By Mark R. Crovelli | 15 November 2007
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My argument about how awful your life will be in ten years takes as its starting point the fact that the American economy is in seriously dire straits right now, and will continue to deteriorate over the next few years. I hope I don’t need to convince you that the American economy is at present suffering from a serious credit malaise (which, I might add, I predicted a full eight months before the housing market began to deteriorate in earnest), but I probably do need to convince you that this serious economic problem will persist over the next few years. How, then, can we know that the American economy will continue to deteriorate?
We can confidently predict that the American economy will continue to deteriorate over the next few years because we know that this credit problem can only be addressed by the Federal Reserve in one of two ways: 1) continuing to lower interest rates to appease Wall Street and bail out ailing banks, or 2) leave interest rates where they are (or even increase them) and let banks and investors suffer the consequences of their malinvestments. The fact that there are only two options available to the Fed is important because both of these courses of action will result in continuing economic deterioration in the United States for at least the next few years. In other words, no matter what the Fed tries to do to combat this credit problem, the American economy will continue to deteriorate.
This last statement might surprise you, especially if you listen to economic commentators like Jim Cramer who view the first of these alternatives as a panacea for the current credit crisis. Just lower interest rates, according to this line of argument, and everything will reverse itself, sending the credit, equity and bond markets through the roof. This is not, however, what will happen if the Fed continues to lower interest rates in order to try to combat the credit crisis. On the contrary, if the Fed decides to lower interest rates (i.e., pump more paper money into the economy) this may only serve to temporarily bail out ailing investors and banks, and it will certainly decrease the value of the U.S. dollar vis-à-vis goods and services.
In other words, since a decrease in interest rates by the Fed is simply another name for increasing the money supply by injecting newly created cash into the banking sector out of thin air, this new money will necessarily serve to decrease the value of the dollar. What is more, this decrease in the value of the dollar vis-à-vis goods and services (i.e., price inflation) will eventually force an increase in interest rates on its own, because banks and other lending institutions will be forced to add an inflation premium to their loans in order to make their credit transactions profitable as the dollar loses even more value as a result of the new money. (For example, if you were going to lend five dollars to your friend for one year, but you knew in advance that the dollar was going to lose 25% in value over the course of that year, you would tack on an additional 25% premium to the loan, in addition to interest, in order to recoup the value of the loaned money you originally lent out.)
What all this means, in other words, is that the Fed will ultimately be impotent to keep interest rates low over the next few years. If the Fed refuses to bow to Wall Street whining and bank pressure, then the credit crisis will continue to spread as the housing bubble continues to deflate (driving many people, like myself, out of work in the housing sectors), credit continues to dry up for businesses and consumers, and consumer spending (especially credit-financed consumer spending) consequently dwindles causing even more trouble for ailing businesses. If, on the other hand, the Fed tries to combat these serious credit woes by lowering interest rates (again, by pumping more money into the credit markets) this new money will eventually percolate through the economy, raising prices for goods and services in the U.S., decrease the purchasing power of the dollar abroad, and eventually make its way into the credit markets as an inflation premium on loans. In short, the unsustainable economic boom of the 1990’s will inexorably cause an economic bust that cannot be combated by the Federal Reserve— no matter what pundits like Jim Cramer say. The continuing credit crisis, however, is just one reason why your life in ten years will probably be extremely awful.
The next reason why your life will be awful in ten years stems from the fact that politicians and central bankers tend to respond in similar ways to economic crises like the one we are only beginning to pass through. Politicians and central bankers tend, quite simply, to try to spend their way out of credit crises. It is thus quite predictable that the Fed will indeed try to combat this credit crisis by lowering interest rates over the next few years in an attempt (albeit futile, as we’ve just shown) to "stimulate" the economy. This attempt to spur the economy with more cheap credit (rather like injecting large quantities of 'speed' when your body has collapsed at mile 22 of the marathon) will only serve to make your life extremely miserable in ten years when you face a dollar that won’t purchase even a fraction of what it will purchase today. If you are a baby boomer on a fixed income, living off the savings you thought was sufficient to last for years, you will find your hard-won savings account buying less and less and less.
If in ten years you are unfortunate enough to have to work for a living (while simultaneously trying to shoulder the enormous national debt— including the debt from the current and future wars, which includes maintaining troops and bases in over 120 countries around the world— Social Security, Medicare, Medicaid, et cetera), the costs of your children, and the uncovered costs of your parents, you will find the need to renegotiate your wages or salary almost monthly in order to keep pace with inflation to afford your daily bread. You will also find it extremely difficult to save for your own retirement (and you can absolutely forget about ever getting any meaningful Social Security) because any cash you stash away in a savings account or under your mattress will rapidly lose value against the goods you want to buy, in addition to the momentous fact that taxes will need to be increased dramatically and often to continue funding Social Security and Medicare for the swelling ranks of the retired baby boomers.
If in ten years, moreover, you are a business owner trying to make a living, you will be in an equally unenviable position. You will be forced, on the one hand, to pay continuously increasing prices for the factors of production that go into your products as the dollar continuously falls in value against those factors, while at the same time you will find it difficult to obtain credit to finance these increasing costs, because banks will be forced to heap the previously discussed inflation premium on your business loans. At the same time, your workers will harass you continuously for wage and salary increases to keep pace with inflation. If your workers are like those of previous generations, moreover, they will probably ignorantly blame you alone for their miserable lot, variously calling you a "capitalist exploiter," and a "profiteer." These misdirected insults directed toward you simply for trying to make a living will undoubtedly provoke Congress, ever opportunistic to reap political rewards for "rescuing labor," into passing increasingly draconian economic restrictions, and price and wage controls. You will probably be forced to pay arbitrarily high legislatively-enacted minimum wages, while you are simultaneously prohibited from charging increasing prices to keep pace with inflation. The end result of this predictable farce will probably mean bankruptcy for you, unemployment for your workers, and credit being taken for the whole episode by the wretches in Congress who will proclaim that they succeeded in "protecting labor," but really they will have succeeded only in crippling the economy still further.
Enough about the economy for now, because there’s still more that that will make your life miserable ten years from now. While we know that the U.S. economy will continue to deteriorate over the next few years no matter how hard the Fed tries to avoid it, we can know with similar certainty that the world ten years from now will not be devoid of "terror." Consequently, we can predict with a great deal of confidence that between now and then our government will find no shortage of nations to invade and people to kill in its futile attempt to stamp out "terror." We can look forward to potential conflicts with Iran, Pakistan, North Korea, Venezuela, and maybe even Russia and China over the next ten years if our government resolves to seriously tramp around the world stomping out "terror" and inculcating "democracy," You will not be surprised to learn that any and all military adventures between now and 2017 will have to be financed somehow, either by increasing the tax burden on you or by increasing the money supply with more freshly printed dollars (which, of course, will still further depress the economy and the value of the dollar ten years from now). By then, of course, the Chinese and others in the world will have long since stopped supporting our 'debt habit.'
Have I succeeded in convincing you that your life will be absolutely awful in ten years? Your dollars will by then be increasingly worthless shreds of green paper, and your tax burden will probably have increased dramatically. Your wages will need to be renegotiated constantly in order to avoid constant pay cuts, and the economy will probably be stifled by more and more legislatively-enacted price and wage controls. You should reread
Nineteen Eighty-Four (Paperback)"by George Orwell
Your savings accounts and cash reserves will get smaller and smaller as inflation increases, and credit will become increasingly expensive with inflation premiums tacked onto loans, and the supply of real loanable funds will have shrunk substantially by then as more people find it impossible and unprofitable to save and lend out their money. You may, moreover, find yourself living under a government embroiled in costly and pointless wars with a score of other nations, passing the costs of those wars onto the future you.
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