Thinking about the USA gives me a headache.
Nevertheless we must put them first in any Global analysis – and it’s simply because they are so dominant, and determined to stay exactly that – even if it kills the entire global financial system and economy in the process. Their mounting problems was one of the major reasons I was so certain we were headed for trouble back in 2005, and it’s one of the major reasons I know we are not out of the woods yet. They are so dominant and have such enormous numbers to deal with nothing in the next five years is going to be straightforward and capable of being divined by past analytical methods. The Global financial/economic system is in for many surprises yet and comforting forward projections by authorities are pointless. This next phase is not much about economics, it about the confidence of markets, and the way they respond to positive and negative announcements.
Just as equally pointless are polls of NZ business and consumer confidence – these are always subject to the desire for improvement but fail to account for the fact that every 1422nd person on this planet is a Kiwi; we are therefore price-takers and our hopes and desires are of very little consequence in the larger picture. Just what New Zealand’s imbalances may mean in the future I’ll get to in a few weeks, but we can be certain that the present and future imbalances in the US will impact us considerably more than anything of our own. THEY are a dog; we are not even a tail, more like a flea.
The big numbers, no the really big numbers in the US look something like this – if you take the present estimated shortfall in unfunded government promises in Superannuation and Medicare and add that to the present US Government debt, this together comes to around $US114.7 Trillion. Next you take the total outstanding personal debt, then the 50 States, together with net corporate; this all amounts to about a further $US40 Trillion; now add all this together ($US154.7 Trillion) and divide by the population of 300 million and every person in the USA has somehow to shoulder their burden of a debt present and coming of $US515,666. Now that’s a really big number! And the best the present administration can think to do about it is add a whole lot more to it, which I’m not about to believe is a solution. (Numbers come from Sprott Asset Management if you want to track them)
Now these numbers are expressed in simple terms so any person reading this can get the idea that in the present vernacular America is screwed. It’s quite frightening I agree and I know you will be tempted to suggest I have my numbers wrong, and they may be wrong by now as I don’t type very fast – so yep, they’re wrong, the number’s just getting bigger and bigger even as you read this. Five years ago when I first did this sum the number was about $US350,000 per person. In these last five years the unfunded obligations for instance have increased from $US72 to $US104 Trillion.
None of the standard methods of avoiding the truth will work – despite all the suggestions to the contrary I doubt the US will halt the process of Quantitative Easing (or printing money) because they have no alternative – this is the only choice that remains after you discard the other possibilities – which are to increase taxes, reduce spending, or default. Placing the first two options in context – the combined level of Federal debt and unfunded obligations are around nine times the American GDP, so messing around with these two will achieve very little. Default still remains unthinkable at present.
The only arrow left in the quiver is the QE arrow which works as long as Global interest rates can be held very, very low – the moment this changes then you’ll see the real action, and I simply can’t see how it can be anything other than extremely catastrophic. This is obviously concerning the Chinese, who have made a number of similar comments recently.
How have they managed to keep interest rates low in the States so far? – according to Puru Saxena (a very on-the-ball analyst writing out of Hong Kong) the answer is “the Federal Reserve revealed that the American central bank purchased half of the newly issued US Treasuries in the second quarter of this year. Needless to say, the Federal Reserve financed these purchases by creating dollars out of thin air – a short- term fix but a long-term disaster.”
One of the things that has always amused me when thinking about the US is how few people recognise the Federal Reserve is not even a Government organisation – it’s owned and run by a consortium of private banks and individuals who shall be nameless, unregulated and unaudited, and yet is apparently able to create, at its own will, money that is treated by the US and the world as a Fiat currency representing the American people. Now this truly stuns me; but if you check it out on Wikipedia you’ll find it’s the truth. So what exactly is the end game, because with these numbers there must be one? Or do they simply not have an end game at all, and are just trying like hell just to stay afloat while one turns up.
The non-US quick answer always sounds something like this – “I know if everybody stopped using the US dollar then they’d have their problems all to themselves!” However the US with 5% of the global population has been for a long time consuming 25% of the world’s output and represents 38% of the world capital markets, so that suggests isolating them maybe won’t be as easy as it sounds. For a start where will the previous borrowers in US dollars, (which has been the currency of choice for most), find their dollars to settle their debts should they be able to? Secondly consuming 25% of the world’s output means the US has been an exporter of dollars, and implicitly therefore successful exporting countries (like China) may have a currency you’d like to own but it’s simply not available. (New Zealand has about $100 million borrowed in $US ourselves as far as I can tell).
No the end game is going to be much more complex than this simple response and I will address some of the possibilities next time. In fact I’ll keep an eye on this aspect all the time; reporting ideas as they arrive.
Sleep well!
Wayne Lochore
