The Economic Recovery Myth

“Beauty is truth; truth beauty,” the poet, John Keats famously mused in his “Ode on a Grecian Urn.” Neither Greece nor Goldman Sachs can seem to get the hang of this concept.

Grecian finances, for example, illustrate an opposing principal: deception is ugly. For more than a decade, the Greeks have engaged in a mass deception – that a revenue-starved nation could finance generous social programs. The idea was never viable, feasible or legitimate. But the Greeks wanted to believe it…and so did the rest of the European Union. They all wanted to believe that Greece’s last six defaults were a fluke – that the new and improved Greece would behave nothing like the old, profligate one.

The truth would have been better. Greece would have been better off if it had never started its game of make-believe. If, instead of pretending it could afford the unaffordable, it had devised a plan for maintaining legitimate solvency.

The Greeks didn’t do that. Instead, they joined the euro bloc and pretended to “act German.” For eleven years this charade succeeded. But the Greeks are not German. (They aren’t even French). Like many American marriages, Greek finances inhabit a chronic state of crisis, interrupted by brief interludes of calm.

But the Greeks are not unique. The nations of the West are full of deadbeats. The Spaniards and Portuguese play make-believe as well as the Greeks. And so do the Italians. But make-believe is not just a Mediterranean game; it is an international game. And no one plays it better than Uncle Sam. He also pretends to possess the means to “make good” on his debts. And so far, his creditors believe him. Your editors don’t. We think the guy is “all hat and no cattle.” We don’t think Uncle Sam can actually afford to pay the debts he’s got already, much less the trillions he’s adding to his debt load year by year.

Based on raw numbers, Uncle Sam belongs in a debtor’s prison. But that doesn’t stop him from borrowing even more money or dispensing more freebies to a populace addicted to “something-for-nothing” or enabling certain privileged financial institutions to leech from the taxpayers’ jugular.

This “system” won’t work. It is not a system at all. It is half fairy tale, half scam. America’s budget deficit, at 13% of GDP, is nearly identical to Greece’s. And America’s accumulated debts – at 86% of GDP – do not trail very far behind Greece’s at 112% of GDP. But that comparison is hardly comforting. In absolute terms, no debtor can compare to America.

As fellow Reckoner, Joel Bowman observed recently, “In a misguided effort to rescue the economy from the untold horrors of the ‘abyss,’ the prophets of modern central planning seek to transfer society’s means of production from the most to the least productive class; from private fist to public mouth; from worker to moocher; host to parasite.”

In doing so, these charlatans shackle the current generation’s liabilities to the income statements of futures generations. The nearby chart (which first appeared in the May 10, 2010 edition of Markets and Money) shows the total “bare bones” funding requirement for various countries during the next three years.

Bare Bones Funding Requirements

Specifically, this chart shows the amount of borrowing that would be required by each country to fund anticipated deficits during the next three years and to re-finance all government debt coming due in the next three years…America’s three-year funding requirement is not nothing. And America is certainly not immune to the kind of investor scrutiny that could produce a debt crisis…or a currency crisis.

In a pinch, Greece could probably borrow $30 billion here or there to plug its revenue shortfall. But in a pinch of similar relative size, the US might not be able to borrow $7 trillion…especially not when the US is unable to scrounge up cash from its own citizens.

“For the 19th consecutive month, the national budget fell disastrously short of anything close to balanced,” Joel recently observed. “According to the Treasury Department’s own figures April’s $82.7 billion deficit was almost four times the shortfall registered in the same month last year. The official tally only tells part of the story. Sadly, it was the best part.”

As Addison Wiggin observed last week in The 5-Minute Forecast, “That figure of $82.7 billion is merely the ‘BS’ figure the Treasury puts out there when it reports the deficit. The real tell is how much the national debt grew. And in April, that figure was twice the size of the ‘official’ monthly deficit – $175.6 billion.

“Don’t look now,” Addison went on, “but we’re just a couple of weeks away from the national debt breaking $13 trillion. If you must know, the exact number this morning is $12,931,157,737,293.42.”

Historically, April tends to produce a modest surplus (or at least a mitigated deficit), thanks largely to the influx of tax receipts due around the 15th of that month. But despite the administration’s assurances that the employment landscape is steadily improving, receipts were down more than $20 billion from the same month last year (2010: $245.27 billion; 2009 $266.21).

Despite the severity of America’s indebtedness, most people in positions of power refer to this disaster as if it were merely a broken water pipe. “We really should fix it,” they say, as if we could turn a valve here or replace a gasket there and get everything running smoothly again. But no quick fix is possible. In fact based on the numbers, no long fix is possible either.

This, too, is a lie…and it’s not pretty.

Eric J. Fry
for Markets and Money

Eric J. Fry
Eric J. Fry has been a specialist in international equities since the early 1980s. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short- selling. Mr. Fry launched the sometimes-abrasive, mostly entertaining and always insightful Rude Awakening.
Eric J. Fry

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9 Comments on "The Economic Recovery Myth"

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The US is soveregn in its own curreny being the monopoly issuer and therefore can never default on debt issued in its own currency. Comparing US debt to Euro member countries debt adds nothing to the analysis other than mis-representation and confusion amongst readers


Hi Guido,

The US doesn’t need to default as you said, they can just issue more dollar to give them back to the creditors.

However, this will bebase the US dollar, causing it to lose value against everything else.

So the end result, default or no default, will be similar

Biker Pete
“However, this will bebase the US dollar, causing it to lose value against everything else.” Y’know, I _used_ to believe that, FB. I’m not so sure anymore. Skyping with my BIL in Canada this morning, he tells me the Canbuck has fallen as far and fast as ours, against the US dollar. Neither country is bailing its economy out as fast as the US… yet a number of factors, including the deteriorating Euro, mean that we can no longer claim that US currency will “… lose value against _everything_ else…. ” Nor is it rationale to even hold the view… Read more »

Here is a food for thought , what if US digs 1 trillion worth of iron ore which importing countries buy by paying USDs. What if there isnt enough dollar reserves held by the country intending to buy and what if there isnt enough to exchange in the forex market.


Australia and Canada are resource/commodity economies. Double dip fear is in so the carry trades have been dumped, and dumped quickly. A lot of money has left Australia in the last few days. USD may not be safer but is still perceived to be a safer bet than a resource/commodity based currrency like ours and Canandas.
Europe problem gets worse and we will see 70’s for the AUD. China falls over and we will see 60’s… or worse.
May have to revise my $3000AUD/Oz call on gold up ;)


At least Australia and Canada will still have some resources in the ground if their currencies crash. A much more useful resource than hundreds on millions of unemployed indebted armed citizens with gas guzzling cars to fill up and mouths to feed.

I guess Canada and Australia still have the gas guzzling cars, but overall we’re in a way better position.

BP, the slang for the Canadian dollar is Loonie.


I hear what you’re saying guys

I still believe there are solid reasons behind the US dollar debasing scenario. As long as their debts don’t go away, there’d be consequences..

However, this is a long term trend, short term movements can be very different as we have seen recently. In fact, it wouldn’t surprise me if $US index goes to 90.

Biker, I also believe in the inflation view. I tend to believe Martin Armstrong’s position on this. E.g. he predicts Dow Jones will go to 18,000…

Biker Pete

“BP, the slang for the Canadian dollar is Loonie.”
Yep, should have remembered that one, Prince2! And the two-loonie coin features the queen with a bear behind, right?!~ :) That design beat mine, which had two stags’ heads on the reverse side of the queen’s head (two bucks).

FB: “Dow Jones will go to 18,000…” I guess anything’s possible with very high inflation. I’ll run that possibility past the family mathemetician and get his view… . He’s very heavily committed in international indexed funds so he has a stake in that long term possibility!~

@Firebug.. I have not discounted a run on the DOW to 14000 or 15000, Just not sure if it falls first then races away to that or higher or goes there first then a big sell off.. either way I am thinking it is going below 5000. ASX the same… may test a new high 7000+ before it’s next big fall, or fall then run high.. again, my belief it is headed for sub 3000. I dismissed the $5000 calls on gold and thought around $2400/$2500… now not so sure.. the Gold Bulls may be right…
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