As we continue to see the bogus numbers coming out of Washington, and the political rhetoric that comes from the President’s reelection, we thought we would look at what stands in the way of a solid recovery, and compare that to what the government is actually doing.
Issue 1 – The National Debt
We are currently running a debt rate of 360% of GDP. This means that we are spending way more than we generate in the total economy which also means that we are not saving anything. This debt level is more the 100 points higher than the high water mark of 1928. So, on relative terms we have way more debt than we did prior to the great depression.
We all know that you cannot continue to maintain such massive amounts of debt without some negative impact. The current projections show that the government debt will continue to increase in 2012 and 2013.
Why is this important? Because at some point, the government has to continue printing money and attempting to borrow to pay for this debt. This eventually reaches a point where the government cannot borrow anymore. This in turn leads to a crisis where the government has to cut back drastically, miss payments, tax more, etc. It becomes very severe austerity.
Issue 2 – Worldwide debt
There is a lot of attention and focus on Europe and their financial crisis. This is because their debt situation is worse than the US debt crisis. Currently, we have about $55 trillion in debt and we have $15 trillion of GDP or a debt ratio of about 360. In the 17 countries that are in the euro, they have about $68 trillion of dollar-equivalent debt and only $14 trillion of GDP, so Europe is even more heavily indebted.
Why does this matter? Because the Europeans will and are implementing austerity measures. This is leading to a shrinking economy and social unrest. Countries in this shape of not consumers and great trading partners which means that we are not exchanging our goods and services with them. This leads to economic contraction in the US.
Issue 3 – Printing Money
When the government engages in quantitative easing (a/k/a printing money), it injects more liquidity into the system. One of the effects of this is that its shifts the demand curve for goods and services because there is more money in the system. This causes the price for goods and services to increase. So, the average Joe or Jane Lunch Bucket is seeing a 2% annual increase in wages during QE2, but because of printing, prices went up 4%.
So, in reality the regular person is getting worse off because price increases, due to printing or QE, is eroding their purchasing power. Therefore, people start cutting back on spending. Consumer spending is 2/3 of the spending, so reductions in this component leads to slower economic growth and actual shrinking of GDP.
What’s ironic about this printing of money is that you have the President out running around demonizing the wealthy, saying the he is for the little guy, but the reality is that his economic policies (and Bernake), actually makes the wealth gap larger and hurts the average American. So, the average American is getting worse off due to a loss of purchasing power as a result of money printing. This will only lead to economic slowing or contraction.
Issue 4 – The Required Solution May Be Too Hard
If the money printing is going to be turned off, the government is going to have to:
- Get social security and medicare under control
- Get the tax system under control
These are two big drivers of the government debt and obligation. The willpower that may be required to correct this may b a very tall order and not feasible. If these two issues do not get addressed, then we are looking at some very difficult economic conditions.
How does this impact my Self Directed IRA?
As we’ve discussed in previous blog posts, we firmly believe that every retirement portfolio needs to be properly balanced with some assets that deal with real estate, precious metals, or other tangible assets that are out of the direct manipulation and control of Wall Street and the Federal government.
With the current national and global debt issues, current and pending austerity, and total lack of political action and willpower, it only makes sense to have a self directed IRA with loans, metals, real estate, private stock, etc. The interesting thing about assets such as real estate, private stock, small business, etc., is that they become desirable in both good and bad times.
The information provided is for educational purposes only and are not a solicitation or offering of an investment, investment advice, or tax advice. You should consult with your tax, legal or financial advisor to determine the suitability of any investments made with a self directed IRA account.