Pundit's Perspectives – Fri 20 May, 2016

The Next Financial Crisis (Courtesy of The Washington Times)

The Washington Times

www.washingtontimes.com

 

 

The Next Financial Crisis

 

By Richard W. Rahn

Published May 17, 2016

 

 

CONTINUED DESTRUCTIVE ECONOMIC POLICIES MAKE IT INEVITABLE

 

The end is near — depending on how you define “near” and where you live.

A couple of weeks ago, hedge fund legend Stanley Druckenmiller gave an important talk arguing that the crisis is about to hit and investors should liquidate their equity holdings. He and others who have similar views have been the subject of much debate among economists — more of it about the timing of the next global and U.S. downturn and not so much about whether it will come.

 

The crisis has already hit many — depending on where you live and what assets you hold — and will eventually spread to billions of others, including a very large segment of the U.S. population. If you live in such diverse places as Greece, Brazil and Puerto Rico, you are likely to have already seen a large reduction in your real income and standard of living. If you are retired and living off interest on your savings, you have seen a reduction in your income as a consequence of the very low interest rates engineered by the Federal Reserve.

 

The fundamental problem is most countries are experiencing little or no growth as a result of excessive government spending (particularly on transfer payments), and destructive regulations and tax policies. The unwillingness of the politicians (and their voters) to cut back on spending and regulation has led to an explosion of government debt, which is not sustainable at current levels of economic growth. This, in turn, is fueling a demand for more government spending (more free stuff) and thus more debt.

 

People buy U.S. government bonds and notes because they believe they have real value. The value comes from the fact that the government has the power to extract real wealth from the private sector, mainly through taxation, to pay the interest and principal on the debt. This issue was settled when the U.S. government put down the Whiskey Rebellion (1791-94), with George Washington showing that he would use force to collect the tax on whiskey. The power to tax is supposed to belong to Congress, but when the Fed sets interest rates below what the market would set and even below inflation, it is, in effect, imposing a wealth tax — as all who have savings accounts have noticed.

 

The U.S. government is not going to explicitly default on its debt because it sells its bonds in its own currency and prints its own money — even though the real value of the principal and interest can be reduced through inflation. Countries that do not sell their bonds in their own currency, such as Greece with euro-denominated bonds or Argentina with U.S. dollar-denominated bonds, can and do go into explicit defaults because they run out of foreign currency to pay the interest and principal. U.S. states, cities and territories, like Puerto Rico, can also default on their debt because they cannot print the U.S. dollars in which their bonds are denominated.

 

What we are seeing at the moment is a slow-motion crisis where real incomes in a number of countries are stagnant or dropping because of the fall in commodity prices and the rising cost of debt service. Debt service is “paid for” through explicit tax increases, inflation or implicit wealth taxes on savers as explained above. More countries are likely to experience major income reductions due to the cost of debt service. For instance, the Italian banking sector is saddled with debt that it is unlikely to be able to service, and the government debt is well over 100 percent of gross domestic product. A small shock might well cause major Italian banks to default, which could cascade throughout Europe. And no one knows to what extent the German taxpayer will be willing to bail out the Italians.

 

At the moment, many governments are eating their seed corn — that is, destroying real wealth in their economies, with far too many people consuming more than they produce and productively invest. As the Greeks, Brazilians, Russians and many others are learning, the real value of the wages and government transfer payments they receive will fall until the total value of their collective output once again exceeds their consumption and depreciated capital. At that point, their economies will begin to grow again.

 

In the United States, many of the politicians who shout most loudly about wage stagnation are the very ones who were the most aggressive in putting in the destructive spending, taxation and regulations that caused the problem. Both democracies and socialist totalitarian states are prone to cycles of excessive spending — which either leads to reform or destruction. For example, Venezuela once was a prosperous democracy and has the world’s largest oil reserves, but now the people cannot obtain basic foodstuffs or even toilet paper, as a result of their socialist experiment.

 

No one can forecast the future with certainty. But I stand by my January prediction of a recession by the end of this year, because those in control continue with their growth-destroying economic policies.

 

 

Richard W. Rahn is on the board of the American Council for Capital Formation and is chairman of Improbable Success Productions

 

http://www.washingtontimes.com/news/2016/may/16/richard-rahn-the-next-financial-crisis/

 


Comments:
  1. On May 20, 2016 at 11:09 am,
    trader jake says:

    The financial crisis never ended. It began in 08 and the only way they could keep the economic bubble inflated is by adding on humongous debt.

    Its all been designed to fail because its the only way they can ring in the NWO.

    NWO = control of everything you do and say. OR ELSE !!!!

    Anyone who doesn’t know this is totally uneducated and misinformed.

  2. On May 20, 2016 at 11:26 am,
    Marty says:

    Trader Jake, the real modern day financial crisis started 45 years prior to 2008, when JFK was assassinated, and came to fruition 8 years later- Aug 15, 1971. It can be said we have not had real economic growth for 50 years in this country, if you recognize that money supply growth has averaged 8+% a year in that duration. Can you recall a year since that we have had a purported 8% growth in our economy?

    • On May 20, 2016 at 12:09 pm,
      trader jake says:

      Marty, its been going on since the great depression or early 1900’s. JFK was the last president we had that stood for the people. We avoided a nuclear confrontation with Russia. Unfortunately, not so lucky this time.

      I think whats really changed now is all our leaders are totally corrupt and the fox is definitely in the hen house.

      Marty, we are seeing the end of the republic unfold right before our eyes. Your definitely correct regarding JFK.

      • On May 20, 2016 at 1:30 pm,
        Marty says:

        Trader Jake, I agree since the early 1900s, that is why I declared “modern day”crisis. We’re on the same page, my friend.

        • On May 20, 2016 at 1:49 pm,
          trader jake says:

          You bet Marty, this shell game is now unfolding for what it is. All debt and no economic activity only by design cardiac arrest and a complete melt down.

          This society will be no different than the previous civilizations that disappeared. Many will disagree but all the evidence says all the leverage and debt will implode.

          When the surprise hits and it will, interest rates are forced up and the domino’s won’t fall but fly. We are also all over Russian borders to boot. If the debt and leverage to the next galaxy isn’t enough. We are facing the dark ages and they say not with technology. Just more lies from those who want to desperately believe everything will be fine.

          • On May 20, 2016 at 2:14 pm,
            GH says:

            I desperately want to believe things will be…well, if not ‘fine’, at least not cataclysmic nuclear war. Of course I recognize the possibility, but I’m not preparing or betting on it…seems kind of pointless.

          • On May 20, 2016 at 2:36 pm,
            trader jake says:

            If we could dispose of Washington somehow, we wouldn’t have to be concerned with it.

            They have decided though to risk all our lives in a corrupt system and its the citizens who are not doing anything. Also, a massive military build up on Russian borders to risk all of humanity.

            The citizens are not rising up because of their comfy zone. The only thing that will wake people up is when the house is really on fire and they will need to evacuate.

            TOO LATE !!!!

            Washington is too bust trying to figure out why the men are not allowed in the womens restroom. Need I say more !!!

  3. On May 20, 2016 at 11:35 am,
    Bentnail says:

    TRADER JAKE:

    Anyone who believes in the NWO drivel spouted by New Age shills like Alex Jones are either uneducated or misinformed.

    • On May 20, 2016 at 11:57 am,
      b says:

      I just watched an Alex Jones vid interviewing Peter Joseph in 2008.
      I really dont know how to describe Alex, not trying to insult but moron?idiot?or stupid would fit I think. Not sure which one without looking up the definitions. lol

      I cant see jumping or going out of my way to watch another A Jones video.

      • On May 20, 2016 at 12:02 pm,
        Bentnail says:

        B,

        The man is a fraud – he is pushing for the same New Age system as Peter Joseph, Russell Brand, David Icke, etc.

      • On May 21, 2016 at 6:55 am,
        Robert Moriarty says:

        B:

        Shill

    • On May 20, 2016 at 12:16 pm,
      trader jake says:

      Bentnail, Its a free world for now in the USA anyway and you are entitled to your own opinion. Its just like many have no problem with men being allowed to use the womens restroom. Very few care. This is our nations problem and its only going to get significantly worse in this once great nation. I say once, because it no longer is.

      • On May 20, 2016 at 12:39 pm,
        Bentnail says:

        TRADER JAKE,

        I agree. We are all entitled to our own opinions. The problem is that “your opinion” is not really YOUR OWN – it is the opinion of men like Alex Jones. All you have done is taken their views (New Age propaganda) and are taking ownership of them. It’s how propaganda works.

        • On May 20, 2016 at 12:47 pm,
          trader jake says:

          Bentnail, I do not appreciate your false accusations. I never mentioned Alex Jones and if I do follow him sometimes I do not agree with everything he says.

          Enjoy the rest of your day.

        • On May 20, 2016 at 2:15 pm,
          GH says:

          To be sporting Bentnail, you should offer an alternative interpretation of things, don’t you think?

  4. On May 20, 2016 at 11:53 am,
    b says:

    I have been saying for awhile, I figure we need a new system, capitilism,socialism etc just dont work, both kill the planet.

    People argue the point of course but their aguments dont change the fact we have 1 ton of plastic in the ocean for every 3 tons of fish etc, which is reducing (the fish)of course. Some people are aware of the toll Fukashima is extracting as well as the oil we keep pouring into our water.

    In any case, 2020, debt gets everyone, 2030 our biodiversity pretty much ends.
    Serious stuff actually.

    Ive said for a long time we need a new system but I had no clue what that system was. anyway, here is a fellow with an actual idea,

    https://youtu.be/Q6F1ZAncqM8

  5. On May 20, 2016 at 12:18 pm,
    Silverdollar says:

    b:
    Maybe things are going to get better for the planet than many of us think and much faster than most this is possible. Do yourself a favor and view the following talk. It has sure changed my thinking on several subjects: https://www.youtube.com/watch?v=Kxryv2XrnqM&feature=youtu.be

    • On May 20, 2016 at 3:14 pm,
      Excelsior says:

      Very interesting post Silverdollar. I don’t know if I agree with his timeline, but I agree with the general premise for the longer term. Thanks!

      Here is the description of that video presentation for those interested in the Energy Space:
      __________________________________________________________________________
      Tony Seba’s Clean Disruption Keynote presentation at the Swedbank Nordic Energy Summit in Oslo, Norway, March 17th, 2016.

      The keynote, based on the book ‘Clean Disruption of Energy and Transportation’ assert that four technology categories will disrupt energy and transportation by:
      1- Batteries / Energy Storage
      2- Electric Vehicles
      3- Self-Driving Vehicles
      4- Solar Energy

      The outcome of the Clean Disruption is that by 2030
      • All new vehicles will be electric.
      • All new vehicles will be autonomous (self-driving).
      • Oil will be obsolete
      • Coal, natural gas and nuclear will be obsolete
      • 80+ per cent of parking spaces will be obsolete.
      • Individual car ownership will be obsolete.
      • All new energy will be provided by solar (and wind)

      Clean Disruption is a technology disruption. Just like digital cameras disrupted film and the web disrupted publishing, Clean Disruption is inevitable and it will be swift.
      ________________________________________________________________________

      Personally, I’m invested in many sectors like Oil, Nat Gas, Nuclear, Renewable energy, Lithium & Batteries, etc… While I share the enthusiasm for an ever-changing energy mix and new technologies, it seems that Tony Serba is a little overly optimistic for that much change to happen in just 14 years. However, I keep the door open for all possibilities, because sometimes change happens faster than we realize. It just doesn’t seem quite probable that quickly, but in 30 years. Sure.

      The odds are it will be about 20-30 more years before hydrocarbons are phased out in a major way (there’s still a lot of money in that sector that isn’t going to role over gracefully.) It should be noted that even Oil companies are now investing in renewable energy sources, so it is starting to pick up some steam).

      I believe nuclear energy will implement new technologies to stay relevant (like beryllium coated pellets and new reactor designs), barring any more unforeseen major events. Most of the reactors that just got built, are under construction, or are planned have 30-40 year lifespans; so I can’t see the governments of the world abandoning them and walking away from the billions of dollars spent in just 14 years.

      As for Fusion reactors, they still seem a ways off from being utilized, but who knows? Then lastly, there are many ideas on “free energy” that have circulated for decades that may start taking root, and make solar, wind, geothermal, hyrdro electric, and batteries obsolete. Energy is a dynamic and ever-changing marketplace.

      • On May 21, 2016 at 1:41 pm,
        Excelsior says:

        do understand the points Tony is making about the S-Curve for adoption, now things don’t happen linearly, but the infrastructure for charging stations and Solar has a lot of work to do to displace all the gas stations, power stations, and industrial power needs. Again, I totally agree with this premise, and that it will happen faster than many of the die-hard Oil/Nat Gas/Coal guys realize or can admit to themselves. However, as mentioned it will displace parking, mechanics, the Oil & Gas industry, oil change places, etc…. and the economic impacts of that will slow this process down and cause quite a heated public debate before people are willing to accept that the cheese has moved.

        As for the concept of Lithium battery power for the electric devices, electric vehicles, commercial vehicles, farm vehicles, home backup, business backup, and industrial backup….. Its already happening and I’ve been writing about it on this blog for the last 3 years fairly vocally and covering the real Lithium miners that are not just marketing fluff, but have an honest chance at being players in the space like Orocobre, Lithium Americas Corp, Galaxy Resources, Neometals Ltd, General Mining, Nemaska Lithium, Pure Energy Minerals, Lithium X, Dajin Resources, Bacanora Minerals, and Critical Elements Corp. It’s a shame so many have been damaged by past commodity bubbles in Rare Earths, Graphite, and even previously in Lithium, that they don’t realize the rules of the energy game have changed since 2011- in a major way.

        Thanks again for posting that video up above Silverdollar. I showed it to my lady and we had a spirited 2 hour conversation about the concepts and implications on the future (that has just arrived……).
        Cheers!

  6. On May 20, 2016 at 1:53 pm,
    Ann says:

    Silverdollar– very,very interesting!!! Thanks.