A Frightening Equation

What happens when America has to borrow money to make its interest payments?
From the July 2002 Trumpet Print Edition

In financial terms, the old adage goes, “When the U.S. sneezes, the whole world catches cold.” Well, the greatest of economic sneezes surely can’t be too far off. It’s a matter of simple mathematics.

The modern management tool employed by business when the bottom line is threatened is simply to sack labor. Consequently, the past half-decade has seen many a U.S. business cut its labor force significantly. Tens of thousands of employees have been cast off the payrolls of countless corporations in the U.S. That amounts to multiple millions in salaries and wages that are not being earned, spent or saved within the U.S. economy.

As this has been going on for some time now, it ought to be having some sort of an effect on the U.S. economy. Yet, the primary indicators watched by investors and economists to denote the health of the economy disguise this reality.

“[T]he U.S. productivity number came in for the first quarter—and it was great. Then came the gdp number—and it looked terrific. Next up, Cisco proved that there was still life in the New Economy, with its breathtaking first-quarter profits up 2 cents above expectation … helping to drive stocks back up above 10,000. And now this … consumers are not only ‘hanging in there,’ the … fools are spending like they had just stolen someone else’s wallet!” (Daily Reckoning, May 15).

Yet, true economic recovery depends not so much on consumer spending as on business investment. Without the injection of capital investment into a nation’s economy, significant productivity gains are not possible; no new technologies are initiated, no new profits generated and no new jobs created, thus diminishing savings to invest.

So where will business investment come from in an economy that has suffered multiple corporate crises, from Enron to Kmart to Arthur Andersen; which sees headlines declaring, “Airlines Won’t See Profits Until 2005” (so why invest in new planes?); where two out of five factories are idle (so why build more?); and where the average citizen is saving far less than ever?

With this deck of corporate gloom stacked so high, how come we have not had a crash on Wall Street? Simply because of what analyst Dr. Kurt Richebacher calls “Ponzi financing.”

Ponzi financing creates a fearful vision of our economic future. In Richebacher’s terms, it refers to an end process of “degenerate capitalism,” which is no longer based on the long Anglo-American tradition of savings and investment. Instead, it is driven by selfish, globalist, corporate management gratification and stock market speculation that is ruthless, greedy, and short-term in outlook.

Richebacher describes the new capitalism: “[T]he essence of this new Anglo-American capitalism [is]: deal-making for quick profit and inherent neglect of new investment, a dissaving public and unfettered credit creation for consumption and speculation. The old capitalism had a sense of high responsibility for future generations. The rising responsibility of corporate managers under the new Anglo-American capitalism begins and ends with today’s stock prices. …

“In reality, this is not new capitalism but late, degenerate capitalism dominated by the most narrow-minded financial interests.

“It is late, degenerate capitalism because it propels asset trading at the expense of asset creation with inherent negative effects on economic growth and overall profitability” (Richebacher Letter, Jan. 2000).

Enter “Ponzi financing,” in which “debtors have largely stopped financing their interest service out of current income, meeting it instead by further borrowing” (Daily Reckoning, op. cit.).

To assess just how huge the U.S. economy’s sneeze will be when it lets go, Richebacher has calculated that it will take about $2 trillion annually to service the interest indebtedness generated on the outstanding credit in the U.S., which, according to Richebacher, totalled $29 trillion at the close of the year 2001. The scary part of this equation is that this amount of $2 trillion in interest demand equates with the amount of annual credit growth in America. What does this mean? Simply that America is borrowing money to pay just the interest on its grossly bloated credit bill! A surer recipe for an economic crash could hardly be envisioned.

America’s massive economic squeeze is inevitable. It’s just the timing that is in doubt. But when it blows, the effects on Britain and America will be disastrous.

As Editor in Chief Gerald Flurry has stated, economic disaster for Anglo-America was foreseen over 2,500 years ago in the vision of the Prophet Zephaniah.

“Howl, ye inhabitants of Maktesh, for all the merchant people are cut down; all they that bear silver are cut off. And it shall come to pass at that time, that I will search Jerusalem with candles, and punish the men that are settled on their lees:that say in their heart, The Lord will not do good, neither will he do evil” (Zeph. 1:11-12).

“What do these verses mean? This world is about to enter into a grave crisis. There will be crying and howling. Anciently, the merchants, or business people, resided in Maktesh. The economies of the United States, Great Britain and other Israelitish nations will soon be ruined. After that, all of this world’s merchants will be cut off” (Zephaniah’s Day of the Lord, p. 11; emphasis mine; request your free copy.)