/ world today news/ The end is near – depending on how you define “near” and where you live. For example, the Italian banking sector is burdened with debt, and a small tremor would be enough to collapse large Italian banks.
Two weeks ago, hedge fund legend Stanley Druckenmiller made an important announcement that the crisis was about to hit and investors should get rid of their equity holdings. He and others who hold similar views have become the subject of a wide-ranging debate among economists — more about when the next global crisis will be and the American recession than whether there will be one.
The crisis has already affected many – depending on where you live and what assets you own. It would subsequently spread to billions of other people, encompassing a large portion of the American population. If you live in other places like Greece, Brazil, and Puerto Rico, you’ve probably already seen a significant drop in your real income and standard of living. If you’re retired and living on interest from savings, you’ve seen a drop in your income as a result of too-low interest rates maintained by the Federal Reserve.
The main problem is that most countries are registering little or no growth as a result of excessive government spending (especially on transfer payments), disruptive regulations and tax policies. The unwillingness of politicians (and those who vote for them) to rein in spending and regulations has led to an explosion of national debt that is unsustainable at current levels of economic growth. This, in turn, fuels the demand for more government spending (more free stuff) and therefore more debt.
People buy US government bonds and securities because they believe they have real value. Their value derives from the fact that the government has the power to extract real wealth from the private sector, primarily through taxes, to pay the interest and principal on the debt. This issue was settled when the US government suppressed the tax protest known as the “Whiskey Rebellion” (1791-94) (the whiskey tax was the first imposed by the newly formed federal government on a domestic product), and George Washington demonstrated that he would use force to collect the whiskey tax. Taxation is a Congressional power, but when the Fed sets interest rates below what the market would command or even below inflation, it effectively imposes a wealth tax—as anyone with a savings account has noticed.
The U.S. government has no intention of defaulting on the debt because it sells bonds in national currency and prints notes—even though the real value of the principal and interest may be reduced by inflation. Countries that do not sell bonds in national currency, such as Greece (with euro-denominated bonds) or Argentina (with dollar-denominated bonds), are clearly in default because they are left with no foreign currency with which to pay principal and interest. US states, cities and territories, such as Puerto Rico, can also default on their debt because they cannot print the US dollars in which their bonds are denominated.
We are currently witnessing a crisis that is slowly unfolding. Because of it, real incomes in a number of countries have stagnated or fallen sharply as a result of the collapse in commodity prices and the jump in the cost of debt service. Debt service is paid for through sharp tax increases, inflation, or an indirect “wealth tax” levied on savers in the manner described above. More and more countries are likely to be hit by large declines in income due to the cost of servicing debt. For example, the Italian banking sector is burdened with debt that it is unlikely to be able to service, and the government debt is definitely over 100 percent of the Gross Domestic Product. A small tremor would be enough to collapse major Italian banks, and this could cause a domino effect across Europe. And no one knows to what extent German taxpayers will be willing to bail out the Italians.
At the present time, many governments are eating the grain for sowing – that is, they are destroying the real wealth in their countries because too many people are consuming more than they are producing and investing productively. Greeks, Brazilians, Russians, and many other nations are now realizing that the real value of the wages and government transfer payments they receive will continue to fall until the total value of their collective output exceeds their consumption and depreciated capital. At that point, their economies will start to pick up again.
In the US, many politicians are vocal about wage stagnation, and these are the same people who have been most aggressive in pushing for the destructive spending, taxes and regulations that are causing the problem. Both democracies and totalitarian socialist states are prone to cyclical overspending – leading to either change or collapse. For example, Venezuela was a thriving democracy and had the world’s largest oil reserves, but today people cannot afford basic food or even toilet paper as a result of their socialist experiment.
No one can predict the future with certainty. But I’m not backing down from my January forecast of a recession by the end of the year because those in control continue with economic policies that destroy growth.
——-
Richard Rahn, American economist. He defends the ideas of libertarianism and minimal government regulation of business. It is part of the “Mont Pellerin” society, associated with the Chicago School, and considered a philosophical center of neoliberalism. His analysis was published in the Washington Times.
#Richard #Rahn #Financial #Crisis
