Since the beginning of the financial crisis, politicians and bureaucrats trying to rescue it have consistently done nothing but fall over their own feet. We would be hard pressed to point to a single true success story among the multitude of programs and regulations that have been proffered during the last five years. All the while, the national debt has increased by trillions of dollars and the housing market remains comatose.
Having now seen transcripts from Federal Reserve monetary policy meetings of 2006, it is abundantly clear that the Fed had no clue about the coming housing market meltdown and ensuing crisis. The warning signs were there, but either incompetence or arrogance prevented the leadership from recognizing the obvious. Ben Bernanke described the cooling housing boom as healthy and said “so far we are seeing, at worst, an orderly decline in the housing market”. Tim Geithner complained that Alan Greenspan had not received the credit that he deserved, a view that is shared among very few people these days.
Today, the continuation of previous policies and the introduction of new ones have run up the federal debt to an amount equal to the country’s entire gross domestic product. If we add in future obligations related to an aging population, throwing more money to Fannie and Freddie, pensions, etc., the total rises to levels that are difficult to imagine and nearly impossible to pay back. Taxpayers are in no condition to help with revenues, given that unemployment remains high and household debt is increasing (up 9.9% in November for installment debt, the fastest rise since November 2001). As the financial industry gets even more opaque and complex, we’re more likely to see additional problems than solutions from that sector.
Where does the country go from here to address its overwhelming debt? Really, there are four ways to get the country out of its current debt predicament. The first two – growth and default – are highly unlikely. As consumers and state/local governments pare down their debt, there will be little overall growth though select sectors will prosper. As deep as the country’s debt problems have been and continue to be, a default by the federal government has a very low probability of happening. If it did occur, borrowing costs would go up and there are additional ramifications too scary to consider.
The other two avenues are austerity (spending less money) or inflating our way out of the problem. Austerity would be the better way to go, but causes pain and unrest during the short term. Since most of the population has no grasp of the enormity of the country’s financial situation, politicians have talked a lot about lowering expenses but taken few actions to tackle the problem. While some cost savings have been put in place, they will have minimal real impact. That is why the administration has requested (and will get) the debt ceiling raised by another $1.2 trillion during the coming weeks.
That leaves inflation as the most likely course of action. Holders of U.S. debt and any other dollar-denominated financial instrument (including stocks, bonds, real estate, etc.) will get burned as the dollar loses value, but the government will care little as they will see no other politically viable course of action. When this all hits the fan, holders of precious metals like gold and silver, as well as those owning more stable currencies, will be rewarded.
Alan Noblitt is the owner of Seascape Capital and a note investor. As a note investor for all 50 states and on most property types, he can help mortgage note holders in nearly any any situation.