Warren Buffett’s Greenback Effect Weighs On Global Financial Markets

``If it seems too good to be true, it probably is. Always look at how much the other guy is making when he is trying to sell you something. Stay away from leverage.” Warren Buffett, Three Rules for Average Investors

Hardly has the ink dried from the issues we dealt with last week when events unfolded almost exactly as anticipated, albeit in a fusion [see Will China’s Stock Market Correction Spread Globally?]

US Dollar Leads The Markets

Here is a summary of what we wrote:

1) We expected that China’s overextended markets to have some ripple or leash effect on global stock markets and the commodities markets.

2) The correction in the China’s markets would possibly trigger a correlation trade-where the US dollar would rise in conjunction with falling markets.

3) We also noted of a contingent provision-our suspicion that the US dollar’s rise wouldn’t find firm legs to stand on, ``if the US dollar fails to rally while global stocks weaken, then any correction, thus, will likely be mild and short.”

True enough during the early part of the week, global markets crumbled resonating China’s rapid fall. This initially prompted for a short rise in the US dollar index.

However, the US dollar index failed to maintain its bullish composure (can’t get to cross the 50-day moving averages) and eventually faltered steeply going into the close of the week.

Figure 1: Stockcharts.com: USD Dollar Index Leads The Markets

The result-global markets, especially in the US and Europe, came back with a vengeance. (see figure 1)

On the other hand, China’s market (SSEC down 2.83% week on week) appears to have hit our defined bottom range and has fiercely bounced back, while the commodities market caught fire- Oil (WTIC) sped back and drifts at its resistance levels!

And again we see some technical pictures failing to keep up with evolving market events.

All of these hyper volatile actions in just a span of one week! Amazing.

And when the US dollar leads the financial asset markets, it is no less than a symptom of inflation driving markets today.

Warren Buffett Warns On The Greenback Effect

Even the sage of Omaha Mr. Warren Buffett acknowledges the growing risk of inflation as the “greenback effect or greenback emissions”. Last week in the New York Times he wrote

(all bold highlights mine)

``Because of this gigantic deficit, our country’s “net debt” (that is, the amount held publicly) is mushrooming. During this fiscal year, it will increase more than one percentage point per month, climbing to about 56 percent of G.D.P. from 41 percent. Admittedly, other countries, like Japan and Italy, have far higher ratios and no one can know the precise level of net debt to G.D.P. at which the United States will lose its reputation for financial integrity. But a few more years like this one and we will find out.

``An increase in federal debt can be financed in three ways: borrowing from foreigners, borrowing from our own citizens or, through a roundabout process, printing money. Let’s look at the prospects for each individually — and in combination.

``The current account deficit — dollars that we force-feed to the rest of the world and that must then be invested — will be $400 billion or so this year. Assume, in a relatively benign scenario, that all of this is directed by the recipients — China leads the list — to purchases of United States debt. Never mind that this all-Treasuries allocation is no sure thing: some countries may decide that purchasing American stocks, real estate or entire companies makes more sense than soaking up dollar-denominated bonds. Rumblings to that effect have recently increased.

``Then take the second element of the scenario — borrowing from our own citizens. Assume that Americans save $500 billion, far above what they’ve saved recently but perhaps consistent with the changing national mood. Finally, assume that these citizens opt to put all their savings into United States Treasuries (partly through intermediaries like banks).

``Even with these heroic assumptions, the Treasury will be obliged to find another $900 billion to finance the remainder of the $1.8 trillion of debt it is issuing. Washington’s printing presses will need to work overtime.

``Slowing them down will require extraordinary political will. With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap.”

Here Mr Buffett makes an elementary calculation. I have to admit my admiration for Mr. Buffett’s ability to explain or relate circumstances in very simple “layman connecting” terms.

Essentially, US savers “borrowing from our own citizens” ($500 billion) + Foreign surpluses “borrowing from foreigners” ($400 billion)= $900 billion. US debt initially estimated at $1.8 trillion, which has been scaled down to $1.58 trillion equals a deficit of still at least $680 billion-that would have to be financed out of “a roundabout process, printing money” or central bank money from thin air!

The US treasury is slated to sell $197 billion next week (CNBC). This means that the US sovereign bond markets will likely be tested anew and the US dollar index will likely remain under siege or under pressure.

Analyzing Inflation From A Political Dimension

While many have been saying that because of the deflationary pressures in bubble stricken economies inflation won’t take hold soon, for sundry mainstream reasons of money velocity, oversupply, output gap, excess capacity, liquidity trap, capital short banking systems, Federal Reserve paying interest rates on commercial bank reserves or a combination thereof, we aren’t sure of the interim impact.

We can’t be “timing” inflation because its impact has always been relative.

However we understand inflation to be an epochal problem of human society, which specifically constitutes a series of processes that makes up a cycle.

We can’t simply read through recent events and interpret them as the future.

Since inflation is a political process, it requires the understanding of the underlying motivations of the current crop of political leaders and their prospective actions. After all, politics revolve around economics.

And this has been a phenomenon that has haunted civilizations, kingdoms, governments or empires alike, which has always been expressed through the purchasing power of the underlying currencies.

Mises Institute President Douglas French in recommending cigarettes as an inflation hedge enumerates on such cycle, ``one of Ludwig von Mises's outline of the typical inflation process: prices aren't rising nearly as much as the money supply… phase two of Mises's inflation outline: instead of a rising demand for money moderating price increases, a falling demand for money will instead intensify price inflation. Finally, we come to phase three, where prices go up faster than money supply, the demand for money drops to zero, and government fiat currencies collapse.” (bold highlights mine)

Currently we seem to be drifting in between the phases of “prices aren't rising nearly as much as the money supply” and “falling demand for money”.

Eventually, we should see a transition deeper into “intensifying price inflation” and most probably segueing into “prices go up faster than money supply” depending on the incentives driving policymaking.

And if consumer prices don’t immediately reflect on the impact of the intermediate inflation process, then most of the present political actions will likely be felt or manifested in the financial asset markets.

And so a boom in asset markets is in the first order, as what we’ve been seeing today, and may likely continue as the US dollar index falls.

In short, asset markets are likely to continue functioning as the immediate absorbers of the inflation process.

As Morgan Stanley’s Manoj Pradhan observed of the difference between today’s cyclical patterns with the previous,

``During this cycle, however, interest rates that matter for borrowers have fallen only very slowly while the flow of credit to the private sector is likely to be weaker than usual due to financial sector deleveraging. Only risky asset prices have been roaring forward since the rally began in March. This imbalance between the various channels creates complications for the prospects of returning monetary policy to neutral. If central banks decide to tolerate higher asset prices in order to compensate for the weaker impact of both the interest rate and the credit channel, they risk inflating another asset bubble. If they respond to rapidly rising asset prices while the other transmission mechanisms have only played a weak role, they risk tightening policy into a weak economic recovery.” (bold highlights mine)

Politically, further inflation is required to sustain the elevation of asset prices, however economically, the risks is that these surges will result to a bubble. So maneuvers for an exit from policymakers seem to be getting trickier by the moment.

Will they take the booze away from the party and allow “normalization” or will they further supply more booze to enliven the atmosphere?

Here, we will bet on another major policy miscalculation.

Yet this boom in financial asset prices won’t translate to sustainable “green shoots” of economic recovery. Instead today’s inflation process will heighten misallocation of resources that would eventually culminate into another enormous bubble cycle.

As Murray N. Rothbard in Money Inflation and Price Inflation wrote, (bold highlights mine)

``Even if prices do not increase, this does not alleviate the coercive shift in income and wealth that takes place. As a matter of fact, some economists have interpreted price inflation as a desperate method by which the public, suffering from monetary inflation, tries to recoup its command of economic resources by raising prices at least as fast, if not faster, than the government prints new money…there is a relative underinvestment in consumer goods industries. And since stock prices and real estate prices are titles to capital goods, there tends as well to be an excessive boom. It is not necessary for consumer prices to go up, and therefore to register as price inflation. And this is precisely what happened in the 1920s, fooling economists and financiers unfamiliar with Austrian analysis, and lulling them into the belief that no great crash or recession would be possible. The rest is history. So, the fact that prices have remained stable recently does not mean that we will not reap the whirlwind of recession and crash.”

So while consumer price inflation may still be currently subdued, this doesn’t exempt us from a prospective bust from the fast evolving malinvestments.

More Inflation Equals Greater Risks

Despite the recent crisis, the fractional banking sponsored debt driven economy conjoint with government policies to rev up the credit cycle has reflected on Mr. Buffett’s admonition of debts reaching record unsustainable levels.

Figure 2: AIER: US DEBT AT RECORD LEVELS

According to Mr. Kerry A. Lynch senior fellow of the American Institute of Economic Research, `` The total debt owed by Americans increased to $51 trillion in the first quarter of 2009. One way to put such a mind-boggling number in perspective is to compare it to the value of what Americans produce. Gross domestic product is roughly $14 trillion per year. Thus, Americans now owe $3.62 for every dollar of GDP. As can be seen in the chart below, this is a record.

``By comparison, in 1980 Americans owed just $1.55 per dollar of GDP. The ratio began to rise sharply in the 1980s, leveled off in the early 1990s, and surged again in the late ‘90s, continuing to do so through the past decade.”

While the recent crisis should have pruned down debt levels to the capacity where the economy may be able to handle it, however, the inherent fear by US and global governments of “deflation”, aside from the implied goal to sustain previous boom days, and the addiction towards inflation has prompted such continued accumulation of systemic imbalances.

As we said in the The Fallacies of Inflating Away Debt, the misleading notion of inflating away such debt levels would make the stagflation era of the 70s a virtual “walk in the park”.

Yet, Mr. Buffett seems quite optimistic on the resolve of the present administration to work this out, which we think could be attributable to the special political influenced privileges acquired from the administration, during the latest crisis, for his personal benefit [see Warren Buffett: From Value Investor To Political Entrepreneur?].

However, Mr. Buffett seems to seriously underestimate the political nature of the inflation process.

The expanded cash for clunkers, the administration’s foisting of its socialized version of health reform (which means another $1.3 trillion through 2019), cap and trade policies and the potential bailouts from the next wave of mortgage resets, the prospective support on FDIC’s eroding funding base as more banks suffer from closure, and the Obama administration’s consideration of future stimulus programs are simply symptoms of MORE (NOT LESS) government addiction towards consolidating power by debt and inflation based solutions.

As Ludwig von Mises on The Truth About Inflation presciently wrote, ``But the administration does not want to stop inflation. It does not want to endanger its popularity with the voters by collecting, through taxation, all it wants to spend. It prefers to mislead the people by resorting to the seemingly non-onerous method of increasing the supply of money and credit. Yet, whatever system of financing may be adopted, whether taxation, borrowing, or inflation, the full incidence of the government's expenditures must fall upon the public.” (emphasis added)

Hence, the current political leadership adheres to the typical path of leaders opting for the profligate inflation route. Inflation is what they want, then inflation is what we get.

So in contrast to the mainstream who thinks inflation isn’t in the near horizon, we join the outliers who have been warning of the risks of a potential disorderly unwind.

The Newsmax quotes Nobel Prize economist Joseph Stiglitz, ``The "dollar now is yielding almost zero return," Stiglitz said in a speech at the United Nations regional headquarters in Bangkok. "The current global reserve system is fraying. It's falling apart. The issue isn't whether we go to a new system. The question is do we do so in an orderly or disorderly way.” (emphasis added)

Meanwhile, PIMCO’s CEO Mohamed El-Erian says the policy divergence or “disjointed approach” between the US and other global central bankers could risk leading “to volatile financial markets, a damaging drop of the dollar and slower global growth.”

The Bloomberg quotes Mr. El-Erian ``The question is not whether the dollar will weaken over time, but how it will weaken,” said El-Erian, a former deputy director of the International Monetary Fund whose firm runs the world’s largest bond fund. “The real risk is that you will get a disorderly decline.” (emphasis added)

Thus, we won’t underestimate or discount the odds of the growing risks of an inflationary pass through by a lower (or a possible meltdown of the) US dollar on asset, commodity or consumer prices.

Remember inflation isn’t only generated through the credit system but also through fiscal expenditures.

In Zimbabwe, where consumer credit is virtually inexistent, an output gap of -99% (Marc Faber) and unemployment of 94% didn’t stop hyperinflation (89,700,000,000,000,000,000,000% year on year basis in 2008 or a doubling of prices daily)!!!

So the obsession with all sorts of perverse math models by mainstream economics vividly manifest that they don’t have a clue on reality.

That’s the reason why they haven’t rightly predicted last year’s crisis and why they are unlikely to be dependable forecasters.

The Fallacies of Inflating Away Debt

``In an inflationary world, deficit spending and an easy-money policy have other reasons. Deficit spending is resorted to simply because of inability to balance the budget. It is purely involuntary. An easy-money policy is advocated because it seems to make possible a speedy reduction of the interest and debt burden of the government and the balancing of the budget without imposing higher taxes. Sometimes it is urged also as a command of social justice. The latter argument is of course based upon pure illusion. Small savers pay the bill directly or indirectly via savings banks and insurance companies, whereas large capitalists, who are interested chiefly in equities, harvest the profits from refunding operations.” L. Albert Hahn The Economics of Illusion

In the US, many harbor the delusion of inflating away the massively expanding debt levels as the ‘best alternative’ policy. Such advocates appears guilty of the following sins:

One, interpreting past performance as future outcome. A semblance of success during the previous incidences allowed for the deferment of the day of reckoning because debt levels had been low, or otherwise said, the economy can yet afford to pay for such policies.

Nonetheless, the untold truth is that the subsequent growth in such imbalances has ensured the reemergence of such boom-bust cycles with greater magnitude of impact.

Two, extensive “blind” faith on governments, to ably prevent collapses in spite of evidences, proved to be a myth.

The multifaceted ‘innovative’ Fed programs (TARP, TALF, Maiden Lane LLC, TSLF, MMIFF, Reciprocal currency swaps et. al.) failed to prevent or forestall the 2008 meltdown, this serves as another patent example of government failure.

Figure 6: Federal Reserve Bank of Minneapolis: Duration of Current Recession

Another fiction is the idea that inflationary policies has shortened the duration of recession period (see figure 6) or has alleviated its depth (figure 7).

Figure 7: Federal Reserve Bank of Minneapolis: Depth of Recession

Despite all expenditures thrown at the expense of the taxpayers, the 2007 recession has been the worst among the 10 post war recessions.

Lastly, they blithely ignore the unseen or unreckoned with ramifications of the shifting but continually expanding debt loads while depleting productive resources of the economy.

In other words, such advocates underestimate the degree of the impact from present policies.

Inflation Is A Political Process, From Risk To Uncertainty

Given the extent of the rapidly expanding debt levels, not only in the US but elsewhere too, relying on inflation to diminish real debt value could make the stagflationary period of 70s look like a picnic in the park.

This likewise risks provoking political unrest or war from prolonged or extended depression.

In short, those who embrace inflationary policies parochially forget that inflation is a political process and thus has political consequences.

As James Kunstler rightly explains, ``It would be sententious to explain how this destroys currencies, but wherever ‘monetizing debt’ has been tried before in history, that is the outcome. The result would be ruinous at every level and would lead straight to the second terrible force: social upheaval brought on by the conversion of economic problems into political turbulence.” (emphasis added)

In addition, while it is true that today’s monetary and fiscal deficit spending policies momentarily benefits asset market participants (that includes me), this view neglects the possible adverse repercussions from regulators to misjudge or miscalculate on the application of untried or untested tools that may trigger disorderly adjustments in the financial markets and the economy system.

Morgan Stanley’s Manoj Pradhan has this insightful observation,

``Central banks correctly describe programmes like quantitative easing as ‘unconventional'. Being far from the norm, policy-makers do not have much experience in dealing with such unconventional policies with nearly the same familiarity as the interest rate tool. When downside risks were dominating, policy-makers were only too willing to throw everything including the kitchen sink at the problem. For the most crucial passage of time in the past two years (the time since September 2008 when markets froze), central bank purchases of risky assets and government bonds (i.e., ‘active' QE) contributed to lower yields and spreads. Outright expansion of these programmes or the implicit threat that they could be enlarged in scope and/or size also kept yields and spreads from rising too much, and the real economy benefited from these developments. Selling assets purchased according to these ‘active' QE programmes could easily reverse those moves, particularly with a return to growth and the risk of inflation. With very little experience in handling such large unwinds along with the risk of derailing a hard-fought recovery by sending yields and spreads higher, central banks are unlikely to move particularly rapidly.” (emphasis added)

When policymakers ply on uncharted territories, instead of dealing with risks, we are transformed into dealing with non-Priceable Knightean “uncertainties”.

The underlying difference against risk, to quote economist Frank H. Knight is that “Risk is present when future events occur with measurable probability” while “Uncertainty is present when the likelihood of future events is indefinite or incalculable”.

In short, the law of unintended consequences has been increasing its role in the unfolding inflationary cycle.

The Bureaucratic Incentive Problem**

Besides, there has always been the question of incentives underpinning the actions of policymakers involved.

When unelected officials (e.g. Treasury or Central Banks) dabble with economic or financial policy tools or regulations or assume greater bandwith of power over their constituents, their accountability essentially remains the same.

Any adverse outcomes arising from their actions on the economic or financial sphere will only lead to, at worst, a job loss-but in most cases the same officials get enlisted with private firms they regulate. Since, to quote Ludwig von Mises, ``A bureaucrat differs from a nonbureaucrat precisely because he is working in a field in which it is impossible to appraise the result of a mans effort in terms of money”.

In short, it cost little for them to commit a policy error, since they’re not punished for it and are measured not based on money performances but on the impact during their tenure.

Hence, policymakers are likely to take actions that are designed for generating short term “visible” benefits at the cost of deferring the “unseen” cumulative long term risks, which are usually are aligned with the office tenure (let the next guy handle the mess) or if they happen to be politically influenced by the incumbent administration (generates impacts that can win votes).

So bureaucratic myopia seems in a natural state of conflict with the long term interest of the marketplace and can function as another vital factor in amplifying the risks of enabling future crises.

**Update: I forgot to include this portion

The Growing Dependence On US Government’s Inflationary Mechanism

``Inflation, in brief, essentially involves a redistribution of real incomes. Those who benefit by it do so, and must do so, at the expense of others. The total losses through inflation offset the total gains. This creates class or group divisions, in which the victims resent the profiteers from inflation, and in which even the moderate gainers from inflation envy the bigger gainers. There is general recognition that the new distribution of income and wealth that goes on during an inflation is not the result of merit, effort, or productiveness, but of luck, speculation, or political favoritism. It was in the tremendous German inflation of 1923 that the seeds of Nazism were sown.”-Henry Hazlitt, What You Should Know About Inflation p.130

Despite signs of recovery in the US stockmarket which most have imputed as “green shoots” of economic recovery, the immense inflationary policies, the unwinding of huge short positions, adjustments in accounting standards to accommodate financial statements of the banking sector, huge oversold levels, the PTSD effects and ‘positive’ earnings from the financial sector have all been significant factors which may have contributed to the recent rally.

Nonetheless here’s the message we’d like to repeat: inflation is a political and not a market process. When governments chooses the winners over the rest, through subsidies, loans, guarantees, bailouts, transfers, market maker or buyer of last resort or through fiscal spending-these are actions decided not by the marketplace but by the political authority. Price inflation as manifested in the markets or in consumer prices signifies as symptoms or the consequences emanating from the accrued policies of the past.

Today’s inflationary process has been driven by the promulgated desire by the global political authorities to cushion or jumpstart markets or economies from the recent crisis based on the economic ideology that governments can substitute for markets during “market failures”. In their ideology, it is assumed that markets always needs to go forward and should never falter- a misplaced perception of capitalism which is actually a profit and loss system.

The political process to inflate the market is seen as the only antidote against the market process, which had been recoiling based on natural economic laws against systemic over indebtedness or overleverage, overvaluation and a system built on excess capacity which produced supply surpluses against an artificially constructed debt inflated demand.

The most recent global collapse in the markets and economies simply reflected the natural state of markets which overwhelmed the untenable imbalances accreted in the system.

Yet by government’s opting to duke it out with market forces works to only delay and worsen the impact on the day of reckoning. Even more so are the policies which have been aimed to perpetuate the same unsustainable paradigm which had been at the root of the crisis.

We never seem to learn that the more imbalances built into the system, the bigger the impact of the next crisis.

And while inflationary policies appear to be gaining traction, which has managed to juice up the activities in marketplace or parts of the US and global economy over the interim, the ongoing market driven deflationary forces will most likely result to outsized volatility, especially in areas plagued by the recent bubble bust.

So those aspiring for “market timing” won’t likely get the same expected conventional patterns because the operational structure of the marketplace has been unprecedented in terms of the scale of government intervention and unparalleled in the scope of massive inflationary measures applied.

The same global inflationary process has apparently been manifesting its presence in the equity and commodity markets.

And that’s why most of the mainstream analysts have apparently been perplexed by the present developments, as economic figures and market signals have been in a deep disconnect. For the bulls, present market actions seem reflexive, they read today’s signals as signs of recovery, for the bears, market actions signify as overreaction and rightly the effects of manipulation. For us, today’s market action has been anticipated and represents as principally a function of inflationary dynamics.

Diminishing Federalism And The Emergence Of Centralized Government

Nonetheless, we expect that global governments to continue to use their “limitless” power to churn money from their printing presses to counter the adverse reactions from market forces.

The financing of US states could be an example why inflationary policies will persist. Presently, revenues in 45 out 47 states in the US have been sharply falling as shown in Figure 2.

Figure 2: Rockefeller Institute: Across The Board Slump in Taxes

And falling revenues against present level of expenditures implies of huge state budget deficits, this also translates to rising risks of state bankruptcies, if not the loss of the autonomous “federalist powers” from a deepening trend of dependency on Washington.

According to the USA Today, ``In a historic first, Uncle Sam has supplanted sales, property and income taxes as the biggest source of revenue for state and local governments.

``The shift shows how deeply the recession is cutting. Federal stimulus money aimed at reviving the economy and a sharp drop in tax collections have altered, at least temporarily, the traditional balance of how states, cities, counties and schools pay for their operations…

``Federal grants — early stimulus money plus conventional federal aid — soared 15% in the first quarter to a seasonally adjusted annual rate of $437 billion, eclipsing sales taxes, which fell 2%.”

Incidentally, California will hold a “special election” or plebiscite aimed at addressing the largest ever state budget gap next week (May 19^th). The electorate will vote on several proposed measures as raising taxes, paring down several social service programs, selling state landmarks and laying off some state workers. However, polls suggest that Californians will likely to vote down on the proposed measures which could translate to a credit rating downgrade or higher costs of financing.

Given the high chances of voter’s disapproval, the state of California will possibly have a harder time borrowing, which means that the odds for a bailout from the Federal Government loom larger, otherwise a state bankruptcy .

California could be a precedent for other states. And state bailouts by the US Federal government should translate to expanded deficits which will likely be met with more money printing, especially if the borrowing window shrinks (Financial Times). Yet if we look for signs from the recent actions in the auction market of US Treasury bonds, then government borrowing does not seem like a promising option.

So aside from inflationary costs, the other costs from state dependency on Washington, according to Conn Connell of the Heritage Foundation (bold emphasis mine) are, ``The costs of the loss of federalism to the American people are real. As Reagan outlined above federal aid to states blurs the lines of government accountability, making it easy for politicians to sneak in government-growing legislation and hard for voters to hold those politicians accountable. Moreover, as states become more dependent on federal funding, they begin to lose their ability to set priorities and make policy decisions that are best-suited to their specific needs. Finally, sending money to Washington, only so that it can later come back to the states, creates a fiscal detour of inefficiency and inequity.”

The point is: The Federalist structure of the US government appears to be evolving into a centralized platform gravitating around Washington, which has been using deficit financing as the primary instrument to shore up or consolidate power.

Entitlement Imbalances + Deficits From Present Crisis = Risk Of New Crisis

We may further add that recent developments have point to the imminence of the possible entitlement crisis encompassing the welfare programs of the US Social Security and Medicare as discussed in US Presidential Elections: The Realisms of Proposed “Changes”, see figure 3.

Figure 3: Heritage Foundation: Entitlement Crisis Dwarfs Current Spending

According to a report from Bloomberg (emphasis added), ``Spending on Medicare, the health insurance plan for the elderly, will reach a legal limit by 2014, the same year predicted in 2008, the trustees’ report said. It’s the third year in a row that Medicare’s trustees have pulled the so-called trigger, a law mandating that the president introduce legislation the following year to protect the program’s financing.

``The trustees’ annual report also estimated that Medicare’s hospital fund will be exhausted by 2017, two years earlier than predicted a year ago. The trust fund will need an additional $13.4 trillion to meet all its obligations over the next 75 years…

``Spending on Social Security is expected to exceed revenues in 2016, one year earlier than last year’s forecast, the report said. The trust fund will need an additional $5.3 trillion over the next 75 years to meet all scheduled benefits, the trustees said. The retirement-assistance program can continue to pay full benefits for about 30 years, the report said.”

In short, growing payments to beneficiaries are likely to be unmatched by revenue collections which should lead to expanded deficits. Again according to the same Bloomberg article,`` The government retirement system faces a cash shortfall because the number of retirees eligible for benefits will almost double to 79.5 million in 2045 from 40.5 million this year. By 2045, there will be 2.1 workers paying into the system for every retiree, compared with 3.2 workers this year.”

This implies another major source of pressure to raise financing.

Author and former Treasury Department economist Bruce Barlett in Forbes recently posited that the US may require taxes to rise by some 81% just to meet these coming budgetary shortfalls.

And considering the degree of deficit financing arising from today’s crisis, which if present programs don’t succeed to rekindle an immediate return to growth “normalcy” for the US economy, and combined with the growing risks of the entitlement crisis, all these could translate to a jarring future for Americans-the risks may not be one of deflation but one of bankruptcy or at worst hyperinflation.

On the same plane, the former comptroller general of the US David Walker recently warned at the Financial Times of a prospective downgrade of America’s AAA credit rating should current trends persist.

Hence it seems to be much ignored by the mainstream or by policymakers how the structure of the US political economy has been evolving to apparently increase dependence on the US government’s inflationary mechanism to support the status quo, as currently depicted by evidences of the diminishing Federalism and from the huge intractable welfare programs which looks increasingly like a Ponzi financing model.

As famed economist Herb Stein once said ``If something cannot go on forever, it will stop.”