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The US federal government spent $369 billion in
August, but only received $179 billion in revenue. The resulting $190 billion
deficit was a record for any August and the third highest monthly deficit in
the current fiscal year, which ends on September 30th.
Looking at this deficit another way, the federal
government borrowed 51.6% of the dollars it spent in August. Consequently,
the growth of the national debt continues to accelerate, as illustrated by
the green bars in the following chart.
This chart also illustrates that the deficit –
the gap between expenditures (red line) and revenue (blue line) – is
not narrowing to any significant extent, which is a critically important
observation. A persistent gap that is barely shrinking has never happened
before.
Normally economic activity revives after a
recession, which in turn leads to increased revenue for the federal
government, like it did from 2004-2008 when the more rapid growth in revenue
almost eliminated the deficit. But not this time. Revenue is increasing, but
so are expenditures at almost the same rate.
Consequently, the deficit is not shrinking, which
confirms a point I have made repeatedly for two years. The US is confronting
a structural problem. It is not a cyclical one that will go away with
improved economic activity. Importantly, the failure to address this problem
will eventually lead to hyperinflation and the destruction
of the dollar.
Mr. Bernanke sees it differently. Here is what he said
in his well-publicized Jackson Hole
speech on August 31st.
“In
light of the policy actions the FOMC has taken to date, as well as the
economy's natural recovery mechanisms, we might have hoped for greater
progress by now in returning to maximum employment. Some have taken the lack
of progress as evidence that the financial crisis caused structural damage to
the economy, rendering the current levels of unemployment impervious to
additional monetary accommodation. The literature on this issue is extensive,
and I cannot fully review it today. However, following every previous U.S.
recession since World War II, the unemployment rate has returned close to its
pre-recession level, and, although the recent recession was unusually deep, I see little
evidence of substantial structural change in recent years.”
[emphasis added]
Note how Mr. Bernanke relies on precedent to defend
his point of view. He believes that economic activity will grow just like it
has after “every previous U.S. recession since World War II”
because unemployment will fall as it always has, even though unemployment
remains stubbornly high. Not only does he thereby imply that so-called
black-swans – which are rare events – exist, he clearly refuses
to believe that we may already be in one. To see the “evidence of
substantial structural change” he says is missing, all Mr. Bernanke
needs to do is look at the deficit gap so clearly illustrated in the above
chart.
It is not the first time Mr. Bernanke has relied on
‘what is supposed to happen’ instead of what is actually
happening. The following is from a CNBC interview on July 1, 2005.
“INTERVIEWER:
Tell me, what is the worst-case scenario? We have so many economists coming
on our air saying ‘Oh, this is a bubble, and it’s going to burst,
and this is going to be a real issue for the economy.’ Some say it
could even cause a recession at some point. What is the worst-case scenario
if in fact we were to see prices come down substantially across the country?
BERNANKE:
Well, I guess I don’t buy your premise. It’s a pretty unlikely
possibility. We’ve never had a decline in house prices
on a nationwide basis. So, what I think what is more likely
is that house prices will slow, maybe stabilize, might slow consumption
spending a bit. I don’t think it’s gonna
drive the economy too far from its full employment path, though.”
[emphasis added]
Just a few months before, Doubleday published The Collapse
of the Dollar and How to Profit From It, the book I co-authored
with John Rubino. Here is what we said on page 164
after providing our analysis of the housing market: “To put it bluntly,
by virtually every measure, today’s housing market is a classic
financial bubble.” The housing bubble was apparent not only to John and
me, but also the dozens of others who understand the fundamental economic
principles of the Austrian School. Apparently, that does not include Mr.
Bernanke.
In conclusion, don’t put your faith on the
pronouncements of any central planner. Rely instead on your own common sense,
which hopefully has been well grounded by insights from parents or
grandparents who lived through the collapse of the German Reichsmark,
Serbian dinar, Argentine austral or any of dozens of other currency
collapses. If you did not have that opportunity to learn from relatives who
experienced a currency collapse firsthand, then I recommend that you read Mises, Rothbard and the other
Austrian School scholars published at Mises.org.
Once you do, then decide
for yourself whether the problem facing the US is cyclical or structural.
Common sense and experience are telling me that it is structural.
Sadly, policymakers are doing little if anything
about it. So we need to prepare for the consequences. The best way to do that
of course is to own physical gold and silver.
Originally published at http://www.fgmr.com/cyclical-or-structural.html
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