Wednesday, April 27, 2011

Between a Rock and a Hard Place

I can’t see any way we can avoid another crisis that is even bigger than the one we are in. Basically, what we have is a lot of money sitting on the sidelines waiting for things to get better, and they’re not going to get better. The government and the Fed know this and they don’t have a lot of choices what to do about it.

The basic problem is still the banking crisis. If things get worse the banking system is subject to collapse. So what is happening is the Fed is printing money to buy treasuries. This money ends up in banks, who use it to buy treasuries instead of investing it, because businesses are not expanding domestically so have no need for investment. There is some business expansion but it is overseas. So banks are getting money without interest and investing it treasuries where they earn interest on these reserves. That’s a good deal for banks. It keeps them afloat and provides an income stream to deleverage their bad debts and pay the big bonuses.

The bad part is that the government is running up debt like crazy with no prospect of a revenue stream big enough to pay it back. Its normal obligations are huge and growing. We’re still fighting two wars and assisting in a third while the baby boomers are beginning to retire, increasing the Social Security and Medicare outlays. To compound the problem, we are on the downslope of the peak oil curve where demand from developing countries is still growing and supply has peaked. Since our economy runs on oil for almost everything, this alone spells crisis in the current decade or the next.

I don’t see a way out, and neither does the government or the Fed, although they don’t say much about it because it would just add panic to an already bad situation. Ultimately what will happen is we will be forced into another crisis due to increased cost of commodities like gasoline and food, the production of which is heavily dependent on oil.

There is no way to reduce the federal deficit substantially from the current or future revenue streams. Projections showing this is possible project revenues that can’t be achieved with the problems outlined above. We are in for really bad times this decade and the next. Current legislation puts a large part of the burden on those already overburdened. We don’t let people starve or deprive them of needed shelter and medical care so eventually wealth will be redistributed in one way or another and the overall standard of living will decrease. Meanwhile, we’re fiddling while Rome is burning, not unlike the legendary frog in the pot of soon to be boiling water.

1 comment:

KristaC said...

Wow, now I'm depressed and want to jump out the window. Yikes!