By Daniel R. Amerman, CFA
The United States government has five interrelated motivations for destroying the value of the dollar:
1. Creating money out of thin air on a massive basis is all that stands between the current state of hidden depression, and overt depression with unemployment levels in excess of those seen in the US Great Depression of the 1930s.
2. It is the most effective way to meet not just current crushing debt levels, but to deal with the rapidly approaching massive generational crisis of paying for Boomer retirement promises.
3. It creates a lucratively profitable $500 billion a year hidden tax for the benefit of the US government which is not understood by voters or debated in elections.
4. It is the weapon of choice being used to wage currency war and reboot US economic growth; and
5. It is an essential component of political survival and enhanced power for incumbent politicians.
In this article we will take a holistic approach to how individual short term, medium and long term pressures all come together to leave the government with effectively no choice but to create a substantial rate of inflation that will steadily destroy the value of the dollar.
If you have savings, if you rely on a pension, if you are a retiree or Boomer with retirement accounts – any one of these five fundamental motivations is by itself a grave peril to your future standard of living. However, it is only when we put all five together and see how the motivations reinforce each other, that we can understand what the government has been and intends to continue doing, and then begin the search for personal solutions.
Reason One: The Political Interests Of Self-Serving Politicians
As further covered herein, almost 9% of the US economy is currently funded by deficit spending. From a political perspective, this $1.3 trillion a year is “free money” that politicians get to disburse on a political district and favored special interest group basis. In other words, roughly $1,000 per month, per American household can be used to reward friends and can be withheld from enemies, with personal credit being taken by the benevolent politicians for this never-ending largess.
In past decades, politicians were restricted to spending perhaps $200 or $300 per month per household over and above what the government was collecting in taxes, with the difference being borrowed in the bond market. Anything above that would require the unpleasantness of raising taxes, which might put individual politicians in danger of actually losing their position and privileged lifestyle if he or she wasn’t in a “safe” district. However, in the current climate all limitations are gone, the pork is rolling out on a historically unprecedented basis, and the politicians are wielding unprecedented power.
So why do the limitations usually exist on at least some level, and why are they gone now? Historically, the US government has directly created money out of thin air on a massive basis to fund deficit spending during the Civil War, and also during the Revolutionary War. There is a very good reason such governmental actions are so rare: the value of the US dollar was rapidly destroyed in both instances. So, this spending without limit would not ordinarily be a sensible path. Unless, from the government’s perspective, there were other dangers that were considered a greater threat, that could be addressed only through destroying the value of the dollar.
Reason Two: To Hide A Depression
I have written numerous articles about various aspects of Reasons Two through Five for some years now, and my long term readers and subscribers have been well aware of the building pressures. While the emphasis of this article is on the interweaving of the short, medium and long-term relationships between the five reasons, we will first set the stage by taking a few paragraphs each to briefly review the individual government motivation, with a link to a full length article that covers the problem in more depth.
While you wouldn’t know it from government press releases or media headlines, there has been a gaping hole in the US economy since 2008, as illustrated below:
During the first round of the financial crisis, the US private economy nearly collapsed, threatening to send the US economy straight into deep depression. We’re talking about a $1.3 trillion private sector collapse that was contained only by the government fantastically increasing the money it spent, even while tax revenues were falling. The creation of huge government deficits has been all that has maintained even a facade of semi-normalcy. Remove the mechanism of the government creating money so that it can spend what it doesn’t have, and it is straight to official Great Depression-level unemployment in months.
Even as the true gravity of the situation is hidden from the general public, so too is the true cost of the grossly irresponsible short-term “band-aid” that is being used to cover the hole in the US economy. The destruction of the value of savings in general, as well as the impoverishment of Boomers and retirees in particular, is explained in my article linked below, “Hiding A Depression: How The US Government Does It.”
Reason Three: A Desperate Attempt To Escape Depression By Waging Currency War
The US government has been waging currency war since September of 2010. Simply put, the US would have great difficulty emerging from the depression described above so long as the US dollar is “strong”, because a strong dollar translates to “expensive” US workers who have difficulty competing for market share even in the US economy, let alone abroad. One solution is that when a nation slashes the value of its currency, its workers become relatively cheaper, and they then cannot only better defend their domestic market share, but can begin to take market share in foreign economies as well. However, when a major nation goes on the offensive, many trading partners will counterattack and try to defend their economies, not by making their own currencies stronger, but by making their own currencies weaker, so that their domestic workers remain relatively inexpensive and will be better able to compete for market share.
To successfully go on the currency offensive and negate attempted counterattacks, Federal Reserve Chairman Bernanke chose a radical tool – he publicly announced that the Fed would be directly creating money on a massive scale equal to 9% of the US economy, with the proceeds going to purchase US government debt in the secondary markets. Ultimately, the only protections for a symbolic currency (such as the US dollar) are the policies deployed by the central bank to maintain that value. And when the nation’s chief central banker directly threatens to use his power to destroy the symbol rather than preserve it – the threat is extraordinarily effective.
There is no free lunch, however. While the US government is insisting to the world-at-large that it is not engaged in currency warfare, in order to maintain the plausible deniability that is essential to diplomatic doublespeak, it is also hiding the heavy cost from its own citizens. The US standard of living since the late 1990s has been based on having a “strong” dollar and huge trade deficits – meaning we haven’t actually been able to pay for what we consume for a long time. Therefore, even as jobs and the real economy grow, there is a drop in the overall standard of living, that is not evenly weighted – but is disproportionately born by savers, Boomers and retirees.
Much more information on how this works and the specific ways that older citizens will be bearing most of the pain can be found in my article linked below, “Bullets In The Back: How Boomers & Retirees Will Become Stimulus, Bailout & Currency War Casualties”.
These second and third elements of hiding a depression and waging currency war are tightly interwoven, and could even be called “killing two birds with one stone”. The money doesn’t exist to keep the US from openly plunging into depression, it simply isn’t there for a fiscally responsible government. And covering the economic hole by creating money out of thin air at a rate equal to 9% of the total US economy is so fiscally irresponsible that few nations dare a counterattack of such magnitude. For now, massive monetary creation allows the US to not only cover over the current hidden depression, but also to wage all-out currency war to try to emerge from that depression.
However, to fully understand the agenda of the US government, we have to look at the greatest financial problem of all, and how destroying the value of the dollar is the intended solution.
Reason Four: Dodging National Bankruptcy
Sometimes households reach the unfortunate point where when they add up the credit cards, mortgage payments, and 2nd mortgage payments – they realize that they will never be able to pay their bills. They know they are bankrupt and there is no way of dodging that. But instead of reducing their spending – they may even step up the spending, until all the lines of credit are maxed out, and the bills are all in arrears. Because, once you know bankruptcy is inevitable anyway – why slash your standard of living before you absolutely have to? Partying it up now for another few months won’t change the destination, so why not?
Fortunately, relatively few ordinary people think that way. There is ample evidence, however, that a good number of politicians hold that mindset when it comes to budget deficits that appear impossible to repay, at least in the conventional manner.
There is a lie that is being frequently repeated, which is that our children and grandchildren will be slaving away for decades to pay back the money that we’ve been borrowing to fund this reckless deficit spending. The assumption underlying the lie is that if it weren’t for the current spending, the nation would be fine, and therefore increased taxes will be needed to pay back the borrowing.
Except that the nation isn’t fine. Like most other major developed nations in the world, the United States has been effectively bankrupt for quite some time, with a day of reckoning that is approaching fast with or without the current outrageous level of deficit spending.
The graph below is from my article, “Six Layers Of Deficit Impossibilities Mean Retirement Catastrophe”.
As developed step by step in “Six Layers”, when we add up current and future Federal deficits, as well as unfunded Social Security, Medicare and other unfunded government promises, the total comes to over $785,000 per non-retired household (over the coming years) that has an above poverty line income. And this isn’t even the total cost – it is the excess cost over and above current estimated tax receipts, which assumes a healthy and growing economy. When we drop the assumption of an economy growing at the same rates of the last 50 years, then the shortfall goes far higher – perhaps over $200 trillion for Social Security and Medicare alone by some recent estimates. That would raise the total shortfall to over $2 million per non-retired and above-poverty-line household.
If taxes can’t pay (and it’s ludicrous to think they can), and the US doesn’t declare bankruptcy, then just how do we cover the gap?
Short answer: pay in full, but make the dollar worth five cents. This drops the per household cost for everything from almost $800,000 down to about $40,000. Painful, but manageable over a period of 20-30 years.
Merely make a dollar worth five cents, and impossible government promises become quite payable. The problem with this “solution” is that it also requires making most people’s life savings worth five cents on the dollar.
Reason Five: Create A Massive Hidden Tax
The Federal Reserve effectively controls short, medium and long-term interest rates in the United States, and this means that it controls the borrowing costs of the United States government. As developed my article linked below, “Hiding A $500 Billion Tax On Savings: How The Government Deceives Millions”, by forcing interest rates below the rate of inflation, the Federal Reserve creates about a half trillion dollar per year “windfall” gain for the Federal government.
This is not “free money”, far from it. Every dollar of benefit for the government from interest rate manipulations comes directly out of the pockets of savers. That is, for the government to come out ahead by $500 billion per year requires savers and pension funds to come up short by $500 billion per year. This makes it a tax in all but name. It is also essential to note that two elements have to come together to make this hidden tax work: 1) there have to be low interest rates, and 2) there also has to a substantive real rate of inflation (which can be quite different from the official rate).
From a politician’s perspective this massive tax – almost three times the size of federal corporate taxation – is a “dream tax”. Half a trillion dollars a year is available to spend without raising taxes or increasing deficits. Sure, there is a cost, which is the entirely deliberate destruction of retirement dreams and promises for tens of millions of US workers and retirees – particularly Boomers – as well as pushing forward the insolvency of state and local government pension funds around the country. But the deliberate bankrupting of a generation is a long term problem with no clear accountability and almost no voter understanding, which means it is more or less irrelevant for how political decisions are made today.
The Convergence Of The Five Overwhelming Governmental Motivations
The second half of this article takes a look at the intertwined relationships between the five reasons over the short, medium and long term, and how the five way motivation to create inflation is far stronger than with any one reason in isolation.
Daniel R. Amerman, CFA
This article contains the ideas and opinions of the author. It is a conceptual exploration of financial and general economic principles. As with any financial discussion of the future, there cannot be any absolute certainty. What this article does not contain is specific investment, legal, tax or any other form of professional advice. If specific advice is needed, it should be sought from an appropriate professional. Any liability, responsibility or warranty for the results of the application of principles contained in the article, website, readings, videos, DVDs, books and related materials, either directly or indirectly, are expressly disclaimed by the author.