A huge percentage of American consumers are confused why the national debt of the United States is newsworthy. I intentionally use the term “consumers” because most are so disconnected from economic reality that they can hardly be referred to as citizens – except for the fact that they have the right to vote.
Numbers vary according to the source, but many reports places the level of credit card debt in the U.S. at more than $8,000 per household. If this is a true average, that means half of the households in the U.S. have NO credit card debt while the other half owe more than $16,000!
It also follows that half of the U.S. households are being responsible and living within their means. At the same time, the other half are living beyond their means. (This is discounting the assumed small percentage within this group of debtors who may be dealing with an emergency and have no other option than to put the bills on the credit card.) However, for the most part, those who have accumulated $16,000 in credit card bills over and above their ability to pay have spent the money on consumer goods and not hospital bills.
With this reality in the private sector, is it any wonder that debt on the part of the government causes no concern among many? But government debt is both a symptom and and cause of “The Great Recession” we are now experiencing.
Dr. David Wiedemer, Robert Wiedemer, and Cindy Spitzer have co-authored a book entitled “Aftershock.” The book’s subtitle is “Protect Yourself and Profit In the Next Global Financial Meltdown.” The Epilogue of this book states: “Say Good-Bye to the Age of Excess”.
The authors write that the United States is not just experiencing a “down market cycle”. They argue that the U.S. has experienced a “Bubblequake” and will face an “Aftershock”. The book “Aftershock” is a follow-up to their first book, “America’s Bubble Economy” which was written back in 2004 and published in 2006.
In both books they make the case that the economy of the United States – made up of the collective economies of households and businesses – is a “multi-bubble” economy. In “good” times, the economy is buoyed by the multiple rising bubbles of real estate, stocks, private debt, and government debt.
In a bubble economy it seems like there is no upper limit to anything.
- Our material desires have no limits so let’s spend all our take home pay on consumer goods.
- When we still want more let’s take out a home equity loan or just let the balance accumulate on the credit cards. Pre-approved credit cards arrive in the mail box every day.
- The stock market is on a continual upward plane and a blind man throwing darts can pick winning stocks. Savings accounts can’t compete and are old-fashioned; put every available dollar into the market.
- Real estate is a “can’t lose” investment. We better upgrade to a larger house now (even if we can’t quite afford it) because next year it will cost even more. In fact, since we can get a loan for 100% of the purchase price, let’s get a bigger house than we actually need and count on a huge appreciation.
- Better yet, take out loans on speculative properties that we can “flip” for quick profits!
The government (that is, the politicians elected by these same spendthrift consumers, and the tens of thousands of bureaucrats hired by politicians) know that the only way to sustain their positions is by “bringing home the bacon.” In every state, city, township, and school district you can find countless examples of projects that “didn’t cost the local taxpayers anything because the price was covered by a federal grant”.
Federal grants are nothing more than bribes from the politicians to local voters. Unfortunately, it seems that none of the voters have been able to understand that in order for the federal government to award a $1,000,000 grant to a local department or park or school it must FIRST collect at least $2,000,000 from SOMEWHERE. (And those who DO understand this reality simply hope that at least half of these grants come from the taxpayers in another district!)
Again, rising bubbles interact to drive each other up – until one pops. And that was what the authors predicted in “America’s Bubble Economy” – and what actually began to occur in 2008. Then the same interactions created a downward spiral as each falling bubble put downward pressure on the rest, eventually pulling the collective economy down. “America’s Bubble Economy” (though written in 2004) accurately predicted the popping of the housing bubble, the collapse of the private debt bubble, the fall of the stock market bubble, the decline of consumer spending, and the widespread pain all this was about to inflict on the rest of the fragile multi-bubble economy. “Aftershock” discusses what comes next during Phase II of the popping of the bubble economy when the dollar bubble and government debt bubble each burst.
As promised, “Aftershock” delivers on the promise of advising how to “Protect Yourself and Profit In the Next Global Financial Meltdown.” But first, let’s review the Epilogue and recap again how the current “financial crisis” seemed to sneak up on the American public, businesses, and government.
The authors write, “It’s sad to see it all go. It was the Party of the Century and not just in the United States, but around the world as well. So, this epilogue is dedicated to reminding us how good the Age of Excess really was.”
Here is a list of excesses, all with the cumulative effect of buoying the corresponding bubble higher and lifting other bubbles in its path. Then each bubble, in turn, drags the others down as it pops.
1. Virtually unlimited credit card limits, home equity loans, and refinance offers allowed consumers to spend without consequence. Household savings entered a negative range for the first time. Even college graduates just entering the workforce thought nothing of starting out with thousands in credit card debt and an average of $24,000 in student loans.
2. Consumers were able to purchase virtually everything with no money down and 0% financing. Every business realized they were competing with every other business, and not just in their sector. Computers, flat screen TVs, and the latest cellphones diverted money from what used to be a family’s pride: the new car. There was just too much to buy and too little time!
3. Real estate values experienced steady appreciation. At 12% annual appreciation, home values would double in just six years! Banks actually offered mortgages of 110% (or greater) of the home finance amount!
4. Just about every business was booming, and so was the job market. It created a shortage of employees and bid up wages. Especially young workers knew that they could swap to a higher paying job AT LEAST once a year. This also fed the rationale that you could overspend today and make up the difference tomorrow.
5. Corporate executives and investment bankers were paid millions, all the while making mistakes that ultimately destroyed the value of their companies.
6. The federal government intervened to bailout these companies, because votes were at stake and government spending was unlimited. Even while the taxpayers were paying for these bailouts, the executives did not face any personal accountability for the failure of these companies.
7. Internet companies showed steady increases in stock value even though their profits did not. Then many companies were acquired by even larger companies despite the mythical valuations.
8. The same applied to private equity firms who knew that there were millions and billions of dollars awaiting a public offering. No price seemed unreasonable because every price was higher than the year before. Big businesses got bigger not through innovation but through acquisition.
9. In the midst of an economic boom, the nation could sustain MULTIPLE overseas wars and countless military bases with NO visible cost to each individual citizen. During World War II, tax rates were increased to as high as 75%. However, during the Age of Excess many tax rates actually were decreased.
10. An ever expanding military also required no additional personal sacrifice. Bankers, executives, and students were not drafted. No reductions in personal consumption were asked for or offered. By 2008, Americans had purchased 35 million MORE autos that we had registered drivers. But many had “We Support Our Troops” bumper stickers!
11. The government also faced no spending limits (that is, borrowing limits.) Bailouts were handed to businesses which were deemed “too big too fail” with no corresponding tax increases passed along to the voters.
12. Fully half of the citizens of the U.S. are allowed to enjoy all the benefits of citizenship while paying ZERO in income taxes. At the same time, this half of the population sincerely believes that they are entitled to even more IF ONLY the other half weren’t so greedy and would agree to higher taxes.
13. As many as 40% of the population directly receives some form of government payment. This does not even include the newest government benefit – health care – which has not been fully implemented and is estimated to cost (unfunded) an additional $1 trillion.
14. In 2010 alone, defaults on college student loans (now the exclusive responsibility of the federal government after this function was removed from local banks) exceeded $58 billion. Again, these debts are just added to the growing total national debt – but with no visible cost to individual taxpayers.
The authors conclude: “It’s almost magical. But whatever it was, in the Age of Excess, you didn’t have to think too much about why things were so good – they just were. Too bad it had to end.”
Yes, the U.S. economy was made up of inflated bubbles. One by one, these bubbles began to leak and then popped. What is the “Aftershock?” The authors’ latest book begins where the last ended. “Just when many people think the worst is over, next comes the Aftershock, when the dollar bubble and the government debt bubble will burst.”
And that is where we find ourselves today. The U.S. dollar has been steadily losing purchasing power. At the same time, the U.S. dollar (in the form of private investments and government bond issues) is not attracting foreign investments. The authors make an important point: money doesn’t have to flow out of the U.S. It just has to flow in less rapidly. In the past, foreign investments injected $2 billion per day into the U.S. economy. Even without any withdrawls, the slowing of this rate to a “paltry” $1 billion per day causes the dollar to suffer a massive decline. Foreign investors have worldwide liquidity and can move investments from country to country with the click of a mouse.
Smaller economies in Europe are facing monetary crises. The PIIGS (Portugal, Ireland, Italy, Greece, and Spain) are facing the reality of “bounced checks”. One by one these countries are facing the same consequences that every family must deal with – you can not spend more than you take in indefinitely.
At the same time, the debt of the U.S. dwarfs all these countries COMBINED. The federal government is increasing the “limit” on the U.S. national debt beyond $14.5 trillion. Is there any upper limit? Why even have a “debt limit”.
The government debt bubble has popped. In 2010 the Federal Reserve purchased more than $600 billion in bonds from the U.S. Treasury. This “Quantitative Easing” exchanges government I.O.U.’s (treasury bonds) for dollars injected into the economy. The entire purpose and reason for “QE I” and “QE II” were to stimulate the economy in the ABSENCE of private buyers for these bonds.
Of course, all these billions of “stimulus” dollars were created digitally – simply transferred from account to account. Instantly the amount of money was increased at the same time spending is declining rapidly, further cheapening the value of each dollar.
The bubbles are popping. One by one, each new popped bubble puts added pressure on the others. The economy of the United States has entered the “Aftershock”. The “Great Recession” is not over. The real estate bubble, private debt bubble, stock market bubble, discretionary spending bubble, dollar bubble, and government debt bubble ALL brought us to the “top” and will continue to pull the economy down as each shrinks and exerts pressure on all the others.