Aware Brain

In the early 90′s startup companies kept a close eye on their “burn rate”, calculating how long they had to turn a profit before their VC funding ran out. Many of them burned out before the revenue started coming in, but for venture capitalists it was a calculated investment. Having funding spread among dozens of startups, the VC investor was assured of some spectacular returns on successful companies, which would make up for the losses on the losers.

The United States is facing its own financial burn rate today, the big difference being that there are no other pool of countries to average out the losses with. Unless GDP, productivity, and revenue starts flowing soon, many entities from individuals to corporations to governments will burn out before they turn around. The government can create its own money to a point. This is not necessarily a bad idea, until the fiat money becomes too much to ever absorb. There is some evidence that threshold may already been crossed. The government currently has contingent liabilities of $60 trillion. “There’s no feasible combination of growth and taxes that can fund that liability,” said Jim Rickards, director of market intelligence for scientific consulting firm Omnis “The government could fund about half that in the next 14 years, which means the dollar needs to be devalued by half.” This is something I wrote about in my blog post “Too Big To Bail“, in February.

The Fed, which is owned by a consortium of banks and was set up to serve their interests, is tasked with seeing that the banks are paid back; and the only way to do that is to inflate the money supply, in order to create the dollars to cover the missing interest. But that means diluting the value of the dollar, which imposes a stealth tax on the citizenry; and the money supply is inflated by making more loans, which adds to the debt and interest burden the inflated money supply was supposed to relieve. The banking system is basically a pyramid scheme, which can be kept going only by continually creating more debt.

But this is their “burn rate”. Currency can only be devalued so far. Apparently, the government is going to play chicken with the burn rate and see if they can get the thing turned around before it burns out. My earlier post today points out that the fundamentals could indicate that is not possible.

The State of California has already hit the ground. Apparently, this can only be seen from outside the United States. The UK Guardian can see this clearly, while it is barely noticed by US sources. The reporters from 10,000 miles away can notice that the state that was once held up as the epitome of the boundless opportunities of America has collapsed. They were able to quote a Professor Kevin Starr, who has written an acclaimed history of the state, recently declared: “California is on the verge of becoming the first failed state in America.” In a scene is reminiscent of the fallout from Hurricane Katrina, as crowds of impoverished Californians stand or lie aimlessly on the hot tarmac of a parking lot. It is 10am, and most have already been here for hours. They have come for free healthcare: a traveling medical and dental clinic has set up shop in the Forum (which usually hosts rock concerts) and thousands of the poor, the uninsured and the down-on-their-luck have driven for miles to be here. Los Angeles now has a poverty rate of 20%. Other cities across the state, such as Fresno and Modesto, have jobless rates that rival Detroit’s.

In the Central Valley town of Merced, house prices have crashed by 70%. Two Democrat politicians have asked for their districts to be declared disaster zones, because of the poor economic conditions caused by foreclosures. In one city near Riverside, a squatter’s camp of newly homeless workers sleeping in their vehicles has grown up in a parking lot – the local government has provided toilets and a mobile shower. This is in America, in the largest state. In addition to being an indicator of where the economy is going, this story should be another reason to look for information and intelligence from outside sources. Get a fresh perspective on events to keep your brain aware.

Even the global marketplace is starting to look at its burn rate. The International Monetary Fund is taking extraordinary steps to protect world markets. “They’ve issued debt for the first time in history,” said Rickards. “They’re issuing SDRs. The last SDRs came out around 1980 or ’81, $30 billion. Now they’re issuing $300 billion. When I say issuing, it’s printing money; there’s nothing behind these SDRs.” SDRs, or Special Drawing Rights, are a synthetic currency originally created by the IMF to replace gold and silver in large international transactions. But they have been little used until now. Why does the world suddenly need a new global fiat currency and global central bank? Rickards says it because of “Triffin’s Dilemma,” a problem first noted by economist Robert Triffin in the 1960s. When the world went off the gold standard, a reserve currency had to be provided by some large-currency country to service global trade. But leaving its currency out there for international purposes meant that the country would have to continually buy more than it sold, running large deficits until it eventually went broke. The U.S. has fueled the world economy for the last 50 years, but now it is going broke. The U.S. can settle its debts and get its own house in order, but that would cause world trade to contract. A substitute global reserve currency is needed to fuel the global economy while the U.S. solves its debt problems, and that new currency is to be the IMF’s SDRs.

That’s the solution to Triffin’s dilemma, but it leaves the U.S. in a vulnerable position. If we face a war or other global catastrophe, we no longer have the privilege of printing money. We will have to borrow the global reserve currency like everyone else, putting us at the mercy of global lenders.

Back in California, the Central Valley town of Mendota has an unemployment rate of 38%. That is expected to rise above 50% as the harvest ends and workers are laid off. City officials hold food giveaways every two weeks. More than 40% of the town’s people live below the poverty level. Shops have shut, restaurants have closed, drugs and alcohol abuse have become a problem. “It is so bad, but it has now got to the point where we are getting used to it being like this,” former Mendota mayor Joseph Riofrio said.

Advice from the leading edge of the Depression: Get used to it.

What if the economy burns out, before recovery takes effect? In an article titled “World War Three Anybody?”, Curmudgeon Jim Kunstler has a point of view on that which describes the likely outcome: “The USA is still stuck in its predicament of trying desperately to maintain an overscaled living arrangement, with no coherent public discussion of downscaling, re-scaling, or re-arranging things.  My guess is that this kind of restructuring only occurs when all other options have been exhausted,” he says. “The last time the USA found itself in an intractable economic morass, World War Two came along and it made things all better here (after considerable sacrifice for us and catastrophe elsewhere). After World War Two, we ruled the world for a couple of generations.”

~ by Dave on October 6, 2009.

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