Also by this author – Never Give UP, Part One

And Never Give UP, Part Two



No MORE Funny Money, Please



Jay B Gaskill


We have lived through corrections before, market corrections, bubble-quakes and other scares. We are much deeper in trouble than you may think, even if you are worried about the so called fiscal cliff, but we are probably not heading to collapse because the movers and shakers of the moment actually realize that a full-on collapse is actually possible this time.  Fear wonderfully concentrates the political mind.  So my prediction is for a new kind of correction, call it a once in a century sovereign correction.  But if it is handled correctly, your world won’t end, but most of your discretionary spending will.  If it is handled incorrectly, well, forget my optimism and move to a self-sustaining farm.


On the commercial side of the ledger, all of the productive enterprises and home-based consumers in the USA have collectively been running a net trade deficit with foreign producers and customers since 1976.


On the federal government side, the debt service load is so high that it exceeds the cost of funding several big-ticket, high-value budget items.  Some blend of revenue increases (tax bills will go up for everyone who is actually earning any real money), inflation, and government cutbacks (don’t expect your mail service to improve or any new federal jobs to appear) will be agreed to, because necessity is the mother of bad compromises. Don’t be confused by the spin.  We are being herded into a lower standard of living.  The president’s rhetoric about taxing the rich is just intended to make us feel better about it.  The rich to whom he refers actually don’t have enough money to get us out of this mess. As Michael Tanner of the CATO Institute puts it –


“You can’t hike taxes on the rich enough to balance the budget. President Obama has called for $1.6 trillion in tax hikes over the next ten years. While that is large enough to do serious damage to the economy, it would amount to just 16 percent of the combined deficits that we are projected to face over that period. In fact, the president’s proposed tax hike doesn’t even cover the $2.6 trillion in spending increases that he has called for over the next ten years. Obamacare alone will add $2.15 trillion in federal spending by 2022”.[1]


We are running out of gimmicks and excuses. The net effect of the inevitable reckoning will be less discretionary spending power for 80% of us, a new normal that could last a long time.


By the way, that trade deficit represents thirty four consecutive years of borrowing real money to pay for real goods and services that we do not provide for ourselves, paid with credit that cannot be fully repaid with real goods and services that we hope to provide for others…if they even want them at prices we can afford to charge.


This is real money because our trading partners expect to be repaid with real money that purchases real goods and real services for them. 


Here are some clues:


(Daily Caller February 10, 2012)


“The U.S trade deficit with China today (February 2012) is (was) 28 times larger than it was during the Reagan era, according to new figures released by the U.S. Census Bureau. That daunting deficit has grown by 18 percent per year since China first entered the World Trade Organization in 2001.


“Census figures now show $103.8 billion in U.S. exports to China during 2011, and $399.3 million in imports, a stunning $295.5 billion difference.”



(Reuters – August 8, 2012)


“The huge U.S. trade deficit with China, fueled by Beijing’s actions to depress the value of its currency, displaced or eliminated more than 2.7 million American jobs between 2001 and 2011, the labor-friendly Economic Policy Institute said on Thursday in its latest look at the issue. The institute estimated that nearly 77 percent, or more than 2.1 million, of the lost jobs were in manufacturing.”


There are many more clues, but there is one tell:  Direct negotiations with the trading partner are required here because real world terms have to be agreed on.  Did you ever hear about direct negotiations with the bondholders and others who are financing our gigantic sovereign debt or our federal government’s insatiable appetite for unfunded spending?  No?  That’s because politically manipulated money for domestic programs is not the same as trading money owed hard-nosed customers.  Economic geniuses like Paul Krugman may argue that the deficit is not a grave concern because we “owe that money to ourselves” and experts of his ideological stripe may pretend that all money is the same, but tell that to the masters of the second largest economy in the world.


A liquor supplier can’t get away with diluting its product and offering it as tender for debts owed to buyers when its customers are the organized crime bosses.  Imagine a consigliore like Krugman who gave a supplier such bad advice.  He might find himself sleeping with the fishes.


Lenders and other customers have other choices.  One way or the other, the various pipers will have to be paid.  If they are paid in diluted currency, our own borrowing costs will go up, our borrowing capacity will increase, prices will rise in response to the dilution of the value of our own money, all this will unfold just as it happened to the banana republics of South America, and to the Weimar Republic of pre-Nazi Germany.


Economists are useful to a point, but in a crunch, give me a smart historian.


We have been living on borrowed time and money for so long that the correction will also take more time than anyone would like to endure.  However the adjustments are spun or disguised, they will result in a lower standard of living for almost everyone you know.  The election of 2016 will be like an angry wake.


England and Japan were locked in a new, dismal normal as a result of similar fiscal problems.  In each case the austerity slump of shared deprivation lasted for more than a decade.  Japan has not yet fully recovered.  England was lucky enough to have a Margaret Thatcher and a North Sea oil boom that finally sparked a real recovery using real money.


Whatever you thought about the candidates in the last election, we did not end up with a Margaret Thatcher in charge. To accomplish what she did will require this president to face down his greenest supporters and engineer a 180 degree turnaround in energy policy.  No, Virginia, we are not Santa Claus.  Yes, Virginia, we do need to sell fossil fuel to foreign customers.  Yes, Virginia, we will be contributing a little more to the CO2 load but not nearly as much as our Chinese brothers and sisters.


IF that happens, IF the American oil, natural gas and coal reserves are opened up, IF that ignites the next real energy boom, you can thank our trading partners who insist on being paid. …or you can thank all the conservative and libertarian economists whose advice has been ignored to date.


A friend of ours owns a family rural property in Oregon that was affected by a natural gas pipeline terminating on the Pacific coast.  A pumping station on the edge of his land will be a noisome nuisance at best.  The entire project was sold to the locals (note that they never had any real choice) on the basis that we would be importing natural gas to fuel our economy.  Not.  It turns out that the pumping station is going to be exporting, not receiving gas.  The tankers on the coast will undoubtedly be Chinese.


As long as we have to repay the Chinese, how about allowing a real energy boom to take hold so the rest of us can prosper?  The industry experts credibly report that the USA could be a net energy exporter within six years and enjoy that status for another two decades, at least[2].  That’s a lot of time to rebuild a damaged productive sector and establish a real economy.  …Especially using real money.





This article was first published on The Policy Think Site {  and one or more of its linked Blogs

Copyright © 2012 by Jay B Gaskill, attorney at Law

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