When Will The Debt-Based Economy Unravel?

Although there are no small number of high-profile individuals who maintain that our fiat-based monetary system is one of the biggest reasons why our country is in the mess it is in, one group has been preaching the gospel of “sound money” for more than three decades: the Committee for Monetary Research and Education. In “Gloomy Picture Perhaps Worse Than It Seems,” trading advisor Rick Ackerman, editor of the Rick’s Picks, highlighted some interesting snippets from the CMRE’s most recent meeting, held last week in New York:

Gloomy forecasts have generally held sway at the Committee for Monetary Research and Education’s annual spring dinner, but this is the only time we can recall when there were no optimists on the dais bold enough to challenge a consensus now gloomier, probably, than at any time since the 1930s. Jim Grant’s off-the-cuff talk was about as sunny as the evening’s presentations got, and even he was unwilling to allow much more than a ray of hope that everything would somehow turn out all right. Bob Hoye, on the other hand, was unequivocally bearish: “The chances of anyone fixing this mess,” he told the crowd, “are literally zero.” But the scariest talk of the night came from Bill Beach, director of the Heritage Foundation’s Center for Data Analysis.  If you find today’s economic news too depressing to imbibe, he said, “things are even darker than they seem.”

A self-described data junkie who loves to delve into the statistical facts behind the headlines, Beach says today’s economic numbers are so appalling that he’s “scared to death” to look at them.  What is most extraordinary about these times, he said, is that government at all levels has never been so willing to take on more debt. As a result, said Beach, our children will be paying back interest and principal for many, many years to come. How much do we owe? Beach asked one person in the room to stand up.  That one person - one among a hundred in the banquet room of New York City’s Union League Club that night - could be said to represent the $182 billion required to bail out just one insurer, AIG. But if you add in the expenses the federal government will incur maintaining Social Security, Medicare and Medicaid over the next 20 years, you’d have to stack the entire room’s dinner guests up to the ceiling to equal the final tally. Nor will we likely be able to grow our way out of debt, said Beach, since, in order to succeed, today’s five-year-old would need to be three times as productive as we are now while getting his pocket picked clean by the tax collector.

Teapot Dome ‘Delay”

So when will the system finally unravel?  Barron’s editor Jack Willoughby reminded the audience that it took seven years for the Teapot Dome scandal of 1921 to have a measurable impact on the economy. Pressures are building this time as well, many of them attributable to corruption and scandal, and sooner or later something will have to give, said Willoughby. “Risk always hits at the weakest point.”

Hoye concluded the evening with a sobering look back on history. He noted that the economic contraction following the Panic of 1873 lasted for more than two decades, until 1895. Although the Federal Reserve came into existence two decades later and was holding the discount window wide open at the time of the 1929 crash, that didn’t prevent the economy from slipping into the Great Depression, noted Hoye, founder of the Vancouver-based Institutional Advisors. Quoting from a 1932 Barron’s editorial, the speaker reminded the audience that all of the Fed’s anti-deflationary remedies had failed, and that bonds had gotten sucked into “the vortex of deflation.”  As much could be said of the federal government’s current, recklessly extravagant bailout - a so-far failed effort that Bloomberg News has estimated at $12.8 trillion.

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