The debt crisis has taken the world by storm; but few seem to be sounding the alarm. The U.S dollar, the go-to currency for global economic stability and growth, is imploding at an unprecedented rate.
Profit Confidential editors have been critics of the U.S.’s inability to rein-in government spending. Based on the White House’s own figures, the national debt will reach $20.0 trillion by the end of this decade—about 140% of our current gross domestic product (GDP).
Historically, countries that have incurred considerable debt and consistent national debt-to-GDP multiples of 120% or more have experienced currency devaluation. The U.S. dollar has been in a free-fall against other major world currencies since 2009.
Since November 2008, Federal Reserve Chairman Ben Bernanke has initiated three rounds of quantitative easing (QE) in an effort to create more economic activity and increase home prices.
Since 2008, the Federal Reserve has printed roughly $3.0 trillion. And, it’s climbing each month by an additional $85.0 billion.
What have three rounds of QE accomplished? It was supposed to increase lending, create more jobs, and lower the unemployment rate. Instead, banks are sitting on a pile of cash and remain tight-fisted, fewer jobs have been created, and the unemployment rate remains high
What QE has done is flood the global markets with trillions of U.S dollars. It’s not as if this new-found money is backed by gold. It’s simply created out of thin air.
And, things are not going to get any better. The Congressional Budget Office (CBO) expects the U.S. economy to remain moribund in 2013 and for unemployment to remain high. What’s more, the official U6 unemployment rate (which includes people who have given up looking for work and people who have part-time jobs but want full-time jobs) has held steady around 15% for months.
The unofficial shadow statistic unemployment rate (which includes the long-term unemployed) sits at 22%!
Americans are out of work, and their dollar doesn’t go as far as it used to. Consumer spending might have once been the workhorse for economic growth, but not anymore. And, that could spell doom for the U.S. economy.
After phenomenal amounts of bailouts were doled out, followed by non-stop government spending, the U.S. national debt rose 76.2%—from $9.2 trillion in 2008 to $16.3 trillion in 2012. (Source: TreasuryDirect, last accessed November 27, 2012.)
It gets worse. The current administration said it would keep the budget deficit below $1.0 trillion. It hasn’t. For fiscal 2012, the federal budget deficit was $1.1 trillion, slightly below the $1.3 trillion deficit recorded in 2011. (Source: U.S. Department of the Treasury, October 12, 2012.) What’s more, 2012 marked the fourth consecutive year in which the U.S. government experienced an annual deficit above $1.0 trillion. As a percentage of GDP, the U.S. government’s budget deficit for the year 2012 stands at seven percent.
Along with skyrocketing government debt, the Federal Reserve has printed $3.0 trillion. Where did the $3.0 trillion come from? It’s not backed by gold. It was simply created out of thin air. And, the presses continue to print an additional $85.0 billion a month!
At Profit Confidential, we believe a home-grown debt crisis is brewing for America, and we believe other aspects of our financial system will suffer because of it
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The market chaos continues to grip the stock markets. We have the European debt crisis and a concerted effort to fix it, albeit it will be extremely difficult and take years.
The European Central Bank (ECB) cut the eurozone’s interest rate by 25 basis points to one percent—the second cut in five weeks. However, keep in mind that the ECB increased rates two times prior to the cuts. The cut will have little impact on the effort to revive the region and avoid another recession given the debt crisis. The ECB should have cut interest rates to below one percent as we did in the U.S. and as the U.K. did. The concern was that inflation in Europe is three percent, so the fear was that lower rates could drive up inflationary pressures.
The upside potential is limited at this time. The problems are global in nature. You have the massive debt crisis in Europe and the U.S., along with deepening U.S. deficit situations. We are seeing state governments take days off here and there in order to save a few extra bucks. But this is merely a loose bandage strategy and not a remedy for the ailing U.S. economy. President Obama and the Fed realize the extent of the hurt. Obama introduced a $447-billion plan to drive job creation, but whether it will work or not is up in the air. It’s not going to be easy and everyone realizes this.