Since we were born, right after World War II, the dollar has lost about 90% of its purchasing power. It will lose more value; the bias toward degeneration grows stronger.
Markets were closed yesterday. With nothing fresh in the news to entertain us, we entertain you with fresh tales of what occupies our mind these days — the decline and fall of the dollar.
Yesterday, we explained to you why this was inevitable. The Law of Limp, we said, shows that an institution invariably rushes into temptation on two strong legs, but hobbles back to prudence as though qualified for handicap parking.
This might seem to you, dear reader, a purely theoretical point. But it describes why the dollar is doomed to trade for the price of scrap paper, eventually.
The Fed is quick to loosen credit, and slow to tighten. Over time, this bias toward the quantity of paper money over the quality means that the dollar gradually weakens. The Law of Limp will make sure of it
The Law of Limp means that the government of the United States has a rendezvous — with destitution.
From a USA Today study of government debt:
“Americans’ government obligations are five times what people owe for mortgages, car loans, credit cards and other personal debt. The $57.8 trillion liability is the amount that government needs now, stashed away and earning interest, to generate enough cash to pay future obligations. The obligations are valued in today’s dollars and come due as early as in a few days, when Treasury bills mature, to as long as 75 years for Social Security and Medicare.
“Like an unpaid credit card bill, the balance grows every year — about $25,000 per household annually.
“Taxpayer liabilities grew 20% in the past two years, 13% above the inflation rate.
“What’s behind the increase:
“Medicare. The health care program for the elderly saw its long-term deficit grow $4.5 trillion from 2004. The causes: higher medical costs and an aging population. Not a factor: the new Medicare prescription drug benefit. It was included in the 2004 number.
“Social Security. The program’s deficit for workers and beneficiaries already in the system grew $2.5 trillion over two years. Reason: Each generation gets benefits greater than the last, so the program automatically gets more out of balance every year.
“Government retirement benefits. Pension and retiree medical benefits for civil servants and military personnel are more generous than those for private-sector workers. But government has not set aside as much money as private companies to pay the costs.”
The Law of Limp tells us why debts are doomed to grow to such proportions. Like the Fed, the feds flew into temptation…and limped back to sanity only reluctantly, hesitantly and partially. They were quick to loosen the purse strings and slow to tighten them. Deficits were many; surpluses were few. The red numbers burgeoned; the black ones shrank. The feds ran over the budget to counteract the downturns in the business cycle, but they forgot to run under the budget to counteract the upturns. And so, the debt mounted up.
During the administration of George W. Bush alone, more debt has been added than during all the administrations put together since that of George Washington.
But wait a minute, you may be thinking, “Isn’t there a war on? Isn’t that the real reason debts have exploded? And doesn’t it make sense to pay the costs of fighting a war — no matter how great they may be — so that future generations may live in liberty?”
We have two answers to this: “no” and “it depends.”
But let us connect a few more dots before we answer so bluntly. An institution is a thing of nature. And like all creatures of nature, it ages…gracefully sometimes, comically and embarrassingly most of the time. As an institution ages, parasites, hustlers, and conmen cluster around it to take advantage — as if they were peddling magazine subscriptions door-to-door to old ladies.
One of the cons described above is the expansion of government spending in rough times. The theory was given to us by Keynes, an economist of surpassing intelligence and questionable sense. The practice of it is given to us by hack politicians. In theory, spending in bad times is offset by forbearance in good times. In practice, spending never stops, because there is no will to stop it, and because the programs, once put in place, persist out of sheer inertia.
As spending continues, the Law of Limp dictates that more and more people will develop infirmities. Government spending, designed to counteract a downturn in the private sector, results in more people employed by government and fewer by private business. Those people are not fired when the economy improves. No, they remain on the public payroll until the next downturn, when a new batch is added. In the private sector, meanwhile, a slump thins the ranks of productive citizens. In the public sector, it fattens them.
Of course, employees are not the only recipients of government gravy. Nor do they suddenly lose their appetites when the menu improves in the private sector. Medicare, Social Security, government pensions, government insurance programs, government contracts — all continue. Gradually, the economy accumulates more and more parasites, people who do not add to its productive output. As their numbers grows, so does the limp. That is to say, government becomes even more reluctant to cut spending, reduce subsidies, eliminate boondoggles or restrain mushrooming public debt. In Britain today, “44% of the electorate [are] either in the pay of or directly reliant on the state for their income,” reports the Fleet Street Letter. In Scotland, 51% of GDP is spent by the government. In Northern Ireland, the figure is 66%. We think of Britain as a dynamic, free-market country, but the recipients of government spending can control the outcome of every election. No wonder the nation limps.
But is America any better? According to the numbers from the Bureau of Economic Analysis, the government spends only about 20% of GDP in the United States. Unlike Britain and Europe, health and education expenses are counted as largely private in the United States and not included in the government budgets. But even they are heavily subsidized and regulated. Include all the spin-offs, contracts, and subsidies to businesses, and the numbers tell a different tale — the public is on the hook for an amount equal to four times GDP.
And Americans limp more than these numbers suggest. In addition to the public debt, they drag around the ball and chain of private debt. They might think they would prefer a stronger dollar and a balanced federal budget, but they can’t afford it. The Law of Limp guarantees that.
u2022 Parasites, gamers, and swindlers — you find them all over the place in the degenerate phase — even at the head of major enterprises.
Somehow, Home Depot managed to miss the big upswing in the housing market. The New York Times reports that its share price has fallen 12% in the last five years, while its rival, Lowes, has gone up 173%. You’d think the board would have called in the CEO, Robert Nardelli, and kicked his derriere back to the paint department. Instead, his pals on the compensation committee decided he deserved to earn almost a quarter of a billion dollars over that five-year stretch.
u2022 Poor Joe Passarelli. The Palm Beach paper reports that he wakes up “anxious and sweaty” worrying about his real estate investments in Southern Florida. He’s knocked $55,000 off the asking price for his condo and still no takers.
“I was never much of an investor before this wild craze began, and somehow I backed into it,” he told a reporter. Now, he’s trying to figure out how to back out of it without getting burned.
But condo flipping isn’t as easy as it used to be. The places have gotten heavier. It’s harder to carry them…and harder to turn them over. Some subdivisions seem abandoned; there are so few residents. Many of the units are for sale. Many others are simply unoccupied, waiting for the next shoe to drop.
“For sale” signs are up everywhere. Real estate agents’ lock boxes are on many front doors.
“My sense is that people who bought an investment in 2005 are probably not going to make money,” said a local investor. “A lot of them, I think, will lose money.”
Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis.
