Depressed about our future

By Mark Lutter

America is broke. We Americans have spent the last 15 years borrowing money for consumption instead of investment. Because of our high levels of debt, several prominent economists, including Gerald Celente — who predicted the collapse of the Soviet Union, the housing bubble and the tea parties — and Peter Schiff — who predicted both the NASDAQ bubble and the housing bubble — are predicting a coming collapse that will dwarf the housing bubble.

The national debt is $12.6 trillion. That amounts to $115,500 per taxpayer. Our last deficit was $1.8 trillion. Social Security is spending more money than it is taking in, and Medicare will become insolvent by 2017, if not sooner, because of lower than expected growth.

Private debt levels are twice what they were during the Great Depression, and the American savings rate has been hovering at about 5 percent during much of the last 10 years. The dollar has lost about a third of its value over the last decade. Our national debt will be due in three years, when the Chinese are going to have to decide whether to continue to finance our consumption binge. If your intuitive sense is that there is something fundamentally wrong with such high levels of debt and low levels of savings, then you are right.

How did we get in this situation? One reason mainstream commentators are unable to understand what is going to happen is because they do not understand economics. Modern economics has become so perverted by mathematical equations that even economists lose sight of fundamentals, not realizing that their complex models are premised on dubious assumptions. One such fundamental notion is Say’s Law, though even Say’s Law has been mislabeled by detractors to say supply creates demand. Jean-Baptiste Say himself stated, “Products are paid for with products.” This does not mean we live in a barter society, but rather that there will always be a sufficient level of societal income to purchase an economy’s entire output. This directly contradicts the conventional wisdom that we must go deeper into debt to get out of this recession.

Can we stop the potential upcoming collapse? No. To understand why the recession is necessary, one must understand the cause. The bust is not the problem; the boom is. The bust is the economy redirecting capital away from poor investments that are exposed during the bust. An example from the housing bubble illustrates this idea well: The problem is not that we stopped housing construction; the problem is that we were building too many houses in the first place. Just as the old scribes lost their jobs when the printing press was invented, so too must some real estate agents lose their jobs to find productive gainful employment. Unfortunately, foreigners have been subsidizing our consumption for such a long period that the necessary economic restructuring will be painful to many.

Though it is impossible to speculate on which straw is going to break the camel’s back, the outcome is relatively easy to predict if one understands the fundamentals. First, it is going to be an inflationary depression. That is, we will see prices spiral out of control. As a result, interest rates are going to increase greatly. As a result of the inflation, we will experience large scale civil unrest comparable to the riots that recently occurred in Greece as a result of austerity measures imposed by the government.

Whether we will be able to pull ourselves out of this depression is going to be a direct result of the policies we adopt as this depression becomes apparent to the mainstream.