currency, the temptation was great to just print more money — after all, it is impossible to connect the consequences of inflation with the actors who unleash it; and like a true Ponzi scheme, once the spiral begins the only way out is to amplify the fraud.
America has accomplished great feats: our legendary economic vigor is why so many in the world enable our debt explosion. But not even America can bootstrap its way out of a debt/inflation cycle, any better than the smallest household. The combination of exploding debt and money supply reflects that the rest of the world may be losing confidence in the “full faith and credit” of our government to keep its word. Will the American Dream unravel as the Great American Doom — a people shackled with foreign debt, hyperinflation, a shrinking economy, and a government that just prints money as a new economic religion?
After implementing decades of similar policies that ignored economic reality (including a failed “landback” movement), Zimbabwe’s currency famously imploded to the point where a $100 trillion Zimbabwe note was “worth” about 40 U.S. cents. America is no different from Zimbabwe when ignoring the laws of finance. Idealistic fantasies that ignore basic economics (in order to employ government in wealth redistribution, eliminating racism, or saving the planet from carbon dioxide) undermine the economic vigor upon which such lofty goals depend.
Like the Jews of old who strayed from God, America will now suffer the consequences of abandoning sound moral fiscal policy. This could make the Great Depression look like a well-supplied picnic.
May God save us — and help us learn math.
John Klar is an attorney and farmer residing in Brookfield, and the former pastor of the First Congregational Church of Westfield.