Charles Hugh Smith, whom we've met many times in these pages, has a gloomy forecast for the economy in the short to medium term. It's depressing reading, but it's vitally important to understand what's probably heading towards us. Too many people are only looking at superficial details, not examining the "big picture" and planning (or failing to plan) accordingly. Mr. Smith doesn't make that mistake.
Here's an excerpt. Bold, underlined text is my emphasis.
While the stock market euphorically front-runs the Fed and a V-shaped recovery, the reality is the crash has only just begun. To understand why, look at income and debt. Income, earned and unearned, is in free-fall, while debt — which must be serviced by income — is exploding higher.
Bailouts are not a permanent substitute for income. In the short-term, bailouts are a necessary substitute for lost income. But longer term, subsidizing income with borrowed money weakens the currency and the economy, as productivity stagnates.
As for servicing debt — the unemployed working class is getting an extra $600 a week not out of kindness but to make sure these households can continue to service their debts: auto and truck loans, student loans, credit cards, etc. Absent a federal bailout, millions of unemployed would cease making loan payments, creating a financial crisis for lenders.
. . .
The money that’s being sent to unemployed workers is borrowed, and small businesses are being offered loans, much of which will be forgiven if the funds are used to pay wages. In other words, all of these trillions of dollars being substituted for earned income are borrowed ... there are no capital flows which will support a return to commerce and productivity that will pay wages or generate investment income.
. . .
The crash has only just begun. Everything, including a rational, connected-to-reality, effective financial system, is on back-order and unlikely to ship any time soon.
There's more at the link.
I'm afraid that from a logical, rational perspective, Mr. Smith is quite correct. Every cent the government is throwing at the coronavirus pandemic and its economic consequences is borrowed money - and that's on top of trillions upon trillions of dollars already borrowed in the past. That leaves only three possibilities to deal with so vast a burden of debt:
- The debt will be repaid, but that'll take a long time (decades), and the burden on the economy will hobble further growth and development.
- The currency will be deliberately inflated (i.e. the dollar will be allowed to weaken), thereby allowing the "old" debt to be paid off with new, much cheaper dollars. This will lead to massive economic disruption (see the Weimar Republic for details).
- The debt will be repudiated (i.e. rejected and not paid) - which will destroy the "full faith and credit" of the United States, and have catastrophic worldwide consequences on the international economic system.
Mr. Smith teamed up with Gordon Long to discuss the impact of the current economic situation on municipal and local governments. Since many of us live under the administration of such entities (including yours truly), this is a vitally important subject, as well as a microcosm of what our big cities are facing. As Mr. Long points out, such governments have "expenses going out, but nothing coming in".
I respectfully suggest that this video provides vitally important information for all of us. It's half an hour long, but well worth your time, IMHO.
Brace yourselves, folks, and keep your powder dry - economically and in every other way.
Peter
