Archive for February, 2011

Our Sovereign Debt Crisis

[Note: This blog post is almost entirely derived from other people’s work.]

The national debt of the United States is increasing at an alarming rate. The chart below is from Dave Short at It shows the ratio of Federal Debt to Gross Domestic Product (GDP).

Federal Debt to GDP Ratio

Below is a synopsis of historian Niall Ferguson’s presentation at the Peterson Institute for International Economics, taken from Ferguson explains the causes and effects of excessive government debt.

What Causes These Sovereign Debt Crises?

  • Excessive debt
        Measured by debt to GDP or to revenue or to exports
  • Excessive interest payments
        Measured by debt service to GDP or to tax revenue
  • Excessive reliance on foreign capital
        Measured by debt to exports or net international investment position
  • Economic weakness
        Low growth
        Low returns on private sector investment
  • Political weakness
        Excessive expenditure and insufficient taxation
  • Irrational exuberance
        Investors keep forgetting to learn from history

What Are the Ways Out of a Debt Crisis?

In theory, there are six ways out:

  1. A higher growth rate of GDP [Possible for the USA, but not likely.]
  2. A lower interest rate on the public debt [We can’t go much lower.]
  3. A bailout, meaning either a current transfer payment or a capital transfer from abroad [Who’s going to bail out the USA?]
  4. Fiscal pain, meaning an increase in taxes and/or a cut in public spending [In our current climate, I don’t think so.]
  5. Increased recourse to seigniorage (revenues from monetary issuance, aka “printing money”) by the central bank [BINGO!]
  6. Default, including every form of non-compliance with the original terms of the debt contract, including repudiation, standstill, moratorium, restructuring, rescheduling of interest or principal repayment etc. [I don’t see the USA refusing to pay its debts, unless we go to war with our creditors.]

Usually, only ways 4 through 6 are used: Cut, Print or Default.

  • Cutters are few and far between
    Only Britain, 1815-1914, reduced debt burden exclusively through budget surpluses, lower interest rates and higher growth, and Britain had the advantage of the industrial revolution
  • Printers
    States with monetary sovereignty [e.g. the USA]
    Sates with debt in their own currency [e.g. the USA]
  • Defaulters
    States with limited monetary sovereignty
    States with foreign currency debt

Lessons of history

What Governments do NOT do with World-War Size Debt Burdens (One exception: Britain 1815-1913)

  • Slash expenditure on entitlements
  • Reduce marginal tax rates on income and corporate profits to stimulate growth
  • Raise taxes on consumption to reduce deficits
  • Grow their way out without defaulting or depreciating their currencies

What Governments USUALLY do With World-War Size Debt Burdens

  • Oblige central bank and commercial banks to hold [buy] government debt
  • Restrict overseas investment by firms and citizens
  • Default on commitments to politically weak groups and foreign creditors
  • Condemn bond investors to negative real interest rates

What Are the Geopolitical Consequences of Crises of Public Finance?

  • In fiscal stabilizations, discretionary military spending is usually the first casualty
  • In cases of default on external debt, conflicts with creditors can arise
  • In cases of currency depreciation, reserve currency status can be lost to a rising rival

Ferguson has succinctly described the causes and seemingly inevitable consequences of the rapidly-growing US debt. I have read other similar arguments giving numerous examples of governments who printed too much money and caused their currencies to crash and lose most of their value. With the national debt increasing, holding the local currency is financial suicide.

Given this irrefutable logic presented by some very smart people, Why don’t I just sell everything and buy gold? click here.

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Sunday, February 20th, 2011 Currencies Comments Off on Our Sovereign Debt Crisis

Why I’m Not Selling Everything and Buying Gold

Lately, I’ve been reading and studying quite a bit about the problem of our national debt.  The growth of this debt is gaining speed like a runaway train, and the interest payments are projected to become an onerous part of future budgets.  All solutions to slowing this runaway train require measures of sacrifice that the US population is unlikely to accept.

We have all been riding the train for so long, that we can’t bear to leave the dining car even though we believe that at the end of the tracks is a cliff over a vast crevasse.  There are still miles of track ahead of us, and this party isn’t over yet.

We read about personal analogies to this national debt.  Families have gone too heavily into debt and have seen all equity vanish in their major investment, their home.  These families have lost their homes, and prospects for a prosperous future have vanished.  Many Americans are able to see how this applies to their own lives, and they are trying to reduce their debts and live within their means.  “Living within your means” was a popular philosophy during most of the Twentieth Century, but fell into disrespect as an outdated and unsophisticated financial strategy.

The logical conclusion to this runaway debt is the crash of the US Dollar.  The only logical outcomes are either 1) Default on the debt or 2) Devaluation of the Dollar.  Either outcome will result in the Dollar losing much of its value and purchasing power.  Pundits have given many examples of this happening to countries in the past.

I have read the logical arguments proving this inevitable result, and I honestly don’t have any logical counter-arguments.  I am regarded as a very logical person, so why don’t I just sell everything and buy gold?

According to most of these logical arguments, the only sure-fire way to preserve my wealth is to convert it all to gold.  History has proven that gold holds its value during times of inflation and the collapse of currencies.  When the currency collapsed in countries in the past, people who had gold survived financially.  So, why don’t I just sell everything and buy gold?

Something has been nagging at my brain as I read these essays of doom.  It’s not that I don’t believe them; I do, and I have blogged about these problems and probably will again in the future.  The trouble is, I don’t believe them “with all my heart.”  Although my logical mind is convinced, I have a nagging doubt – a lapse of faith in the science of economics.

I can hear your response right now, “You are just in denial.”  That may be true, but I am not denying the facts.  I absolutely agree that too much debt is very bad.  Paying off the debt will be bad, and defaulting on it will be bad.  There’s no denying that.

Well then, you say, “You are just paralyzed.  You are so terrified of the inevitable collapse of the Dollar, that you can’t take any appropriate action.”  That’s not entirely true either.  I have a significant percentage of my net worth in gold, but it’s nowhere near “everything.”  So, why don’t I just sell everything and buy gold?

Maybe its because I’ve heard this story before.  I remember Howard Ruff and other gold bugs in the late ‘70’s and early ‘80’s saying much the same thing.  They predicted doom and its been over thirty years.  Surely they didn’t think it would take this long for us to go to Hell in a handbasket.

Also, I am acutely aware that I don’t know everything.  Too many times I have been certain about something only to have something else unexpectedly happen.  And since I am smarter than the average bear, I must conclude that nobody else knows everything, either.  Other pundits may not admit to ever having been wrong, but I am skeptical.

I took a lot of philosophy classes in college, but I have to admit that it took a recent blog posting to remind me of Hume’s problem with inductive reasoning.  You see, all these arguments of doom and gloom rely on the assertion that “This has always happened in the past, so it will happen in the future.”  This is inductive reasoning.  Inductive reasoning draws upon past experience to predict future experience.  One famous example of this is:

All of the swans we have seen are white.  Therefore (“ergo” for you philosophers),
All swans are white.

As Hume points out, it only takes one counter-example, a black swan for instance, to invalidate the theory.  Hume concludes that, no matter how many repetitions there may be, we are not justified in extrapolating things we have experienced to things we have not experienced.  He further concludes that we are not even justified in arguing the probability of things we have not experienced based upon past experience.

On the other hand, George Santayana said, “Those who cannot remember the past are condemned to repeat it.” I have a counter-assertion, “Those who rely on the past are condemned to repeat it.

Let me repeat, I do not see any painless way out of our national debt problem.  It’s just that I am not so convinced that I am willing to go “all in” and sell everything to buy gold.

This blog post is not intended to make you, or me, comfortable with our national debt.  It’s not even intended to be a rationalization for investing in the same old things we have always invested in.  This is just an introspective look into why, counter to logic and reason, I don’t just sell everything and buy gold.

How about that, a blog post with no charts or graphs.

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Sunday, February 20th, 2011 Currencies, Gold 1 Comment

Worldwide Demand For Gold

Below is a chart I got from  It shows the demand for gold for the past three years.  It also shows the breakdown on what the gold is used for.

Worldwide Gold Demand

By weight, demand dipped in 2009 and in 2010 returned to the 2008 level.  However, when measured in dollars, demand grew slightly in 2009 and jumped substantially in 2010.

If you are interested in a little more detail, click on the link above.

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Thursday, February 17th, 2011 Gold Comments Off on Worldwide Demand For Gold

Our Jobless Recovery

Our current recession has officially “ended.” The government says that recovery has now begun. One area of the economy that has not begun recovery is employment. In all previous recessions since World War II, employment has recovered much more quickly.

Here are two charts from the blog, Calculated Risk.

The first chart shows how employment declined in the past eleven recessions.  The graphs are aligned at the peak of employment before recession and each vertical line represents one month.

Job Losses in Latest Recessions

The second chart shows this same data realigned at the date of maximum job losses.

Job Losses Aligned to Worst Month

Employment in the USA has fallen for more months and has bottomed at a lower level than in any prior recession.  Although employment is rising again, it is increasing much more slowly than in the past.  It will be many more months before we approach levels that we considered “normal” three years ago.

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Saturday, February 12th, 2011 Work 2 Comments

The Dismal State of US Employment

Here’s a link to a short and to-the-point article by Gregor Macdonald pointing out that we do not have a recovery in the US labor force:

Here is one of the two charts from that article showing Non-Farm Payrolls:

Non Farm Payrolls

We are still down by 8 million jobs from the peak in 2008.  For the economy just to maintain the status quo, we need to add at least 125,000 jobs every month.  We should have added about 4.6 million jobs on top of the 8 million jobs lost to be where we were at the peak of our economy in 2008.

Read the article; it’s interesting:

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Thursday, February 10th, 2011 Work 1 Comment

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I am not a registered financial advisor. I only offer opinions, and sometimes these opinions veer off at weird angles from conventional wisdom (That's probably why you are here). My advice is, "Don't take my advice." Read my sidelong glances at economic issues and form your own conclusions.

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