How can the Federal Reserve taper when the real US economy is in a terrible state? Add to that the massive problems in the eurozone. And Japan, the world’s third-largest economy, is a guaranteed basket case.
In the US, the job participation rate is the lowest since the 1970s, real unemployment (calculated on a consistent basis) is 23%, workers’ real wages have not gone up for decades, 50 million people are on food stamps, government deficit runs at $1 trillion per year and government debt including unfunded liabilities is $220 trillion and growing exponentially.
Does this sound like an improving economy? Well not to me. Also, the banking system has the same toxic debt and derivatives as in 2008. The banks are just fortunate that they don’t have to value their assets at market. If they did, very few banks would be standing today.
In the G-7 countries, total debt is exploding, and it now takes $7 of debt to produce $1 of additional GDP. Talk about the law of diminishing returns.
The G-7 are the top industrialised countries in the world; the US, the UK, France, Italy, Canada, Germany and Japan. Since neither China nor Russia is included, you can question the validity of this group, especially since most of the G-7 countries are bankrupt.
Nevertheless, the G-7 represent around 50% of world GDP and total $35 trillion. But these countries have a total debt of $140 trillion, which is a remarkable 400% of their GDP. If you look back to 1998, the total debt of the G-7 was $70 trillion and their GDP was $30 trillion.
So debt has doubled between 1998 and 2012, and GDP has gone up by only $5 trillion. What this means is that it takes $70 trillion of additional debt to produce $5 trillion of additional GDP.
So the world’s so-called richest nations need $7 of debt to produce 50 cents of GDP. The world is bankrupt, and all of the economic figures that are being published are just a mirage of a castle built on a foundation of worthless paper money. The world can, of course, never pay back the debt with real money, and the world can’t even pay the interest with real money.
Every 1% increase in the interest rate means an additional cost for the G-7 of a staggering $1.4 trillion. That is absolutely massive. $1.4 trillion is only slightly less than the entire GDP of Canada. If interest rates increase by 10%, then we are looking at an increase in interest expense for the G-7 nations which equals the entire GDP of the United States.
Anyone with a sane mind would realise that this whole situation is untenable, and sadly, this will end very, very badly for the world. We don’t just have an economic bankruptcy, but we also have a moral and ethical bankruptcy taking place on top of the threat of war, and the fact that most governments are taking away freedoms and personal initiatives by making people dependent on state handouts.
We also have the very dangerous situation where the rich are getting richer and the poor are getting poorer. Since 2009, the wealthiest 7% have seen their wealth increase by 28%, while the other 93% have seen their wealth decline by 4%. If you take the wealthiest 300 in the world, they have more wealth than the poorest 3 billion. This is very dangerous for a world that will have more and more people going hungry.
If we turn to the situation in gold, there is a major shortage of physical gold, and Western governments and central planners are doing what they can to sell or lease their gold into the market. At the same time, the manipulation in the paper market continues.
Remarkably, only half of 1% of world assets are invested in gold. Considering what will happen to the world in the next few years, that percentage will go up dramatically, but that will only happen at much higher prices, since there is virtually no physical gold available at these prices.
Egon von Greyerz
for Markets and Money
Ed Note: Danger! Exploding Wealth Gap! originally appeared in The Daily Reckoning USA. This essay was adapted from an interview with King World News.
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