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America’s Debt Dependence Makes It An Easy Economic Target

Brandon Smith
June 20th, 2018
Alt-Market.com
Comments (43)
Read by 2,941 people

This report was originally published by Brandon Smith at Alt-Market.com

There is a classic denial tactic that many people use when confronted with negative facts about a subject they have a personal attachment to; I would call it “deferral denial” — or a psychological postponing of reality.

For example, point out the fundamentals on the U.S. economy such as the fact that unemployment is not below 4% as official numbers suggest, but actually closer to 20% when you factor in U-6 measurements including the record 96 million people not counted because they have run out of unemployment benefits. Or point out that true consumer inflation in the U.S. is not around 3% as the Federal Reserve and the Bureau of Labor Statistics claims, but closer to 10% according to the way CPI used to be calculated before the government started rigging the numbers.  For a large part of the public including a lot of economic analysts, there is perhaps a momentary acceptance of the danger, but then an immediate deferral — “Well, maybe things will get worse down the road, 10 or 20 years from now, but it’s not that bad today…”

This is cognitive dissonance at its finest. The economy is in steep decline now, but the mind in denial says “it could be worse,” and this is how you get entire populations caught completely off guard by a financial crash. They could have easily seen the signs, but they desperately wanted to believe that all bad things happen in some illusory future, not today.

There is also another denial tactic I see often in the world of politics and economics, which is what I call “paying it backward.” This is what people do when they have a biased attachment to a person or institution and refuse to see the terrible implications of their actions. For example, when we point out that someone like Donald Trump makes destructive decisions, such as the continued support of Israel and Saudi Arabia in Syria and Yemen, or the reinstatement of funding for the White Helmets in Syria who are tied to ISIS, Trump supporters will often say “Well what about Obama?”

This is a game of shifting accountability. Is one person worse than the other? Possibly. I say give it time and make notes. However, the negative decisions of one politician we don’t like do not diminish the negative decisions of another politician we might like. They should BOTH be held accountable.

The same goes for countries and economies. When an analyst points out that U.S. debt is at historic highs and is utterly unsustainable, people in denial will say “but what about China or Europe?” One does not negate the other and, of course, there are differences that make the situation in the U.S. far more tenuous.

Primarily I am talking about America’s endless dependency on the world reserve status of the U.S. dollar and, beyond that, the steady expansion of debt at low interest rates for the past decade.

The Federal Reserve, once the No. 1 buyer of U.S. debt, has essentially declared it is cutting off support and has begun dumping assets from its balance sheet. The only assets the Fed seems to be maintaining are Mortgage Backed Securities (MBS). All others are being cut, including Treasuries. The American economy is inexorably attached to the idea of our Treasury debt as a safe investment, with our national debt spiking above $21 trillion and many trillions more owed to entitlement programs depending on how you calculate the expenditures, there is a vital need for steady foreign investment in U.S. debt.

But what happens when investment in U.S. debt becomes politically unsavory? Consider the current escalation of the trade war; Many pro-dollar talking heads and cheerleaders have argued in the past that no nation has the guts to dump dollar denominated assets and risk the wrath of American “economic might.” But, already we have seen Russia dump half its U.S. Treasury holdings in a single month and the trade war has only just begun.

Is Russia’s action a sign of things to come? Will other nations like China follow the same strategy? We will have to wait and see, but I believe this is the inevitable outcome of the trade war if it drags on for the rest of the year.

America’s dependent nature, feeding off of foreign investment to support its debts, is a disaster waiting to happen. The concept of economic “recovery” is laughable until this issue is addressed.  And, entering into a trade war while ignoring this blaring weakness is foolish, to say the least.

Beyond the issue of government (taxpayer) debt, let’s not forget about American corporations and consumers. U.S. corporate debt as a percentage of gross domestic product is at historic highs not seen since the housing bubble of 2008 or the dot-com bubble of 2001. There is a distinct difference, though, that makes today’s bubble far more insidious. After years of near-zero interest rates, corporations have become addicted to cheap debt. So much so that they have been borrowing nonstop to support their own stock prices through stock buyback manipulation. But now the Fed is raising interest rates and has committed to expanded hikes in the future.

So, what will corporations do as the cheap debt dries up? Thus far, they are spending the majority of their Trump tax cut still trying to artificially prop up stock process. When this money runs out (and I believe it will much faster than the mainstream thinks), the existing debt of these companies will cost much more to finance, and future borrowing at the same pace will become impossible. This is a threat that is developing now, not in some far-off future.

Eventually, corporations will have to make deep spending cuts rather than borrow. This means mass layoffs, store closures and potential cuts to pensions. And, of course, no more stock buybacks, meaning a market crash will ensue.

What about the U.S. consumer? U.S. consumer debt is set to reach new highs by the end of the year; around $4 trillion by official estimates.  While discussion continues about the alleged “labor shortage” in the U.S., one thing is clear — the jobs that do exist do NOT pay wages that keep up with true inflation. When we see spikes in retail sales in the U.S. and this is applauded as economy recovery, very few mainstream analysts point out that higher retail sales are merely tracking higher inflation.

That is to say, consumers are spending more money on less stuff. Again, this is unsustainable, which is why consumer debt is exploding. Dependency on credit cards and loans is being used by the public to offset much higher costs. But as the Fed raises interest rates, this too will end. Higher Fed rates translate to higher credit rates as well as higher mortgage rates (indirectly). With higher interest payments comes a large drop in overall spending.

As you can see, there are at least two forces at work here that will end all talk of U.S. recovery and which undermine any notion of economic strength — the first is the trade war, which I believe is a massive distraction designed to draw attention away from the actions of international banks and central banks. The second is the Federal Reserve, which has addicted the country to cheap fiat and is now flushing the drugs. We cannot delude ourselves into thinking that this trend will remain slow or that it will not develop into a crash in the near term. We also cannot simply deflect to other countries like China or those in Europe as if their problems are somehow worse and therefore ours are not a concern.

The fact that the health of the US economy is inexorably reliant on the continued foreign demand for the dollar and Treasury debt means any reduction of the dollar’s world reserve status or petro-status, or any decline in treasury purchases, will directly affect the carefully crafted image of America as a stable system.  Without a sudden and aggressive resurgence of domestic production and innovation America has no safety net in the event that our debt addiction is used against us.

The argument that the central bank can jump in at any time to monetize that debt and reduce the danger is also delusional.  This assumes first and foremost that the Fed WANTS to reduce the danger.  I believe they want the danger to increase, not decrease.  Debt monetization also has the added bonus of causing even more inflation as foreign investors dump their dollar denominated assets back into the US.  Monetization is a poison, not a cure.

The crisis is here, now. Seeing and accepting it allows us to prepare accordingly. Denying it as inconsequential sets people up as victims of their own bias and ignorance.

***

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You can contact Brandon Smith at: brandon@alt-market.com

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Author: Brandon Smith
Views: Read by 2,941 people
Date: June 20th, 2018
Website: http://www.alt-market.com/

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43 Comments...

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  1. fullmoonrizing says:

    I agree that the crisis started decades ago. It is going to continue to get worse. We just have to wait and see how quickly it all deteriorates.

  2. Kevin2 says:

    There are times you speak and times you listen. Awaiting DKs rebuttal for analysis.

    • Anonymous says:

      Kevin2, your buddy is no expert and he knows about as much as anyone here.
      Maybe less…

    • Prepperplus says:

      DK is a moron. Never been right on a single claim or prediction on this site, which is why he always says “check the archives…” You could spend months searching the archives and not find one time he said something accurate.

    • TharSheBlows says:

      DK doesn’t know his head from his ass about economics.

      Of course the Government Lies to the American people on Labor statistics. You think they are going to report their fiscal policies are an utter disaster and the country is bankrupt. s Why its Apple Pie More needless wars and go wave your flag. They needlessly spend money on adventurism and nation destroying neglecting the American people and our economy and infrastructure. The Fascist Wallstreet has lost its way on actually creating class products the world begs to buy, but it instead destroys nations so these Wallstreet corporations can run their monopolies globally with a chosen dictator at their helm. And us Tax payers get the Bill for that drunk party of psychopaths.

      Sit-down strike people, stop feeding the beast. No income means you pay no taxes. Starve the beast.

      • bunji says:

        You are the ass. DK is a knowledgeable person but u are an asshole and attack so many fine folks on this site! Go away !

      • Kevin2 says:

        I agree with your second paragraph but disagree with the first. I listen to everyone and decide from there. While I may at times disagree with DK he is knowledgeable and far more educated in economics than I.

  3. laura ann says:

    People gotta watch sales, clip coupons like I have for decades, learned it when young and low income, and it became a habit (I am not a couponer freak with lots of coupons that cashiers hate). I get them from store flyers and news papers, magazines passed on to me by friends, find them in waiting rooms in Drs. offices. I have heard/read about lots of what’s in article for years, yet folks need to realize the deep state freaks didn’t “take over everything” after the crash of ’29- one yr after the folks got married. Ialways wondered why, when the country was in a big mess then. No one seems to know answer to this day.

  4. The Deplorable Braveheart says:

    People today just can’t understand the concept of living within or below your means. I use cash for most of my personal transactions and I piss off cashiers almost every time I do so. I do as little online shopping as possible. My vehicles come from private owners for cash only; no financing for me. I always manage to have money set aside for preps and that’s what it goes toward UNLESS some type of emergency comes up. Being debt-free has a certain advantage to it. Now I just have to wait for TharSheBlows to come back on here and ridicule me for it but that’s OK. I know I’m on the right track.

    • Kevin2 says:

      The Deplorable Bravehear

      There is nothing the matter with credit cards. The problem is if you don’t IMMEDIATELY pay the bill as soon as you get home. We pay no interest. We get frequent flier miles from ours. We only use a credit card on line. If anything you buy is broken or has any other problem you have an advocate. No business wants to lose their credit card status. The key word with it all of this is discipline. Prepping is discipline. Living below your means is discipline.

      • The Deplorable Braveheart says:

        Kevin2, agreed about credit cards but at this late stage of the game I still prefer to avoid them.

        • Kevin2 says:

          Like physicians describe steroids as “the good devil”, they’re dangerous. Like everything its discipline. I’m too long in the tooth to loosen up. If one day I spend wildly senility has arrived.

      • JayJay says:

        I love my free gift card from Lowe’s every 3000 points I put on my CC!!
        When I do use the CC, I place the money in an envelope after buying whatever–today, top soil for those althea it’s been too hot here to plant….tomorrow, I’ll sart.
        I feel like I used the CC company–I didn’t pay them a dime–I get $25 gift card.

        It doesn’t add up quickly, but wouldn’t be there at all if I didn’t use CC—and I seem to use Amazon a lot.

    • TharSheBlows says:

      The Dep BH Deadbeat parrot squawks again.. no CC’s /Used cars, blah blah… N Georgia to squat on someone else’s land. blah blah. Like you even have a choice in life, because you failed to pay your bills and destroyed your credit years ago, so all you got now is cash, that’s it period. F for Failure on economics. You cannot get a single credit card because you have sh!tty credit. Like you even have a choice.. lol

      Try pulling a free credit report and fixing your debt problems you created Dep BH. Or remain a parrot deadbeat blah blah squawk.

    • TharSheBlows says:

      Hey Dep BH. How is it you claim to be debt free and have crappy credit report. Somewhere down the line you borrowed money and failed to pay it back. Not paying your debts back does not mean you are debt free. And you sure don’t seem to know anything about economics or how to manage credit and finance. A homeless bum on the street lives on cash only. Does not make him a smart man does it.

      So Dep BH after living 60 years with that philosophy, tell us what your net worth is?

      • Archivist says:

        You are wrong.

        For example, I had a low score back in the 1970s (however they scored things back then), but it was because I had never borrowed any money or bought anything on credit.

        So I went to a furniture store that was having a sale and seemed to be desperate for business. I bought some stuff, and they got a finance company to do the loan on the condition I paid the furniture store a down payment. I didn’t have that, but the furniture store was so desperate, they financed the down payment themselves.

        So it is possible to have bad credit without having done anything wrong.

        Take it back and tell him you’re sorry.

      • The Deplorable Braveheart says:

        TSB, this is one time you actually made me laugh. How do you know I ever borrowed money from anyone for anything? I’ve tried a few times way back in the day for two types of loans and was turned down. So when I’m turned down for a loan, CC, or whatever, and I DON’T sign any papers regarding such items then how the hell do I have an obligation to pay anything? WELL DUH! And I’ve ALWAYS paid my other bills on time for the most part. Yeah I was late a few times on one bill or another but I always got caught up INCLUDING the late fees. Sounds like you need to go back and check the definition of ‘deadbeat’ again and I’m NOT homeless either. Now who is the ‘squawking parrot who doesn’t know wtf he’s talking about?

      • bunji says:

        Mac… do u realize this idiot is a troll and attacks folks to destroy this site??? I am sick of this parasite attacking good folks on this site and u let him????

  5. aljamo says:

    Never had a credit card in my life either. Same as you DB, never bought a car without paying cash. Use coupons like you laura ann, a true penny pincher. I’m so cheap I squeak. Strange that capitalism left out provisions for rising costs of living needing enough money to afford it.

    • rellik says:

      aljamo,
      Inflation is a Democrat construct. Our government artificially causes it on purpose. Capitalism should result in cheaper prices as it works on the idea that your product will only bring the price that someone is willing to pay for it.

  6. rellik says:

    DB,
    I definitely agree about debt, cash, and private sales.
    Because of where I live I do a lot of online shopping.
    For example I recently ordered a grinder so I can make
    my own black powder. You simply cannot get
    such a grinder locally(I will make my own charcoal),
    nor can you get the other necessary
    chemicals locally so I go online.
    My 10 kW of solar panels was bought online for far less than
    local prices.
    My point is sometimes you have take advantage of technology.
    but always keep on prepping.

  7. The Deplorable Braveheart says:

    Rellik, I do take advantage of technology when it’s absolutely necessary but for the times when it’s NOT I’ll still use cash and buy locally.

  8. The founders of the Republic fought a revolution because they objected to “taxation without representation”. We’re passing on a national debt in excess of $20 trillion dollars to future generations of Americans who have no say in it at all.

  9. Kevin2 says:

    Were big fans of garage / estate sales. Got a rear bagger, self propelled Lawn Boy one year old for $25. The throttle cable was hit with a weed eater and stretched. The seller, an office type bank employee (lessened my guilt knowing he was a bank employee) had no clue why it wasn’t working.

    • rellik says:

      K2,
      I have done similar, but I have a Troy-bilt tiller right now I can’t figure out the model of, or get parts for, until I identify it.
      price was right, but right now it is #250 of junk.

      • Archivist says:

        Troy-Bilt is a good brand. My riding mower is over 10 years old and still looks and runs like new.

        The push mower is even older and still starts on the first good pull. I slowly pull the rope out fully and let it go back in. I do that once more for good luck. Then I really pull the rope, and the mower starts every time.

      • TharSheBlows says:

        I had a Troy built rear tiller, Worked great. I bought it when I was 19 Yrs old for $700, I used it 2 full seasons tilling other people’s gardens in the spring and fall. Then I sold it for $700, same as I paid… Never had to put a repair into it. Business 101, make a profit. All cash and checks. That could also be a good part time business tilling peoples garden’s. I put small adds in the paper for a few bucks and my phone ran off the hook in the spring more than the fall. I would till one garden and the neighbors next door begged me to till theirs. It was a good cash biz. That was 35 years ago. I could use that tiller right now on my property. Never be afraid to take a chance to make extra money.

  10. The Deplorable Braveheart says:

    Kevin2, I go to garage sales on occasion myself. A small percentage of my survival gear came from a few garage sales at some real bargain prices. You’d be surprised what you can find on occasion at a garage sale.

    • Kevin2 says:

      There are many “older” retirees here in Florida that pass on. Their kids sell everything and its extremely well kept. I find stuff they owned, manufactured decades ago, like Skill Saws made of metal (heavy) Craftsmen are far better than the junk today. Their used cars are 15 years old with 80k miles, garage kept, well maintained. Laughably however they have a box TV, 1980 vintage and a VCR. Garage sale “pickens” are unusually good here.

  11. Countries only cash in their Treasuries to aquire FRNs to pay dollar denominated debt or for forex trades. International trade is almost all done in FRNs and Treasuries are fungible with FRNs. Buy them when you have surplus FRNs and cash them in when you need FRNs.

    No country is “dumping” Treasuries just to get rid of them.

  12. rellik says:

    JRS,
    I do three month Tbills as a rule.
    FRNs are a little scary.
    Hard to dump “Treasuries”
    and make money.
    For all SHTF people Treasuries
    aren’t taxable and as long as you
    pay your taxes I’ll get paid.

  13. Dead Meat says:

    There is no red vs. blue.
    It’s only them vs. YOU…
    Two wings of the same bird, and this bird is a vulture.
    Spread the word.
    Let’s end the two party system…

  14. Dead Meat says:

    ###
    # #
    #(o) (o)#
    _____OOO__ # # __OOO_____
    # #
    # #
    ###

  15. If you and a party of friends are eating out at a restaurant, you can’t do it forever! Sooner or later, you have to settle the bill! Party’s over!

  16. Old Codger says:

    ALL of the G20 are drowning in red ink!
    Not just America.

 

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