Your Bankrupt Future

A story reflecting a recent conversation with my publisher…about metals and the U.S. dollar.

Babushka Generation of Pensioners

Babushka Generation of Pensioners

Fellow citizens of Amelia Island those of us who are saving for the future could easily end up bankrupt for our efforts. That‚Äôs what happens when governments try to ease the burden of their debts by devaluing the currency. This is a marvelous piece by Paul Tustain explaining why this is likely to happen. ‚ÄúThose people who have saved for the future could soon form our own generation of bankrupted, ‚ÄúBabushka‚Äù pensioners…‚Äô

Twenty-five years ago the Russians found themselves in a hole.

They had an official price for petrol (gasoline) of one ruble. But the cost of providing it, for example by buying it on world markets, was eight rubles. Insofar as the state could supply any petrol to anyone at all, it was definitely going to be at a big loss. Yet they obstinately refused to accept that their price was wrong.

How we laughed at this dogmatic denial of the discipline of the market! We put it down to some sort of political imperative, but in fact it was much simpler than that.

Rather than lose money at a world-record rate, the Russian state responded by distributing official petrol in limited quantities, and only to favored clients, which in their society meant party members. The members used to fill up their Zil limousines with this cheap petrol, and effect a supply chain to retail via the simple device of draining their tanks into the jerry cans of local teenaged entrepreneurs — at six rubles per liter. That left the last two rubles to the entrepreneur, who sold it on the side of the street at eight, with hardly a murmur from official sources.

Party members were getting rich, after all, and the taxpayer was footing the bill.

Now substitute USA for Russia, and credit for petrol, and you have the essence of what is going on today. Can you get a mortgage in America or the UK at 2%, even if you pay a 50% deposit on your house? Certainly, not – in America, only government mortgage agencies (Fannie and Freddie) and megabanks which are too big to fail have access to the 0.25% credit provided by the Fed. And once again, those megabanks are making very large sums, much of which gets distributed via bonus pools to those with an unremarkable talent for re-selling this cheap credit at market rates of 5.0% or more.

Political leaders regularly rail against greedy bankers, but the problem — all that cheap money — has for the last five years come directly from the false market in credit extended by ultra-low rate policies sourced in the Treasuries of the West.

Who’s at fault is academic. The issue now is that this artificially low interest rate environment can set off a hyperinflation chain reaction, just as it did in Russia once market forces prevailed. Not much is different from previous hyperinflation episodes, save that the melting of a glacially frozen stockpile of $50 trillion in government bonds performs the role traditionally played by the printing press.

In the end, those who have saved for their futures could form our own Babushka generation of pensioners. Paid out monthly, and in full, their pension will buy them a sandwich or two. The nominal value of sovereign debt will not decline, but the value of it will inflate away, taking with it the value of all those bonds.

We could end up needing to remove a couple of zeros from banknotes, because otherwise the coinage will be melted back into nickel and copper ingots as soon as it is issued, and then sold to the Chinese.

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4 Comments

  1. Hal_Burns

    Government is not the answer. It is free trade based on supply and demand. If that model is followed then there will be sustainable jobs simply because free trade will demand employment. It never fails, when government gets involved, nothing works.

  2. john1113

    If the government had not try to fix all the problems by thorwing tons of money at them, we would be in much better shape today. I agree with you Mr. Burns.

  3. tommylee

    I still agree with Publisher on a 6 month ago discussion and short story that the best way would have been to fix the immediate problem is to set everyone who wanted to retire at the age of 50 with a golden handshake of 2 million dollars but are not allowed to re-enter the workforce but had to stay on the job to train the new entrant for 6 months in the job the 50 plusser would be lieving. thereafter they can start a home based business if they would like to, but is not allowed to be an employee.

    Since we all are very aware that 80% of the GDP is small business this would have sparked a exponential growth in business start-ups and would create a much more realistic “productive economic outlook” than being just a consumer economic factor.

    This would have created the much needed job openings, relief the pressure on the economy, create demand in the market place, would have paid off mortgages, raised demand for new cars and most of the bail-outs would not have been necessary but spend on restarting the economy. The total cost estimated somewhere in the range of 500 billion.

    Of course there are some far reaching consequences to this, so stringent regulations are required.

    I still like the plan.

  4. john1113

    That plan, in my opinion would have worked, I agree. The only problem is it would not have played out in the plan that was being executed. If what they did truly helped everyone, then those who were earmarked for free giveaways would not have received them. The old saying is true, it's not what you know, it's who you know, especially in politics. I do agree though, there were other ways that would have made much more sense and it would have gotten this economy up and running.

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