More Debt to Hide Our Depression
President Obama delivered a speech before a joint session of Congress this evening to outline his “new” job creation plan. It would add $450 billion dollars of more deficit spending for 2012, with the unrealistic hope that it could be “paid back” a decade later through smaller increases in government spending.
Let me see if I can shed some light on the unspoken game being played. The US Gross Domestic Product (GDP) for 2010 was projected to be around $14.7 trillion. Meanwhile, a good “rule of thumb” to gauge when we’re in a MAJOR depression is when GDP shrinks by 10%, or more.
The Federal government ran a budget deficit of between $1.6 trillion and $2 trillion for 2010. Well take the lower value of $1.6 trillion, just to keep things fair.
Taking 10% of 2010 GDP of $14.7 trillion gives us $1.47 trillion. What would have happened if the US ran a balanced budget in 2010? What if that extra $1.6 trillion wasn’t spent? A fully realizable Greater Depression would be staring everyone in the face.
Our government will continue to seek ways to deficit spend close to $2 trillion per year for as long as the international banks freeze credit. History shows that we still have at least another seven years to go. Can our government deficit spend that much for that long? I don’t believe they can. In fact, I don’t believe President Obama will be successful with getting his jobs bill passed. If it fails, then be prepared for a major market move downwards as we experience the deflationary spiral ride.
On a side note, I do not favor deficit spending. However, a balanced budget can ONLY be effective if our US Treasury begins to issue our money supply so that it is not debt-based.
Europe on the Precipice
Headlines declared an easing of the crisis in Europe yesterday, as the German court struck down a case seeking to keep Germany from bailing out other countries, like Greece.
Be careful what the media tells you. Their headlines change like the wind, with no clear understanding of the root causes of the problem.
The German court decision also had another component which effectively struck down the possibility of Germany participating in the issuance of “Eurozone” bonds. These types of bonds were the last gasp that the European Union had of surviving. In other words, things are about to get very, very bad in Western Europe.
We saw earlier this week where both the European Central Bank (ECB) and Bank of Japan (BOJ) made major moves to weaken the Euro and yen. This weakness causes the US Dollar Index to rise, due to the inverse relationship these currencies have in the Index formula.
What moves can we expect in the US Dollar? If the European Union undergoes even larger amounts of turmoil then the US Dollar could weaken, due to the increased strength of the Euro in a deflationary environment.
If the moves to weaken the Euro and yen are temporarily successful then we could see a significant increase in the US Dollar Index, especially if President Obama’s jobs bill fails passage.
Either way, the US Dollar Index moves have much more to do right now with Western Europe and Japan than with economic conditions in the United States. This will change as we continue to sink further into deflation here – at which time the US Dollar Index will rise and confound those with an incorrect hypothesis of inflation.
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