Let me tell you what it'll not be: return to normalcy. We are going to pay the full price of thirty years of financing prosperity by debt and Walmart's shipping of manufacturing jobs overseas. Obama is right in saying that he had inherited the whirlwind, but wrong in believing that even bigger government programs, bigger entitlements, bigger deficits and bigger debt will solve the problem which big government programs, big entitlements, big deficits and big debt have incurred. This is like curing stomach cancer by inducing colon cancer.
Who we vote in this November is irrelevant: the patient is dying, the boat is sinking — pick your metaphor. Fiscal conservatism and balanced budgets and reduced taxes will not change the fact that we are buried in a deluge of debt ($13 trillion) and unfunded liabilities (various estimates between $30 and $100 trillion). Moreover we have an enormous negative trade balance principally with oil exporters to satisfy two-thirds of our oil appetite and with China for toys painted with bright, lead based paint and toothpaste that'll sicken you, if not kill you.
Inflation is the preferred method of liquidating debt and entitlements. Debt is not dishonored, all financial and legal conditions are fulfilled, and the government can feel good about itself. Of course, the investor who purchased the bond with an amount of money that would buy a Bentley and is paid off in money that can buy a plastic tricycle may not feel so good. But anyone who has that amount of money can afford to lose it according to the politicians who debase a currency. Inflation also handles entitlements nicely — recipients of social security and government pensions still get the full amount each month. But instead of paying for rent and food, they can buy a month's supply of Chinese toothpaste. Argentina is being hailed by some as a model for liquidating government debt and entitlements.
Another way for the patient to die or the boat to sink is deflation. Governments don't like deflation because they feel that they've lost control. "Control" of course being defined as maintaining the means to print enough currency to smother an economy. But governments do not have as much control as they believe as seen by the frequency with which they fall. We see evidence of inflation by looking at the price of gold and the value of the Japanese yen. The high value of both is a knee jerk reaction by dollar holders to get out before the currency vaporizes in a wisp of smoke. We see inflation in the higher cost of food and fuel, and, oh yes, taxes.
What many people do not see is evidence of deflation. Housing foreclosures are 25 percent higher this year than last. People who have been unemployed for a year or two are finally running out of money. Walking away from their home is no longer a choice, but an "unavoidable inevitability." What happens to the mortgage? It has to be written down to its true value. Liquidating debt is a sign of deflation, not inflation. Sooner or later municipalities, counties and states (yes, even New Jersey) may come to the realization that falling tax revenue (governments can always increase the tax rate, but that does not necessarily mean more tax revenue) cannot pay operating and financial costs. Governments will be facing a stark choice of either keeping government workers or government bond holders happy, but not both. Once one community declares bankruptcy, it'll be much easier for the rest to follow. The ultimate step in deflation is reneging on all debt public and private, a new issue of currency (beware — it may be computerized) and a new beginning (beware — it may be a complete loss of freedom).
Because a new beginning means new politicians, and because it's easy to keep the printing presses rolling — the odds on favorite is inflation. But that is not guaranteed. Suppose that OPEC and China tell the Administration that they will not accept dollars unless they receive interest on their trillions of dollar holdings that are far too large for conversion to gold, silver, Japanese yen and the European euro (now disfavored with the PIIGS phenomenon). We cannot live without OPEC oil and we got to have low priced consumer goods at Walmart made by workers so ill-paid that they cannot buy what they make. We may cave-in to circumstances, a favorite Washington parlor game, and hike interest rates.
Do you have any idea of the interest cost applied to about $14 trillion of recognized public debt excluding that which has been swept under the carpet away from public view and the untold trillions of dollar holdings of our friends in China and OPEC? Interest payments on dollar obligations will swing the annual Federal deficit from $1.5 trillion (yes, that's where we're at) to, oh, you can do the calculations. Paying interest on debt will reduce government net income to paying entitlements and interest with nothing left over for anything else. Sooner rather than later the government will wake up that they are no different than unemployed homeowners without the means to make mortgage payments or state, county and municipal governments who do not have the luxury of printing their way out of financial trouble.
It will not be a government official who will suggest reneging on all debt public or private. It will be an outsider. Remember, Hitler arose from the inflationary shambles of the Weimar Republic, another banana republic who thought it could pay off its debt and financial obligations through inflation. And also remember, Hitler got Germany back on its economic feet and was for a while the proverbial Man of the Hour.
What should you do to protect yourself? Frankly I haven't the slightest idea. If you ask me whether you should buy gold or stock your cellar with cans of beans, I would suggest that you get down on your knees and ask for guidance and protection, neither of which will you get from Washington.
Roy Nersesian, a resident of Maplewood, teaches at the Leon Hess School of Business at Monmouth University in West Long Branch and also at the Center for Energy and Marine Transportation at Columbia University. He has authored several books, the last on Energy for the 21st Century published by M.E. Sharpe.