This weekend brought us Black Friday, the beginning of our month-long celebration of shopping before Christmas. But there was little holiday cheer: despite claims that the economy is recovering, shoppers aren’t buying more things than they did last year.
Why aren’t people buying more this year? To put it simply, America has a cash flow problem; we as a nation have too much debt and not enough income. Let’s take a brief look at the math.
There’s a few trillion dollars in the world — $900 billion in cold hard cash and then a couple times that in checking accounts, savings accounts and other such bank funds. On the other hand, America as a whole, combining the debts of people, companies and governments, has roughly $54 trillion of debt. The rest of the world has roughly $50 trillion of dollar-denominated debt, thus, there’s more than $100 trillion in debt that must be repaid with dollars.
See the problem? There’s only a few trillion dollars in the world, and yet a hundred trillion dollars are needed to pay off that debt. There simply aren’t enough dollars for everyone to pay off their debts. Since 1970, the number of dollars in the world has risen steadily in linear fashion, while the amount of outstanding debt has grown exponentially so that today there is more than $10 of debt for every dollar that exists in the world.
As the gap has grown wider between debts and dollars, our government has tried to manipulate interest rates so as to make sure that people can make their debt payments. As interest rates have fallen, the amount of dollars needed to service debt has fallen.
This worked well — for a while. But now, interest rates have reached essentially zero, and the debt remains. You can’t keep stacking more debt onto on a limited amount of dollars forever; eventually the pyramid collapses. The first dominoes of this debt pyramid toppled last year as AIG, Bear Stearns, Lehman Brothers and the big automakers collapsed. It appeared the government had finally lost control of the debt machine it had built.
But the government intervened and added another layer of debt to the now-wavering pyramid by paying people to buy homes and cars with credit. The result of these new stimulus projects was even more debt, each person who took the government’s $8,000 to buy a home added another mortgage to the debt pyramid — but there aren’t any new dollars with which to pay those mortgage payments.
In short, the whole world has run out of dollars, and the global economy is seizing up and sputtering as there simply isn’t enough cash to pay the world’s bill, as seen by recent failures such as that of the gigantic Dubai World investment company.
We are now at a crossroads, as there are only two ways to tackle the debt/dollar gap. We can either print dollars out of thin air, or we can allow debts to go bad and let bankruptcy run its course. Since there is too much debt and too few dollars, the only options are to create dollars or destroy debt. The first course is that taken by Germany in the 1920s and Zimbabwe last year.
The result is that inflation would run rampant, the price of goods would soar and the value of the dollar would collapse. We got a taste of this scenario last year when gas surged to $4 per gallon before the dollar recovered and gas prices stabilized.
The other option is more common. Letting debts default leads to deflationary periods such as the Great Depression.
The government has tried to keep the economy from getting too hot or cold, but each new dose of government medicine makes the patients’ temperature increasingly unstable.
Our economy is now swinging ever more rapidly from hot to cold and back again. The government must now choose whether to print dollars to pay debt, which will fan the flames burning our currency’s value to ashes, or allow the economy to freeze over, with bankruptcies and failure clearing out the bad debt.
These are the only two mathematically possible solutions to the gap between the limited supply of dollars and the tremendous demand debtors have for dollars. Let’s hope the government chooses wisely — regardless of what they pick, it’s clear our economy still has dark days ahead of it.