System in freefall now

I think that the system is in freefall now.  It is not because of any ratio that has been breached.  I have spent a lot of time trying to speculate on some metric that would indicate whether some problem has occurred, usually as a percent of GDP or tax revenue.  Most of the "objective" trends that I have been coming up with indicate a problem somewhere around 2025 to 2035, which is too far out to worry about.

No, the problem has to do with attitude.  If you give a spoiled girl a credit card and she spends it and doesn't even keep track of the receipts and ignores the bills when they come in, then you know there is a problem.  Why do I need to care, she says, my daddy will take care of it, and even if he doesn't, what are they going to do, arrest me?

We have that same problem.  Everyone is living in a fantasy world.  And here are some indicators, either causes or symptoms, of the problem.

1.  The collapse of the Super-Committee talks.  This happened on November 22.   This was the committee that was supposed to come up with $1.2 trillion in savings over the next 10 years.  And nobody cares.  I think this was the last best hope of reaching an agreement.  I don't think we will ever have a serious attempt at cutting the deficit again.  Instead, there will be some token attempts, like arguing over how to pay for FEMA costs, or holding up FAA construction projects for a few weeks.

2. Lack of seriousness in the budget projections and process.  CBO and OMB projections don't even start with the same numbers for 2010 and 2011, and don't have a common definition of what is mandatory spending or defense spending.  We don't have a budget, instead we have Continuing Resolutions.  The current one funds the government through 12/16/2011 (this Friday).  I don't even know when the last time the US had a budget (as opposed to a series of resolutions). 

3.  The collapse of MF Global, and the apparent immunity of Jon Corzine.  MF Global collapsed on 10/31/11, and there was a "shortfall" in customer accounts of $1.2 billion. Will Corzine go to jail?  I don't think so.  The accounts are insured by the SIPC, so nobody really cares. But it shows systemic problems.  The collapse of MF Global is what caused Ann Barnhardt to lose it, which seems extreme.  One company fails and you think the sky is falling, but if you see every company as having the same problems then I think you have a valid argument.

4.  Social Security.  I have written about this before.  The combined Social Security and Medicare trust funds reached a permanent peak balance on 10/18/2011 and it is all downhill from here.  It would be fiscally prudent to reinstate the 2% payroll cut, but nobody cares.

5.  Increasing Cash Deficits.  I look at the Debt Held by the Public as a key indicator.  This was $10,389,958 on 11/30/2011.  It was $9.756 trillion on 7/29/2011; $10.024 trillion on 8/31/2011; $10.127 on 9/30/2011 and $10.256 on 10/31/2011.  It has gone up at least $100 billion every month since August.  I don't think we will ever have a month again in which the debt does not increase at least $100 billion.

So now that the crisis is upon us, what do we do?  First, stop using the dollar as a measurement of anything except insanity.  It has no fixed value, so it is meaningless as a measurement device.  The is also true of the other major currencies, the pound, euro and yen.  Instead, use the stable secondary currencies, such as the Swiss franc, Canadian dollar, Australian dollar, Hong Kong dollar, Norwegian krone, Chilean peso, Brazilian real, Indian rupee, South Korean won, etc.  And buy silver. Sell any bonds and invest in foreign stocks.  Don't worry about any debts, they will be inflated away.

How long until we see the practical effects of this?  Well, it depends on what you are looking for.  I don't think we will have a stock market crash or a lot of major companies failing because they are being artificially inflated.  When M2 velocity starts to pick up, I think we will quickly see inflation of 10% or more.  The M1 multiplier is already starting to turn.  I think we will see the effects by summer 2012.

I am going to stop making any budget projections since they are meaningless.  I will continue to blog about positive developments.

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Update 6/19/12: This isn't a model, it's a pessimistic rant. An economy is pretty robust and won't collapse just because the government doesn't go through a formal budgeting process.