Outside the BOX: Bubbles, Part I

The unprecedented expansion of the Federal Reserve’s balance sheet over the last few years looks like it may be setting citizens up for a “bond bubble,” and future currency crisis of historic proportions. Looking over the $17 trillion in national debt and the Fed’s creation of over $3.5 trillion all on its own, should give even a high school dropout with basic math skills pause. Now I know I may be preaching to the choir, but there is a large percentage of the population that is comfortable with, or oblivious to, the spiraling debt. “The deficits don’t matter,” is often their flippant claim. BS, spouted off by elected officials like Dick Cheney, and akin to a two pack-a-day smoker justifying continuing to smoke because he hasn’t gotten cancer, yet. These deficits do, in fact, matter when they get too large. And guess what? OUR DEBTS ARE TOO LARGE!

Unfortunately, one usually can’t win politically by informing the public that we have collectively spent more than we should have, and that we will need to face up to the reality that the current rate of spending cannot continue. At some point, our creditors are going to say, “Enough is enough,” and we’ll likely witness this massive mess completely unravel. Decades of “cheap” money has its limits that, if not addressed, will reach an irreversible tipping point where it becomes mathematically impossible to pay off the debt with sound currency. Unfortunately, I believe we are experiencing this tipping point RIGHT NOW, with its full repercussions to be felt sometime after 2015, right on time for the next presidential election cycle to begin.

Historically, very few countries have been able to recover from tremendous debts of our size without significant inflation and currency devaluation. Back in 1981, the national debt hovered around 33 percent of our GDP (Gross Domestic Product) during Ronald Reagan’s first year in office, with the US population at 226 million persons. Since that time, the population has grown to its current 317 million, a 40 percent increase, but our debt has exploded by over 200 percent. You read that correctly. The debt is now more than 100 percent of our GDP, and we are—in effect—borrowing money to pay the interest. On top of these large numbers is the Fed’s current Quantitative Easing fix of $85 billion a month (or about $1 trillion per year) which works out to about $265 dollars per person per month (for example: an average car payment) just to suppress interest rates to keep the debt loads manageable. It is this manipulation of the monetary system that is the basis for the bond and currency bubbles forming all over the world. This gigantic mountain of debt is so large that a return of interest rates to where they were just a decade ago could implode entire economies. The best example of this is the Japanese economy, where, if current interest rates were to rise to merely four percent, servicing of the country’s debt could consume the entire country’s tax receipts—engulfing the budget and leaving very little for anything else. The US, on the other hand, has at least some flexibility if rates were to rise, but our actions would probably have to entail massive cuts in defense spending and entitlements (which comprise the vast majority of our federal budget). The caveat is that we need to act now rather than later.

Our financial system is being held together by a massive coordinated effort by central banks across the world to keep rates low—manipulation that at some point will need to be scaled back. From my perspective, what the markets fear right now, more than anything else, is the slowing down of cheap money being injected into the economy on an almost daily rate via the Fed’s Permanent Open Market Operations (POMO). It is my assertion that it is, in fact, this same cheap money that appears to be the largest factor in keeping the world economy from officially stagnating, in moving stock market valuations ever higher, and in postponing the impending danger of currency and bond bubbles, all due to this misallocation of capital. The longer we wait, the worse this problem becomes.

Part II of this article will discuss the transition from a pay-as-you-go lifestyle to a debt-based one

  • Jason Scheurer
  • Jason Scheurer is a Financial Advisor, former US Senate Candidate, Eagle Scout, radio talk show host and columnist.

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