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Inflating Away America's Future

Americans are suffering from a lack of adequate savings to fund a comfortable retirement. Our growing debt burdens virtually assure us that the lofty living standards of today will soon be nothing more than a long forgotten memory.

Those ideas are now becoming more promulgated.

But what is less known is that our government will likely seek a panacea that will lead to perdition, not only for our retirees, and soon-to-be retirees, but our entire economy and country as well.

Consumers – especially those who are about to retire – are currently experiencing a barrage of economic hardships. The value of their real estate holdings is back to the level it was in 2002. Stock prices are back to the same level they were at the end of the last millennium. Real incomes continue to fall, while the unemployment rate remains near double digits. Household debt as a percentage of income and gross domestic product (GDP) is near record levels. Many public pension plans are insolvent and our entitlement programs have scores of trillions of dollars in red ink.

Given all the headwinds that have plagued consumers over the course of the past decade, it is no surprise that their balance sheets are in a state of massive disrepair. In fact, household net worth fell from the 2007 peak to the 2009 valley by a total of $17.5 trillion, or 25.5%, and is still nearly $10 trillion away from its all-time high.

But unlike what occurred during the Great Depression, prices at the retail level are rising sharply instead of falling. The consumer price index (CPI) is up 3.6%, imported goods are up 12.5% and commodity prices are up 35% year-over-year. So our current and prospective retirees are forced to deal with the worst of all combinations: a negative real return on savings, rising consumer prices, and deflating asset prices.

It should also come as no surprise that the U.S. Federal Reserve and our government believe the best answer to all of our retirement problems can be found in the printing press.


Because the U.S. economy has devolved from a manufacturing economy into one that predicates economic growth on consumption and asset bubbles.

Back in 1953, the percentage of the economy devoted to manufacturing was over 28%. Today that all-important sector of the economy has sadly dwindled down to just 11.7%. Since we have progressively over the last 50 years decided to eschew manufacturing jobs – mostly by abusing the status of the U.S. dollar as the world's reserve currency – Americans have increasingly come to rely on the building and servicing of equity and real estate bubbles for economic growth and retirement savings.

The engineering of our bubble-economy used a tried-and-true formula. All we needed was a fiat currency and the temerity to borrow a ton of money that is printed by the Fed. A parade of Fed chairmen starting with Arthur Burns paved a smooth road to perdition (the exception being Paul Volcker) and current Federal Reserve Chairman Ben S. Bernanke was an excellent protégé.

Fed Chairman Bernanke printed money with alacrity, especially after the credit crisis ensued. Within just a few years time, Bernanke expanded the Fed's balance sheet by nearly $2 trillion in order to fight what would otherwise be the healing process of deflation and the paring down of debt.

Our government's "recovery plan" has enabled us to perpetuate our artificial economy and to postpone the eventual pain. The goal of this doomed strategy is to circumvent the market forces that demand the economy enter into a period of deleveraging. Sooner rather than later, however, debt levels will become far too onerous just as inflation erodes the economy by destroying the middle class and those living on a fixed income (retirees).

Indeed, that day may have already arrived.

Today, the American economy has $14.4 trillion in gross debt, while our publicly traded debt has soared 90% in the last four years. Annual deficits have grown from a couple of billion dollars during the pre-crisis era to $1.5 trillion and 10% of GDP today.

If the U.S. desires to take a peek into the crystal ball, all we need to look at is Greece.

Athens followed a similar economic model of borrowing money to boost current consumption. But it didn't take long before Greek debt exploded to $481 billion (340 billion euros). Government debt as a percentage of GDP went from 105% in 2007 to 158% today. And according to the European Commission (EC), that debt figure will reach 166% of GDP by 2012.

It's now game over for that once-proud nation as its total revenue soon won't be able to cover its interest expense. The only remedy is a massive restructuring of public debt, which will likely entail duration, principal and interest rate adjustments. Once that occurs, its credit rating is sunk and future borrowing costs will be prohibitive. In addition, the hit to creditors (mostly European banks) will have dire consequences for the entire European economy.

How would you like to be a Greek citizen who has planned to retire this year?

But here is where the United States also makes a critical error. Our government blames the problem in Greece on not having an independent central bank that has the ability to print an ever-increasing amount of money to pay off its creditors. We believe our advantage is the capability to inflate the debt away by dramatically lowering the value of the dollar.

However, that will only lead to an American version of a Greek tragedy. And as an added bonus, the U.S. foolishly thinks we will get a boost to GDP through the increased exports generated by a weakening currency.

But not only does a falling currency fail to balance a trade deficit – it actually causes the debt-to-GDP ratio to increase. It is true that monetizing debt can make the value of existing debt fall, but that is only true if those debt service expenses are fixed and long-term in nature.

Greek interest rates exploded to 30% on the two-year note from just the low single digits back in 2007. Imagine how high those Greek bond yields would eventually become if Athens were able to inflate its own currency!

Compare that Greek note to our own two-year issue trading with a yield of just 0.37%. But the U.S. has already made the mistake of rolling over our debt to the short end of the yield curve. The average maturity of our debt is only about five years. And our publicly traded debt is projected to be near 100% of GDP by the end of this decade – and even that lofty number is only achieved by using rosy assumptions of GDP and interest rates.

Once debt reaches that level we will become Greece. Only the U.S. seems determined to use the printing press as our preferred form of default. However, bond yields are determined by credit, currency, and inflation risk. Yields on U.S. debt could skyrocket in a very short period of time to a level much higher than what Greece is experiencing today if we continue to use inflation as the solution to every economic problem. That will be especially true if the dollar loses its status as the world's reserve currency.

The consequences for the future economy are clear: Living standards are set to decline dramatically, especially for those who have the least time to prepare. We must balance our budget, boost the value of the dollar, lower inflation, cut taxes, reduce regulations and introduce competition back into our educational system. That is the best hope for America's future. Since the bond vigilantes are currently busy over in Europe, the U.S. may have a little bit of time remaining.

The peak of the Greek empire crested in circa 300 B.C. It would be a catastrophic mistake to fritter away our last opportunity to ensure that this current generation doesn't mark the peak of our great American civilization.

[Bio Note: Michael Pento is a senior economist at Euro Pacific Capital, Inc.

Pento brings 18 years of industry experience to Euro Pacific Capital, where he serves as a senior economist and vice president of its managed products division. His economic and market commentaries are regularly featured on that Website and newsletter. In addition, Pento heads up an external sales division that markets managed products to outside broker-dealers and registered investment advisors.]

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  1. Borys Soboliev | June 24, 2011

    Ukraine has experienced hyperinlation several times.That is tragic to the nation, mostly for low-income population. We shall never wish Americans to have the same. Try to curb your expenditures, stop the wars and cut bureaucracy. I share all the ideas put forward by the Author and wish you to succeed

  2. Bill | June 24, 2011

    With about 20 paragraphs of what is wrong Mr. Pento gives us one (1) sentence on how to solve the problem. Probably nobody else has ever thought the answer would be so simple.

    Everybody knows the problem and I think everybody knows the solution. The tough part is how to implement it. We are not a dictatorship, nor do we have a benevolent monarchy. We have to bring politicians together for the common good. When was the time that ever happened? They all want to keep their jobs and none of the measures necessary to solve the problem would be popular with the voters. So, here we are.

  3. Phil Steinschneider | June 24, 2011

    Today, while getting my daily dose of Money Morning, I was pleasantly surprised to see Mr. Pento as a guest writer. Please bring him back more often. I couldn’t agree more with everything he outlined in his article.

    As Mr. Pento explains, it’s amazing that the neoclassical economists have been able to hijack the entire global economy and move to destroy nearly every fiat currency on the planet through inflation; particularly the US dollar.

    Regrettably, no one likes the guy who can predict the future. After all, he tells people what they don’t want to hear; explains that things have to be done that they don’t want to do; and makes everyone look like an idiot when the day of reckoning finally arrives.

    When Mr. Pento’s prescient analysis finally comes true, and the most avoidable financial crisis in history finally relegates the American economy to developing world status, the economic leaders that plunged us into the mess will surely cry out, “The problem was contained.” and, "We didn’t see it coming.” or, “This time was supposed to be different.”

    Indeed, history is doomed to be repeated, even by those who claim to understand it.

  4. Tom Pollan | June 24, 2011

    "The consequences for the future economy are clear: Living standards are set to decline dramatically, especially for those who have the least time to prepare. We must balance our budget, boost the value of the dollar, lower inflation, cut taxes, reduce regulations and introduce competition back into our educational system. That is the best hope for America's future. Since the bond vigilantes are currently busy over in Europe, the U.S. may have a little bit of time remaining."

    Hmmmmm……once again, someone spouting off what we should do without providing an actual plan on how to do it given the governmental structure of the US. Very helpful!!!!

  5. Greg Czora | June 24, 2011

    Excellent article, clear and to the point.

    The only thing missing is that you did not clearly tie the mess the world is in to its cause: Stat-ism. That is the idea that proper role of government is to participate in the economy. Every failed country fails due to either dictatorship or democracy + stat-ism (which is a watered down form of dictatorship). There is a clear spectrum from the USA to North Korea. It is the ideas about government and economics that are the drivers, not the pragmatism of business decisions. Look at history for proof.

    Ayn Rand has clearly made the case that there should be separation of government and state for the exact same reasons as separation of church and state. The latter inevitably leads to Islamo-fascism. The former inevitably leads to North Korea and Greece.

    People need to grasp this crucial point. I encourage you to study the book "Objectivism: The Philosophy of Ayn Rand" by Dr. Leonard Piekoff before you write your next article — especially the chapters on government and economics.

  6. Jeff Pluim | June 24, 2011

    What an excellent article. This says it all. You have covered all aspects of the current crisis and painted what I believe is an accurate picture of the future.

  7. Greg Czora | June 24, 2011

    Correction for the moderator: Ayn Rand has clearly made the case that there should be separation of government and state for the exact same reasons as separation of church and state. The latter inevitably leads to Islamo-fascism. The former inevitably leads to North Korea and Greece.

    This should read as follows: Ayn Rand has clearly made the case that there should be separation of government and ECONOMY for the exact same reasons as separation of church and state. The latter inevitably leads to Islamo-fascism. The former inevitably leads to North Korea and Greece.

    Sorry for the typo.

  8. Sameer G | June 24, 2011

    I think one of the solution for the Goverment is to Natinoalize Facebook,Microsoft,BH,adn like wise.otherwise US is a sinking ship , its a matter of time .

  9. JR | June 24, 2011

    The massive decline and crushing deficit of the United States since the year 2000,began with the election of the George W. Bush and Cheney regime. The election of Bush and the 911 terrorist attacks,were horrible tragedies that should have never taken place.

  10. KenG | June 24, 2011

    I have long admired Mr. Pento's insights and this article is another example of his ability to tie things together in a clear and straightforward manner. I would have also stressed the pressure all the union-driven unfunded liabilities will have on state and local governments. We are in a real dilemma and the longer they kick the can down the road, the worse the day of reckoning will be.

  11. Thom Baker | June 24, 2011

    If everything I've read is true the US is in a death spiral. If this is so there is an alturnative to setting in a one room apartment, eating kitty pate' & waiting passively for the inevitable. We can do what our ancesters did & migrate to a new "promised land". On he surface that may seem radical & to some even unamerican but think about it. Think of how much farther our meager savings would stretch, of how much better our standard of living would be & w/ our American can-do spirit we would have a positive effect on our new country. If our ancesters had that spirit of adventure & accomplished what they did then maybe it time we immulated what they did 150 years ago. Lets stop fearfully wringing our hands in defeatism & strike out for that new "shinning castle on the mount". Thom

  12. PAUL | June 24, 2011



  13. Darien | June 24, 2011

    Hi Michael,

    How come you do not dare touch the "Sacred Cow" Pentagon huge budget with its 3 wars that we are fighting now as the number 1 cause of the need to INFLATE AWAY AMERICA'S FUTURE ?


  14. Ed Bacon | June 24, 2011

    Tragic times are upon America and much of the world. I am buying a boat with a diesel motor and generator to live on. I can hunker down here or float away to where things may be safer.

  15. Jon morgan | June 24, 2011

    You omitted several factors that are the most significant. First, you left out the UNFUNDED wars that are draining trillions out of the economy at taxpayers expense. Second, you left out the offshoring of the manufacturing base to foreign countries through the elimination of tariffs and establishment of legalized corporate tax evasion. Third, you left out the Bush Tax Cuts which destroy the tax base and Jobs. And don't forget how the Bush administration did not do it's job in regulating wall street and monitoring the economy until Hank Paulson got on his knees to beg for TARP. What you are proposing is elimination of the middle class, enrichment of the rich and multinational corporations, and the sell off of America to foreign entities, and widespread povery. That will also include US population reduction through poverty, disease, and squalid living conditions.

  16. Ryan Kollenborn | June 24, 2011

    My opinion of the current financial crisis concerning the stock market, rising costs of everything, low interest return rates, high interest rates on all forms of credit, loss of jobs, especially premium paying jobs, high unemployment, illegals draining the United States economy, devaluation of the housing market, countries defaulting on loans, and everything else going "down the tubes" around the world and especially in the United States, which will end up as a second class nation very soon, I think I'll just sit back and watch the inevitable happen. I as a "baby boomer" lived in the best possible time in the entire history of the world. It's sad to sit back and watch the deterioration of the United States defragment and fall apart. God Bless America

  17. Steve | June 24, 2011

    Thanks, Mr. Pento, and thanks Money Morning for allowing the prophetic truth be spoken!!

    What a superb piece of gutsy truth stated without academic fog. I will be listening for presidential candidates who will publicly state the facts just as you have. Unfortunately, I don't expect it to happen. Thanks, Mr. Pento, for relieving me from self diagnosed insanity, now knowing that at least one other person is seeing the economic world as I also see it.

    I am now compelled to add:

    Natural economic forces are surely mounting just as the waters of the Mississippi and Missouri are, to sweep us away. We cannot build Keynesian dams and dikes high enough nor strong enough to control the coming flood caused by the economic distortions envisioned and sustained by "Great Society" policies which continue to short circuit the very nature of economics and wealth.

    Our wealth, our industry built by the combination of sacrifice, balls, and sheer grace received from WWII have been arrogantly consumed by leaders beginning in the '60's who believed their own self interests would only serve to sustain America's fleeting circumstance. Every leader since that time has in one way or another presumed upon the mirage of U.S. invincibility, ignoring or even feeding the parasites and mould invading from within, insidiously rotting away our hard-fought-for economic and military strength.

    Last week, departing Secretary Gates said that our undoing will be the partisan separation regarding any military mission or action. We used to be able to unite when vital military concerns confronted us victorious or not. At least when united, defeat wasn't quite so expensive. Partisanship must now be secondary regarding the economic calamity facing us. Partisanship in the vacuum of selflessness is costing us dearly just as partisanship has cost us in the middle east wars. Thomas Friedman on Charlie Rose mentioned the need for a third party. That will surely break the frozen ice that unconditional partisanship has locked us into. Will it come in time?

    There is no greater influence on an economy than the results of war. The USSR succumbed to the cost of losing the cold war and one hot war in Afghanistan. The equity built from the US's victory in WWII, long ago spent, was so great that it allowed us to borrow to sustain the cold war, lose Korea, Nam, frustrate the USSR in Afghanistan, abandon a chance for unconditional victory and its subsequent influence in Desert Storm, engage Afghanistan, reenter Iraq, snub moderates in Iran, now engage Libya and inevitably, when broke, the real enemy, nuclear Islamic Pakistan possibly to be united with a nuclear Iran. I would imagine that the cumulated cost of that string of failures and future failures will well exceed $100 trillion in today's and tomorrow's dollars, all borrowed.

    Next time we are attacked, I hope we have the kind of leader who instead of being preoccupied by extramarital conquests, telling us to go shopping, or selling a mirage of hope and change, will have the guts and intelligence to tell us that we have a dirty job to do, and his (the president's) job is to minimize the cost by using our maximum resources to rapidly conquer an enemy who presumes to wake a benevolent and powerful giant. He must also courageously announce that the citizens (civilians) of the countries who's leaders and agents those civilians have supported and tolerated without challenge, having picked a fight, will not be spared when in the way of our mission of extracting unconditional surrender. This is the historic, proven way to victory and subsequent effective diplomacy. As long as the U.S. can remain benevolent after such victories, we will remain. We must not waste a trillion dollars and 500,000+ American casualties impotently building nations while at war with those nations. That is as practical as attempting to reverse the course of time. We first conquer then allow to build. Germans and Japanese understand that. They were out to conquer; instead and fortunately, we conquered requiring unconditional surrender. Why we ignore those Biblically proven theorems prosecuting today's wars only leads me to believe that there is a profit motive laying behind our self crippling policies while our passive citizenry tolerates it.

    The radicals of Islamic culture, using the Koran as their creed have repeatedly stated their mission. They believe in the success of their mission because our policies of engagement both economically and militarily give every indication that their perception of victory and their mission to conquer western civilization is achievable because of our disunity and their determination. That kind of commitment ignored and condescended to will set us back 500 years if we survive at all.

    Will we put aside our lazy, status quo, entitlement mentality to prevent the massive social cost of our present course? I am very pessimistic, There are too many leaders, both political and corporate who will not make even the slightest change of course because the status quo is working so well for themselves. Those are who must be convinced that what awaits will destroy themselves last, but inevitably.

  18. IVAN | June 24, 2011

    With the doom that is approaching. What are people like myself supposed to do? I am in my early 30's and I have very little invested in anything. With the doom of the US economy how do I best protect myself and my future family. Move out of the US??

  19. Venture Shadow | June 24, 2011

    The most disempowering and demoralizing scenario for Americans–and therefore the most likely one–is a stock market crash followed by a horrendous inflation. In the crash everyone loses his discretionary assets. Things become very cheap but no one has money to buy, people can barely get by. Then when hope starts the arise the big inflation hits. Then people lose their basic assets because they can not afford the higher prices.

    Of course the Wall Street execs are insulated from this, they already sucked out what they need.

  20. AlmostBroke | June 24, 2011

    In order to balance the budget and save $50 billion a year, cut all foreign aid. We are broke and cannot afford foreign aid at this time.

    In order to balance the budget, bring home all of our troops from Iraq, Afghanistan, Libya and all foreign military bases. We cannot afford these wars and expenses.

    In order to balance the budget, deport 15 million illegal immigrants. It costs US taxpayers $110 billion a year for education, health and incarceration expenses related to illegal immigration.

  21. Mannstein | June 24, 2011

    Had enough? Vote Republican. They'll balance the budget on the backs of the most vulnerable members of society, the retirees and slaves. The fat cats will be taken care of, the banks will be bailed out, and the Department of Offence will not be lacking because there are wars to win.

    Profits will be privatized losses socialized. If you can't afford health care because of a pre existing condition the free market will solve the problem. Death panels will be outsourced.

    BTW wasn't that the situation during the Great Depression or am I missing something?

  22. Alistair, San Diego | June 24, 2011

    Darien, you are highly mis-informed. The Pentagon budget, admittedly large these days, is not the threat to our future that out-of-control govt. entitlement programs are … not even close. Wars are ended, and troops can be brought home, and hardware can be put into maintenance mode if needed later.

    Stop drinking the Jim Jones media coolaid and go learn something that wasn't a 15 second soundbite you heard on TV … your comment simply puts your ignorance on display.

  23. James in PA | June 24, 2011

    Perhaps the best commentary on the stte of money ant the economic status I have read in quite some time. Sadly I seealso the portents another 1929 style Depression in our future on a scale that will boggle the mind.

  24. Jim C | June 24, 2011

    So the writer opines, "We must balance our budget, boost the value of the dollar, lower inflation, cut taxes, reduce regulations and introduce competition back into our educational system." Sounds like something right out of the Tea Party agenda. No, there are many ways the U.S. can work its way back to being in the leadership role in the world economy. And, it does not have to be done by cutting taxes further for the mega-rich like Mr. Pento, nor gutting the regulatory system in this country that protects the environment and worker rights. Right now at the national level, one party runs the risk of leading this country to financial ruin by not increasing the debt limit. Trillions in cuts have been agreed to, but the Republicans have picked up their marbles and walked away because they refuse to even consider ending tax breaks for corporations or closing tax loopholes. This is not the way this country became great nor is it the way it can return to greatness; indeed, with the current approach we are doomed to second rate world status or worse.

  25. Jeff Hatchett | June 25, 2011

    When a change of government turns from democracy to communism is when things become better for all. Our sell-out coperations are already preparing for this and hoarding all that they can for when it comes. China is waiting people, China will be the new management. And it will be every US Citizen's fault. Thats what greed get ya.

  26. Darien | June 25, 2011

    A piece of information for Mr. Greg Czora.

    With all due respect just in case you were not aware of it. For all her criticism of Government and State, Ayn Rand happily accepted and enjoyed her Government/State provded Social Security Benefits to the end of her life.

  27. Hambone Littletail | June 25, 2011

    How about THIS for a soulution to the problem? Take some personal responsibility for your part in this mess, and STOP BUYING ALL THIS USELESS CRAP. Three years ago, I left my six-figure job as a Realtor, sold my primary residence and two of my three rentals, sold my two gas-sucking vehicles (I've been walking and taking the bus since then), and gave away virtually ALL of my material possessions (the main exception being my laptop). My present budget is $500 per month. I don't miss all the crap that used to enslave me, I'm a better person for it, and this is a better planet for it. We have become the single biggest nation of whners and crybabies on this planet. We deserve everything we have coming our way. But if you don't want to "fall" with the sheeple, I suggest you JUMP. Wake up, America! We're heading down the toilet, and we have nobody to blame but ourselves for the mess we are in.

  28. Rick | June 25, 2011

    What to do? It is prayer time. Seek God while there is still time. Study the Word. Educate yourself on the Book of Daniel and Revelation. The devil is the God of this age. Times will be hard for many of us but we must not fear those that can do harm to our body but fear what can destroy our soul. Because they killed Jesus who was the Truth, He sent us a deceiving spirit who most will follow. Nebechanezzar, the king of Bablyon was a tryannical leader as told in Daniel. This is a type of what it to come in the New testament.
    Look up the Miracle of the Sun in October 13, 1913. A miracle so great that the freemason newspaper reporter who was there to cover and mock the story had to admit that it was Mary. Mary is the ark of the New Testament. Look at the last verse in Revelation chapter 11 and the first verse of chapter 12.
    All these crooks will pay for their sins. Many who are now first shall be last and the last first. There is no pleasure on Earth that the elite have that will not be topped by what God has planned for those that love Him. Pray the rosary.

  29. Benny Chan | July 1, 2011

    Americans have choosen the high road to success by fuelling their enconomy with debts instead of production (real work). They have to be prepared to pay with their lifestyle. Fortunately, USA is not Greece. USA still has plentiful of saleable resources, tangible as well as intangible, within and overseas, to repay the present debts and to start from square one again. The problem is they do not know where is square one. There is no shortcut to success and spending beyond one's mean is not the answer. The knot cannot be untied just by pulling the string harder. Obama must reaffirm the CHANGE that won him the presidency. There is enough talent and creativity in Americans to find square one. May God Bless America.

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