The True Cause of America’s Troubles

Are you wondering why the U.S. economy has now stagnated — despite the largest government stimulus, bailouts, and money printing of all time?

Are you puzzled why the real income of American households has just suffered its worst plunge in recorded history — despite the so-called “recovery” of 2009-2011?

Do you want to know why it now takes 40.5 weeks for the average unemployed worker to find a new job — also the worst in recorded history?

And are you flabbergasted by the utter failure of the U.S. Congress to do anything about trillion-dollar federal deficits for years to come?

Then, let me tell you precisely what’s causing this mess.

The fundamental source of the nation’s troubles is DEBTS that are far larger and more destructive than Washington admits.

Indeed, the U.S. government is covering up the magnitude of the nation’s debt disasters with three major deceptions:

Debt Deception #1
Washington Excludes the Massive
Debts of Federal Government Agencies

“As long as the government’s debt burden is under 100 percent of GDP,” they say, “we can handle it. It’s only when it surpasses the 100 percent threshold that we’ll be in danger.”

True or false?

Let’s look at the numbers:

• U.S. GDP is $14.6 trillion. And …

• According to the Federal Reserve’s Flow of Funds, U.S. Treasury debts outstanding are $9.7 trillion.

• So that means the debts are well under the 100 percent danger threshold, right?

Wrong! The authorities conveniently ignore a massive $7.6 trillion of additional government debts that have piled up on the books of U.S. government agencies, such as Fannie Mae and Freddie Mac.

These agencies were created by the U.S. government, have always been controlled by the U.S. government, and now, after the federal bailouts of the last debt crisis, are even owned by the U.S. government.

How in the world anyone could possibly exclude their debts from the U.S. government’s books is beyond me. And yet that’s precisely what Washington does.

Add those debts to the government’s total burden … and guess what! Instead of $9.7 trillion in federal government debts outstanding, the actual total comes to $17.3 trillion — a whopping 118.3 percent of GDP!

How bad is that?

Well, back in 1970, about eight months before President Richard Nixon devalued the dollar and abandoned the gold standard, all U.S. government debts (even including government agencies) was only 32.9 percent of GDP.

Now, at 118.3 percent, the nation’s debt load is nearly FOUR times worse — in an economy that’s far less competitive than it was in the 1970s.

Moreover, at 118.3 percent of GDP, the U.S. federal government now has roughly the same horrendous debt burden as Greece had before its collapse and as much as Italy has today!

Debt Deception #2
Wall Street and Main Street Are
Also Swimming in Excess Debts

The current debate in Washington seems to be focused almost exclusively on federal government debts and deficits.  

However, the debt burden of U.S. households and corporations is also the biggest in history.

In fact, throughout more than two centuries of American history, total U.S. debts (including consumer debts, corporate debts AND government debts) never exceeded 200 percent of GDP; and when it did, it was invariably a cause for grave alarm.

Now, it has mushroomed from 154 percent of GDP in 1970 to a nosebleed level of 360 percent of GDP this year.

Needless to say, this is a massive, inescapable burden that pervades nearly every aspect of American life — via mortgages, credit cards, bank loans, municipal debt, and corporate debts of all kind.

Debt Deception #3
The Government Has Failed to
Admit that America’s Private-Sector
Credit Engine Has Collapsed

Since 2009, the giant U.S. engine for the creation of new PRIVATE-sector credit has utterly collapsed.

Sure, the federal government and its agencies continue to borrow money at a torrid pace — to finance their massive deficits. But …

In nearly all U.S. sectors outside of the federal government, instead of new credit being created, old credit is being destroyed.

I have never seen this happen before in my lifetime! Nor did my father, J. Irving Weiss.

Dad began compiling statistics on the creation of new credit in the early 1940s. And he introduced his methodology to the Federal Reserve’s research department soon after World War II, which they later adopted, calling it the Flow of Funds.

So if anyone could have been in a position to track this phenomenon, Dad would have been the one. But he told me — emphatically and repeatedly — that in all the years he tracked it, he never saw a sustained, outright NET contraction of credit.

During the Great Depression? Perhaps. But we have no reliable data from that period.

Now, though, it’s happening — and in a big way. Here are the facts …

Until the housing bust, the massive private-sector credit engine in the U.S. was robust and booming: At its peak in 2006, the U.S. added a net of $3.5 trillion in new mortgages, consumer credit, and other nonfederal debts.

And in 2007, it added another $3.3 trillion, according to the Fed’s Flow of Funds.

Then, suddenly, in 2008, banks began cutting back on new loans. Hundreds of billions of mortgages went into foreclosure. And combined, the net overall expansion of credit outside of the federal government plunged by a shocking 83 percent from the prior year — to a meager half-trillion dollars!

Can you imagine that?

Think about what the impact would have been of an 83 percent plunge in the stock market … or in any sector of the economy!

Yet here you had precisely that kind of a collapse in THE most fundamental source of stimulus for the U.S. economy — credit!

But if that sounds bad, wait till you hear the rest of the story …

In 2009, as millions of Americans defaulted on their mortgages, auto loans, or credit cards … and as thousands of banks tightened up their lending standards for new credit … we actually witnessed a massive liquidation of private credit.

When the dust settled, the Fed tabulated a net destruction of credit to the tune of $1.99 trillion in mortgages, consumer credit, bank loans, and other nonfederal debts.

It was literally the biggest decline of credit outstanding in recorded history.

If it ended there, it would have been bad enough. But it didn’t. The credit carnage continued in 2010 and is still taking place now in 2011:

All told, in the 30 months between January 1, 2009 and June 30, 2011, the U.S. has witnessed the net destruction of nearly $3.2 trillion in nonfederal credit.

Remember: Credit is the stuff that drives the U.S. economy … that millions of American families are addicted to in order to maintain their spending habits and lifestyle … that businesses count on to keep their sales and earnings flowing.

So now do you understand why the economy is stagnating? It’s quite simple when you think about it:

Washington is hogging nearly all the new credit available to finance its out-of-control deficits. But nearly everyone else is sucking hind teeth or, worse, getting kicked out of the pen entirely!

No wonder households are suffering such huge income declines despite the “recovery”!

No wonder it’s taking an average of 40.5 weeks for folks losing their job to find a new one!

No wonder Congress is hopelessly deadlocked on budget fixes! With households and small businesses already suffering massive credit withdrawal, no politicians in their right mind would to go to their home district to impose even more pain.

Bottom line:

1. Don’t count on the Treasury or the Fed to rescue the U.S. economy. Even with the biggest bailouts and lowest interest rates in American history, we are still witnessing net destruction of credit RIGHT NOW!

2. Don’t count on Congress to make any major progress in reducing our nation’s massive federal deficits.

3. Don’t expect an end to the liquidation of private credit — and the damage it’s doing to the economy — anytime soon. So …

4. Stay on course with the safety-first approach we’ve been urging here!

Good luck and God bless!

Martin