Monday, February 15, 2016

Debt is the problem, deflation the outcome

Even though no presidential candidate want to address that sore point, most of us understand the seriousness of our debt problem. In round numbers, the U.S. total credit market debt is $40 trillion and government debt is $17 trillion, leaving private debt at approximately $23 trillion.

Some say that the government debt will rise towards the $30 trillion level while the private debt will drop towards the $20 trillion level, but that will still remain too high. This debt scenario is bad enough, but if we take into consideration our future liabilities like social security, medicare and medicaid, we might add another $80 trillion to today's $40 trillion of total credit market debt.

By the time we, the baby boomers all retire, the 40 million seniors will balloon to 72 million. If these numbers don't scare our kids and grand-kids I wonder what does... The main reason for the Fed's quantitative easing (QE) or exercise in money printing was to prop up the economy. Clearly, this isn't working, corporations keep on hoarding cash and individuals are afraid as well. What must happen to stimulate the economy is "velocity" a measure of the rate at which money flows to purchase goods and services.

This measure is computed by dividing the nation's GDP by the total money supply. Velocity of money also slows when interest rates are low; people hold on to their cash even tighter, instead of investing. This situation is exactly where Japan has been stuck into since 1989. Will it be the same scenario for us? With a little bit of luck, we might be able to weather the announced slowdown and patch-up our household finances so we can emerge out of this mess sooner than later...

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