Most Popular ArticlesJune 23, 2009
Those liabilities do not include the costs of proposed programs, such as health care reforms and bailouts of foreclosed homeowners. “With no full funding available for any new programs,” says Williams, “the government again is showing its willingness to spend whatever money it has to create.”
The prescription drug program enacted in 2004 under the Bush administration added $8 trillion in unfunded liabilities – more than the size of the government’s debt burden at the time. Recent government decisions, Williams says, to partially or fully nationalize banks, automakers, and mortgage companies “are not going to save money. It will cost us a lot more and add to those unfunded liabilities.”
Financing these debts will force interest rates higher in order to attract lenders. Those lenders – most importantly the Chinese – will diversify their borrowing and investing activity, and become far less dependent on the US Treasury debt than they are currently, forcing interest rates to even higher levels. That process is already unfolding, as evidenced by recent warnings from Chinese central bankers against the dangers of a falling dollar. “Dollar dumping” will force a flight to safety outside the US by foreign countries, who have purchased approximately 80% of new Treasury issuance over the last five years.
Williams calls this debt-driven downward spiral “dollar debasement” – “the U.S. government’s willingness to spend whatever money they have to create in order to keep the financial system from imploding.” The Federal Reserve will be forced to monetize its debt, effectively printing more money to pay the interest on its increasingly out-of-control debt.
I asked Williams why the US dollar will suffer so heavily vis-à-vis other currencies. After all, the US economy is far bigger than that of any other country and as such should be especially resilient. But Williams says that the Europeans have been more honest and realistic about their economic conditions, and that no other country has “so deliberately and excessively debased its currency through fiscal and monetary policies.” Only the United Kingdom has unfunded liability exposure (as a percentage of GDP) that rivals the US’s.
Some elements of Williams’ forecast are already unfolding. He says the weak dollar has been key to the recent rebound in oil prices, which is providing the “roots for a pickup in consumer prices.” Despite the ongoing downturn, inflation will increase in July and August because of the weak dollar, he says.
Debt monetization is already occurring, as the Fed has been buying longer-term Treasury bonds. As the demand for Treasury debt dries up, Williams says the Fed can either allow long term rates to spike or it can step in and buy securities to keep rates down and markets stable. It has chosen the latter – and that is monetization.
The economy has been in a recession since late-2006, according to Williams, and things will get worse. Once you adjust for the gimmicking of CPI numbers by the government, we are in an inflationary recession that is at least half-way toward Williams’ definition of a depression. He does not rule out further “bounces and dips” in economic activity, but the ultimate destination will be a second Great Depression – which, thanks to hyperinflation, will be more disruptive than the original.
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