The US National Debt is currently more than $16 trillion. Unfortunately, the US currently owes, depending on who you believe, somewhere between $50 and $100 trillion more in unfunded liabilities for things like Social Security, Medicare and public employee pensions.
America has been able to run up these huge debts because it broke away from the gold standard in 1971. The gold standard imposed at least a modicum of fiscal responsibility and faith in the US dollar because the world’s central banks were allowed to exchange their greenbacks for the gold sitting in Fort Knox.
But once the gold standard was abandoned, our politicians were freed from the constraints that had previously forced them to be fiscally accountable.As you can see by the chart below, government spending — and the inherent money printing that is ultimately required to finance it — is now completely out of control; the National Debt is expected to reach $20 trillion by the end of this decade.
Of course, there’s no such thing as a free lunch. Every new dollar that is printed by the Fed increases the money supply, which in turn reduces the value of the dollars already existence — including the ones in your wallet and retirement account.
As you can see from the chart below, soon after the United States abandoned the gold standard in 1971 — and our politicians began to greatly expand the size and scope of the government — cumulative price increases embarked upon an exponential trajectory. Those price increases are the result of the declining purchasing power of the US dollar. In fact, the buck’s purchasing power has been decimated since 1971; so much so that today you would need $559 to buy something that cost $100 back then.
Clearly, abandoning the gold standard was a fiscally reckless decision, akin to giving a teenager a credit card without a credit limit. To illustrate, let’s first look at the current impacts of America’s spending addiction by looking the graph on the left.
Next, let’s drop a whole bunch of zeros from those figures to make the federal government’s ledger look at least little more like a typical household’s finances:
2012 Household income: $24,680
2012 Household expenditures: $38,200
2012 Credit card debt: $13,520
Outstanding balance on the credit card: $163,500
Annual interest on credit card debt: $2,200
Proposed 2013 spending cuts: $850
The figures reveal a dire situation. A financially responsible individual who found himself in a similar situation would drastically cut his spending while looking for ways to increase revenue.
Our politicians insist that’s exactly what they’re doing but, as you can see from the proposed spending cuts, they’re really just going through the motions, financing the nation’s obligations in the same way any financially irresponsible individual would — by taking on even more debt through the selling of US Treasury bonds. It’s a practice that’s essentially no different than using a VISA card to pay the MasterCard bill.
The Illusion Is Unraveling
The problem is, using one credit card to pay another credit card bill only works for so long. As long as a debt addict can continue to find lenders who are willing to extend additional credit, the game can continue. But once the pool of lenders dries up, the game is over.
No, I can’t say exactly when this will happen. But it’s coming, folks — and when it does, middle-class America’s way of life will undergo a catastrophic change that will dramatically drop their standard of living forever more.
Until recently, the United States’ profligate spending wasn’t much of an issue. For years, plenty of investors — both foreign and domestic — have willingly parked a portion of their money into the perceived safety of America’s bonds. But over the long march of time, the dollar’s standing has seriously deteriorated and, as a result, foreign nations are becoming increasingly reluctant to buy US Treasury bonds because, thanks to the Fed’s near-zero interest rate policy, the risks are no longer worth the reward.
Normally, depressed demand for bonds results in higher interest rates, but so far the Fed has managed to keep bond demand artificially inflated via their quantitative easing campaigns. And the Fed is keeping US Treasury bond rates as low as possible now because interest payments on the National Debt already consume roughly 10% of annual revenue. If US Treasury bond rates increased to merely 5%, America would be forking over one-third of its annual revenue just to satisfy the interest on its $16.5 trillion National Debt; it would also be increasing its annual deficit by more than $800 billion.
The Beginning of “the End”
Although they won’t admit it, the Fed backed itself into a corner with its reckless easy-money policy. They know that once the money-printing party stops, interest rates will have to rise — and then the bond market will almost certainly crash. If that happens, things are going to get very interesting. For example:
As bond rates rise, mortgage interest rates will naturally follow them upwards. And since higher mortgage rates ultimately result in higher house payments for a given size loan, it follows that home prices will have to drop in order to keep them affordable — and the decline could be devastating. The cost of borrowing will also go up for everyone else including small businesses, corporations, and state and local governments.
The stock market should fall as higher interest rates hurt economic growth and hurt stocks’ value.
Once interest rates start rising, a vicious cycle can ensue as higher interest rates beget larger deficits, which in turn lead to still higher interest rates. As the debt piles up, and the faith in the US dollar continues to diminish, the US will eventually reach its day of reckoning. The US will then be faced with two very unpleasant choices for solving the crisis: print away the debt or default.
What Will Economic Collapse Look Like?
While I don’t expect a Zombie Apocalypse resulting from either scenario, temporary supply disruptions caused by market uncertainties will be inevitable — and that will lead to empty supermarket shelves, fuel shortages and, possibly, utility failures that will almost certainly result in civil unrest and increased crime in more populated areas.
The good news is a new (hopefully gold-backed) currency will be issued and society will slowly recover. Eventually. I’m hoping it will take no more than six months before the supply chain recovers to eliminate shortages.
Thankfully, tangible assets won’t go up in smoke after the economy resets; your home, automobile, and other possessions will be unaffected. More good news: Any long-term debt you hold in old US dollars will essentially be wiped out because you should be able to retire it with worthless currency. It’s why I no longer bother trying to pay down my mortgage early. Even so, things will never be the same for most people.
Although it’s anybody’s guess, I believe Americans will be lucky if their post-collapse standard-of-living will be equivalent to half of what it is now; worst case, one-third. That ain’t so bad if you earn $1 million per year but, if my assumption is correct, and you earn $60,000 annually, then your post-collapse standard-of-living will be between $20,000 and $30,000 today.
The ensuing economic collapse won’t be the end of the world, but it’s going to be a wild ride. Next, I’ll share some tips on how to survive an economic collapse, and get out relatively unharmed.