The United States Needs Canada to Survive

We have been pointing at the problems of the concentration of decision-making quite a bit recently, but we feel it bears repeating. Much blame for the 2007 Depression can be placed on, for example, the U.S. Federal Government allowing the super-huge American banks to become... well, super-huge. It gave those banks, and therefore their respective managements, so much power that the bad decisions made by the banks had global implications. The rest, as they say, is history.

Now the United States is hurtling down the first dip of the 2007 Depression, and the programmes for a quick "recovery" back to the consumer economy are only opium-induced hallucinations. In our opinion, the only real way to bring the Depression to a close is the old-fashioned way: liquidation, down-sizing, and reformation. If we were the optimistic type, we would suggest that the Government is running out of time to allow this. Realistically, though, we fear that the point-of-no-return is several economic pot-holes in the past.

So... where does that leave the average American citizen? Nowhere comfortable is our reply; the Citizenry is faced with a mind-numbingly-large (and exponentially growing) national debt, the fallout from the imploded consumer economy, and a world in a Depression. Whether or not the Citizenry is aware of this is another matter; the important point is that the United States probably will not be able to bring itself out of the 2007 Depression by its lonesome anymore.

Hence, the U.S. will need friends. Specifically, friends with usable industrial capacity, a less-unsound currency, a less-irresponsible Federal Government, and a Citizenry with a healthy work ethic. Bonus points for having a border with the U.S., as well as being a major trading partner.

We would suggest Canada: it is the only functional country which borders the U.S., and it offers the qualities we listed above, more-or-less. Canadian Citizens have their problems, to be sure, but Canada has not done many important things: the Federal Government hasn't been usurped by the super-huge banks; it isn't running massive wars of occupation; it hasn't annihilated its cities and industrial capacity in favour of strip malls and hair salons, it is the U.S.'s largest trading partner.

It seems, however, that the U.S. Federal Government is intent on de-friending Canada. We'll write more on this topic tomorrow.

Read part two here.

How Likely is Hyperinflation in the USA?

Hyperinflation is certain in Zimbabwe, but can such a thing happen in the USA? Typically, hyperinflation occurs quickly when economies are under extreme stress such as during wartime. The USA had that experience during its Revolution, and many European countries did so during and after the World Wars, and after the collapse of the Soviet Union and its satellites.

Are present economic conditions suitable for the formation of hyperinflation in the USA? The use of paper money creates chronic inflation, but what speeds up inflation to the point where doublings of prices occur not over decades, but weeks?

Typically two factors occur to induce hyperinflation. The first is when governments spend money well beyond their ability to collect taxes. This can occur when spending increases significantly (such as for a war). The second is when tax receipts fall significantly such as during a depression, and the government is unable to borrow money, and yet the government maintains, or even increases, spending.

Clearly, the first factor may come into play since the USA is presently engaged in expensive military campaigns abroad, and is undertaking a nationalisiation of the financial system. More subtly, the federal government has liabilities of over $60,000,000,000,000 (or $200,000 per person) - and growing. There is no way to tax the population sufficiently to honor this commitment in full, so 'printing up' money will be a temptation. Whether debasing the currency will continue at a fairly moderate pace, or will get out-of-control, waits to be seen.

The second factor has come in to play only so far as tax receipts are falling and spending is increasing. The USA still maintains its ability to borrow, at least for a time. Three things may come to pass that may end that privilege. First is the unwillingness of lenders - though at present that seems unlikely since Treasury Debt and Federal Reserve Notes are highly regarded. The second is the incapacity of lenders. As foreign trade crashes, foreign central banks and other corporations will simply have less money to invest in the USA. Increasingly poor domestic investors will be similarly unable to buy. Finally, the knowledge that increasing public borrowing at the expense of private investment (e.g. more money for unemployment benefits and less money to dig new oil wells) would likely make the Depression worse, may prompt the government to 'print' rather than borrow.

We do not care to make specific predictions of how much prices will rise and how quickly. We do believe that hyperinflation in the USA is a definite risk, as the 2008 Depression causes increasing income loss. At the moment, hyperinflation is not imminent, but stand by for further updates.

The Looming Tax Catastrophe

The 2008 Depression is lowering tax revenues due to investment losses, declining earned income, and falling property values. To raise taxes at this point, even to maintain revenue, will create even less investment if levied on business, thus hurting prospects for job creation; and if levied against individuals, will lower discretionary spending and further the crash in consumer spending.

Governments can cut spending, as is happening in most U.S. states, but the effects of that are also depressing - government spending is, after all, somebody's income. Governments at present are actually increasing their spending in a big way via the bailout mania both by 'investing,' and by covering the losses these 'investments' will inevitably bring. Additionally, there are plans in the works for a new, New Deal.

Governments tend to have pretty good credit ratings, so they can borrow quite a bit to cover the shortfall of tax revenues, but there are limits. There comes a point when lenders begin to doubt whether the funds will be repaid and that source is precluded. Currently the USA has a direct federal debt liability of about $40,000 for each and every person in the country. Evidently the USA's creditors (mostly trade partners) think that is a viable sum. How much higher will they let that go, especially as incomes start falling? We don't care to hazard a guess, but probably not too much higher. So while this option is open to the USA Federal Government for the time being, it is a temporary phenomenon.

There is a darker 'solution' to where a government could get money to spend - the printing press. This would, of course, cause a ruinous decline in purchasing power - furthering deepening the depression.

Raise taxes to cover spending - deepens the depression. Cut spending to match the fall in taxes - deepens the depression. Max out the Federal Debt 'credit card' - keeps the bills paid for the time being, but what to do when it's maxed out? 'Print' money - one way ticket to Zimbabwe. This is looking like a no-win situation.