Fishermen and sailors must be constantly on the lookout and prepared for changing weather. Smooth sailing can quickly turn into a fight to keep one’s head above water. Likewise, today’s breadwinners must be prepared for abrupt changes in the economy. Good times can quickly turn into recession; high-flying stock markets can crash; and as history clearly shows, all bubbles eventually pop. Often, fat years are followed by lean years.
As economist James J. Puplava has said, “Economic and financial conditions never remain constant. They are as seasonal as the weather. Forecasts change depending on the patterns that emerge” (Financial Sense Online, March 15, 2001).
Financial meteorologists and prognosticators identify two looming, yet self-induced storm fronts threatening America’s economy: deflation and inflation. However, like climatologists trying to predict the weather, many disagree as to which poses the most immediate danger. Further, some identify a third and even more powerful economic storm brewing.
Although the outcomes of these coming storms are predicted to be very different, their origins are similar.
Mounting Debt Levels
Like a downdraft of dense freezing air, virtually all levels of American society have become weighted down and pressured with debt. Personal, corporate, state and federal debt levels are all at or near record highs.
U.S. consumer credit debt hit an all-time high of $2.4 trillion last September, soaring 80 percent since 2000. Similarly, the amount of household and mortgage debt as a percentage of disposable income is at its worst level in over a quarter century. For the past two years, Americans on average spent everything they made and then some. During 2006, people spent 1 percent more than they earned. The only other time in history America’s savings rate was in negative territory for a full year was during the Great Depression.
In corporate America, debt has become so endemic that there are now more companies with “junk” credit ratings than with investment-grade ratings, says credit rating agency Standard and Poor’s.
State and federal governments are also bursting with debt obligations. For example, New Jersey’s total debt has almost doubled over the past six years, from $15.2 billion to $29.7 billion. California is heavily indebted; New York, Massachusetts and Hawaii are all in the “danger zone” of debt, according to a Citizens Budget Commission report. Kansas’s state debt exploded from $420 million in 1992 to $4 billion in 2005.
Then there is America’s national debt, which is now a record $8.7 trillion. When all levels of debt (federal, state, corporate, personal, etc.) are totaled, according to the Federal Reserve Bank, Americans owe over $43 trillion—and that doesn’t include future government promises such as Medicare and Social Security.When those numbers are included, the total debt soars past $60 trillion.
In contrast, the total value of all the goods and services produced in America last year was only $13.2 trillion. The profit made on those goods and services was minuscule by comparison.
This massive ocean of debt threatens to swamp America.
Deflationary Storm Building
Americans are so indebted that a slowing economy could create a nasty deflationary spiral, or so predicts one school of economic analysts. These analysts say that when the debt bubble explodes, deflation (a reduction in the money supply) will ripple through the economy. For workers, this means less money to spend, whether because of job losses, asset depreciation or other trouble. That is why debt is so dangerous. It doesn’t matter that you lost your job or that your house has no equity left in it—debtors require payment.
A declining housing market is a looming deflationary force. Market psychology has changed, and people are beginning to anticipate lower future prices. The incentive to make a quick purchase has disappeared. “Bids are drying up. Many potential buyers are simply waiting for lower prices. The word is that ‘it pays to wait,’” says economic analyst Richard Russell. Why buy a house today when you can buy it for less next month or maybe much less next year? A 5 percent housing decline would result in at least $1 trillion in lost home equity. That’s definitely a deflationary force—never mind all the lost construction, home supply and financing jobs that would be associated with a housing bust.
Wage pressures are also aggravating deflation. Foreign competition is putting pressure on consumers. Thanks largely to outsourcing, American workers have lost bargaining power at the wage table. In the increasingly globalized economy, corporations have the option to simply move operations to low-cost foreign countries. Consequently, many workers are having problems maintaining their current salaries, let alone bargaining for wage increases. The legislation for a federal minimum wage increase currently being debated by Congress is proof that at least low-wage earners have little bargaining power. As wages lag and the cost of living increases, it gets harder for consumers to make debt payments.
There is coming a time when the consumer will be tapped out, and the debt-fueled consumption binge will end. When it does, consumer confidence will be replaced with fear and eventually panic. This panic will result in increased asset sales and reduced spending as workers attempt to pay off their debts (or save their homes). Evaporating confidence will cause consumers to rethink current and future spending plans. The economy, hit with a lack of demand, will slow, corporate earnings will fall as businesses lower prices to move stock, and layoffs will become prevalent. As more people enter the unemployment line, consumer demand will continue to fall and the deflationary spiral will intensify.
Yet, as America’s northern horizon grows dark with a deflationary storm front, rumblings of a high-pressure inflationary front approach from the south.
Even though economic theory suggests that massive debt loads are deflationary, increasing numbers of financial weathermen believe the massive debt in America will ultimately be inflationary. Why? Because there is only one way America will be able to pay all its bills—and that is by inflating its way out. That means printing more dollars.
Inflationary Storm Building
As of March 23 last year, when the Federal Reserve stopped publishing its m3 money supply statistic, the figures on how much money is being created are no longer public. Since m3 was the only number that provided a true picture of how much money was being put into circulation, many analysts criticized the Fed for trying to obscure its actions. You be the judge. During former Chairman Alan Greenspan’s tenure, the money supply was expanded at a comparatively low average of 5.85 percent per year. During his last year, the money supply ballooned by 8.9 percent. Since the March 23, 2006, m3 deletion, the U.S. money supply growth rate has shot up to an annualized rate of 12 percent.
The fact that Ben Bernanke is the new Federal Reserve Bank chairman is also helping the inflation argument. Before taking over, “Helicopter” Ben made himself famous by saying he would willingly drop money from helicopters if deflation ever threatened.
Although operating the printing presses in overdrive may ease national debt payments and temporarily stimulate the economy, the longer-term effects can be disastrous. As more dollars are created, each previously created dollar becomes worth less. Eventually, the higher number of dollars filtering through the economy results in price inflation. In other words, although some people have more money to spend, things cost more for everyone. Additionally, since dollars are worth less, your accumulated savings are worth less too. At a 12 percent growth rate, the nation’s money supply will double in just over six years. Will your retirement savings double in six years?
The primary reason inflation has not reverberated more severely is the dollar’s status as a reserve currency. Today, the majority of global trade is denominated in dollars. This means that as global trade has grown, nations have held on to more dollars as opposed to spending them in the U.S. This has mopped up much of the increased dollar supply. Also, since historically the dollar has been fairly stable, many nations have chosen to put their savings into dollars (by lending money to the U.S. and purchasing government bonds, etc.) as opposed to their own currencies. This too has kept excess dollars out of circulation.
However, the dollar’s status as a reserve currency is shaky. The euro is rapidly gaining on the dollar as a unit of global trade. As a result, demand for the greenback is receding. This is evident in the dollar losing a third of its value against the euro since the euro’s introduction. Over the same period, the greenback has suffered from double-digit percentage losses against other currencies such as the Canadian dollar and the Australian dollar.
This loss of value has undermined the dollar’s reputation as a safe store of wealth. Consequently, many nations have decided they want to hold less of their savings (currency reserves) in dollars. Central banks in Russia, Qatar, the United Arab Emirates and Syria have all announced intentions to dump dollars in exchange for euros. Sweden’s Riksbank has done the same, while the Bank of Italy, in what was the most dramatic move to date by a G-7 country to slash exposure to the dollar, dumped one quarter of its currency reserves (mostly U.S. Treasury bonds) in exchange for sterling. However, possibly the greatest threat to the dollar is coming from China’s central bank. China has telegraphed its desire to diversify, which would mean dumping at least some of the us$1 trillion it holds.
As more nations shun the dollar, selling their dollar holdings before their value drops further, and as the federal government continues to print more money to pay debts, a seemingly never-ending supply of dollars will begin washing up on American shores. Prices for oil, food and other commodities will skyrocket—especially foreign imports that Americans now rely so heavily upon. Foreigners seeking to spend their dollars before further depreciation will attempt to purchase American-based corporations and assets, further fueling price increases. The average American will be economically ravaged as his inflation-eroded savings lose purchasing power and as wages fail to keep pace with rising prices.
Yet, even while the deflation/inflation debate rages on, a third, more dangerous storm could be in the making.
Economic analyst and investment newsletter writer Jim Willie warns that the ultimate result of such massive debt loads combined with excessive money creation could be the development of what he terms a stagflation “mega-storm”—incorporating some of the worst aspects of both deflation and inflation.
“The contrast of greater high pressure against greater low pressure will add to the storm differential. Its power will increase, just like a hurricane. Higher pressure will come from … monetary inflation .… Lower pressure will come from the shrinking value of the housing sector, from the diminished credit lines off flat home equity, and from eventual cutbacks in household spending” (Hat Trick Letter, Oct. 6, 2006). Puplava refers to this impending scenario as “the perfect financial storm.” He says the economic pressures at play are so huge, it is conceivable that the world’s present economic system, based upon the dollar, may be about to end.
If deflationary and inflationary forces butt heads, the U.S. economy will be whipped back and forth like a wind-torn flag on a flagpole.
If that happens, the resulting economic instability will lead to a vicious cycle of consumer spending cutbacks, a plummeting economy and soaring unemployment. Home prices, along with many other domestic-demand-driven assets, will be sucked into a deflationary spiral, likely stimulating a banking crisis as thousands of bad loans must be written off. Simultaneously, import prices will soar as the federal government continues to inflate and spend money in a vain attempt to stimulate the economy, prop up the banks, and keep paying promised Social Security and Medicare liabilities. The dollar will fall further as boatloads of rapidly depreciating greenbacks flood into America when foreign debt holders try to spend their U.S. dollars before they become worthless.
Where will these events leave the majority of Americans? Without a job, without a home, with little or no money (what little savings Americans do have will be destroyed by inflation), coping with food shortages and skyrocketing food and heating prices. As is the case during economic crashes, the middle class will almost certainly be hurt the worst.
Sound a little too apocalyptic? The fact is, it doesn’t matter what we may think: The storm is coming.
Setting aside the billowing thunderclouds of economic evidence, the Bible says this “mega-storm”-type scenario is just around the corner. Further, Scripture warns of a time when economic conditions in America become so bad that people will resort to extreme measures to secure food (Deuteronomy 28:53; Isaiah 9:20; Jeremiah 19:9).
The good news, however, is that God always provides a way out to the individual willing to obey Him and live by His way of life. There are steps you can take in order to be protected and even blessed as future economic storms hit America. To learn how to live God’s way of life, request copies of The Incredible Human Potential and Repentance Toward God, and read the following article, “Storm-Proof Your Financial House ▪