Austerity or Money Printing?

I was asked to write a once-a-month Market Observation for Financial Sense.  Here's the first one (posted today, Feb 10): 


From time to time, I think it's a good idea to stop squinting at the short-term market wiggles and pull our heads back for a wide-angle view.  Now would be a good time, so that's what we're going to do.  For the record, I also happen to believe that close-up market analysis loses some of its potency during times of immense official intervention.  As with any subsidy program, prices become distorted and often fail to tell the real story, which is absolutely true with respect to interest rates and, by extension, the risk premium for stocks.

Back to the story.  Where the current crisis has been described using millions of words in thousands of articles packed with arcane acronyms (such as TALF, CDO, and CMBS), perplexing regulatory lapses and with a degree of complexity that dwarfs the Apollo moon mission, I can explain why the whole thing happened using just three words.

Too.  Much.  Debt.

Total credit market debt in the US doubled between 2000 and 2008, while incomes stagnated and jobs were not created.

When your debts are skyrocketing, but your means of servicing those debts are not, you are on a path to a credit crisis.  And that's exactly what we got.

That's all there is to it, and we'd have a better shot of crafting an enduring recovery if we better understood the difference between causes and symptoms.  Too much debt was the cause; virtually everything else was either a symptom or a contributory factor.  The main contributory factor was Alan Greenspan's monkeying around with interest rates between 2002 and 2004 to create ultra-cheap money to fight the effects of his prior monetary and regulatory mistakes.

Which entirely explains why I am so dismissive of world efforts to stoke an economic recovery by deploying even cheaper money and even more debt.  As earnest as these efforts are, they spring from the very same flawed thinking and practices that got us into the mess in the first place.  Plus, they've never worked before.

I've analyzed this situation nearly to death, and I arrive at this one very simple conclusion:  The US is insolvent (and so are many other governments around the world).

We all know the numbers.  The US government has over $12 trillion in direct debt obligations, but another $40 to $60 trillion in unfunded liabilities.  Collectively, the nation has $52 trillion in credit market debt, up from $26 trillion in 2000, but also many more trillions in unfunded pensions scattered throughout various corporations and state and local governments.  Taken together, including all liabilities, debts, and other obligations, the US has a total shortfall that exceeds GDP by more than 1000% (not a typo; I meant one thousand percent).

In short, we're broke.

The Way Forward

At this point, all investment strategies must align themselves with the proposition that the nation is fundamentally insolvent.  Either by rejecting the idea, hopefully with sound analysis and evidence beyond mere belief that the situation must be otherwise, or by accepting it.  Ignoring the 5,000 pound elephant in the room is not really an option, especially for long-term or generational investors.

Assuming one comes to the conclusion that our debts and liabilities cannot be paid back out of future production, then investing becomes easy; all one has to do is select between one of two possible official responses and tailor their holdings accordingly.

Option #1:  Austerity

Option #2:  Money printing (inflation)

Under option #1, austerity, the government trims expenditures by a third, the economy shrinks by the amount that it was supported by excessive debt growth (roughly 30% or so), and powerful and politically well-connected holders of debts take massive losses.  Such a program continues until the entire credit bubble is unwound, which means roughly another $25 trillion of deleveraging.  At the end, we get the chance to rebuild from a solid base.  I personally assign this option a 0.1% chance of being selected and followed.

Under option #2, money printing, a determined government seemingly gets out of its self-inflicted economic predicament by printing money.  Such a program appears bold, creates the illusion of (temporary) prosperity, protects the assets of the wealthy and well-connected, and provides interventionist bureaucrats with unlimited employment.  By simply understating actual inflation (to lower entitlement COLA increases) while collecting inflated tax receipts, the fiscal gap can be closed up.  At the end, it is all revealed to have been a sham, one can't actually print true prosperity out of thin air, and we get to rebuild from a shattered base.  I assign a 99.9% probability to this course of action being chosen.

Of course, I am cheating here, because we have been pursuing "option #2" for a year and a half already.  It is really not a terribly bold 'prediction' to suggest that we're going to continue on that path.

More tellingly, as I recently wrote in a recent article entitled The Emperor Has No Clothes, when we examine the 2010 federal budget, we discover that 94% of all revenues will be consumed just by the mandatory entitlement and interest-payment categories.  Ninety-four percent.  Think about that for a minute.

No matter how earnest our current politicians might be about controlling spending, there's really not a lot of maneuvering room left in that equation.  Not when there's only 6% left over to fund the entire rest of our government operations.

(Pro tip:  Your future taxes are going to go up.  A lot.  Count on it.  A 15% capital gains tax rate is going to seem like a distant dream before too long.  Please take that into consideration if you find yourself hesitant to lock in current capital gains because of the potential tax bill.)

For austerity (option #1) to have any hope at all, there has to be some way for the story to work out, but given our budget/fiscal realities, that path is amongst the most painful that can be envisioned. Spending would have to be cut, taxes raised, and dreams dashed.  Everybody would feel like a loser on that path, so I just don't think it has any chance at all of being seriously considered.

Which leaves us with money printing as the preferred course of action.

For investors, then, the main decisions rest on guessing the market impacts of continued stimulus, bailout, and monetary printing.  Which markets will benefit most?  Where will the vast pools of distorting money flow first?

Disturbingly, the best way to answer these questions over the past year and a half has been to ask which companies have had the best lobbyists and best connections to high-level politicians.

Making matters worse, many companies, especially financial institutions, have been allowed to fudge their income statements by using mark-to-fantasy asset models.  So we often don't really know the true financial condition of many companies or where the risks remain.

Which means that a good investor today needs to be part cynic, part prosecutor, and part forensic accountant.


We experienced a massive, obvious, and ill-advised credit bubble that is in the process of bursting.  Rather than rip the band-aid off quickly, our fiscal and monetary authorities are pulling it off as slowly as possible.  Along the way they are actually compounding our problems by offering even cheaper money and running up massive public debts.  Nothing is being solved, only deferred.

If all goes well, we can expect an anemic economic recovery.  If not, we face the prospect of a massive public fiscal crisis and/or a currency crisis.  That is, the risks and rewards are completely asymmetrical.

Because I am the type of investor that hates losses more than I fear missing out on gains, I routinely counsel that "better safe than sorry" is a viable investment strategy, and that keeping one's investments in highly liquid forms makes a lot of sense.  Further, given the currency risks involved, keeping some money entirely out of fiat money is a prudent course of action.   Physical gold is my preferred investment of choice, both because it is a monetary asset and because it is not simultaneously somebody else's liability.  That's a hard combo to replicate.

Yes, there are some signs of economic life out there, but we are not out of the woods, by any stretch of the imagination.  While I fully expect our financial markets to bounce up and down in response to the massive walls of liquidity being routinely thrown at them, I remain troubled by the obvious disconnect that exists between our fiscal condition ('insolvent') and current prices for far too many financial assets, especially those that represent somebody else's debts.

A fair number of people out there think that we'll simultaneously experience both money printing and austerity, which will be brought on by deflationary forces.  I don't completely discount this possibility (or any possibilities for that matter), but so far the lesson seems to be that there's no line our fiscal and monetary authorities are unwilling to cross, so I wonder how much more can be swept under the rug.  My guess is "a lot more."

So, that's my investment outlook made easy.  Will it be austerity or money printing?

Your faithful information scout,
Chris Martenson

For a complete view of how we got here and where we are headed, please take the time to watch The Crash Course, a free 20-chapter explanation of how our economic system operates and the challenges it will face in the coming years due to macro trends in energy and other depleting resources.  

This is a companion discussion topic for the original entry at

Congrats on writing for FSN! That should give the CC some good exposure.
Nice piece - I see you aren’t holding back! Good. Too many are (choosing to be?) blind about what’s going on. Once again what I like best is your simple number crunching; in this case the fact about revenues and funding. It really clarifies the problem we have.

Keep it coming!





Congratulations, Chris, for the once-a-month Financial Sense gig!
That is where I first saw this article…I was checking out, and all of a sudden I realized that was your name associated with the headline article (Market Observation).  Very cool!  I’ve thought for a while that it would be great if more of your analyses could be made publicly available to people there.  I think you’ll get a big audience.

By the way, excellent article!  Great clarity; way to bring the message home hard and clear for those folks who still need help connecting the dots!



Dr. M,
Your recommendation to invest in gold should be well received by the FSN crowd. Is it more accurate to say that the Fed is “printing” credit rather than money? 

The Fed will only be printing credit if they unwind their balance sheet by selling their purchased debts back out to either the original owners or the open market at the original purchase price.
To the extent that the Fed will hold some of the purchased debts to maturity I happen to think “printed money” is the right term.  It’s only credit if you have to pay it back.

Nice report! No plan B & not much of a plan A…below.

Looks like the whole world might go Japanese style.

Congratulations Chris. FSN’s articles are a daily stop, Jim and John’s News Hour is a weekly staple for me. Another group who like this site, make the world a better place.

Chris  Nicely stated and your article makes the case for much higher tax rates in the future.

This would seem to be an argument to convert an ordinary IRA to a Roth and pay the taxes now.

But, what is your take on whether this bankrupt government would honor its pledge to let you take the money out of the Roth tax free in the future?  If not you might be doubly taxed (in addition to whatever additional dollar devaluation ensued).


Dr. M, thanks for helping me understand that. Your answer makes me wonder if the unwinding of QE will be inflationary (instead of deflationary), since credit seems to fuel inflation in our monetary system.
Thanks again…Jeff


Part 2 to iDoc’s video:

Kudos to Mr. Hendry

You can tell from part 2 of the Coming Euro Collapse that the only solution on Politician’s minds is PRINTING LOL. We have had different currencies collapse with different stresses as one country gets itself in a bind. But all these countries with similar problems in unison trying to wiggle [print] their way out at the same time has got to be a first one would think? Looks like a VERY hard landing at some point.
You have to love Hendry here IMHO.

Dr. Martenson, you wrote:

"Under option #1, austerity, the government trims expenditures by a third, the economy shrinks by the amount that it was supported by excessive debt growth (roughly 30% or so), and powerful and politically well-connected holders of debts take massive losses.

Unfortunately, that isn't the way things work under austerity programs. Under asterity programsm the people who take the losses are not the powerful and politically well-connected. The losses (just as in the socialized losses we've seen in the bank bailouts) are borne by the masses. That is to say that the people will pay. In every asterity program that has been implemented in every developed or developing country over the last 30-40 years, that is what happens. And that is what will happen here.

I wish I saw a good way out. I don’t. I believe our system is fundamentally out of balance and has reached (or is in the process of reaching) a tipping point. When a supposedly liberal* president justifies bonuses for banksters that are like once in a lifetime lotto jackpots for 99.95 percent of the populace and tells us how these are “savvy businessmen” and how we shouldn’t “begrudge” them (apparently for their success at taking effective ownership of the government and getting taxpayers to write checks so that they can get their “moderate” bonuses), we are well and truly through the looking glass. I don’t think that FDR would have said such a thing as this “liberal” president just did. But I digress…

Anyway, it will be the masses of people who take it in the shorts under an austerity program. Better to inflate away the previous debts. That is what will really hurt the banksters and Wall Street.

*President Obama is not a liberal. He is a crony corporatist/crony capitalist. He will not bite the hand of the benefactors who put him in the position he is in today.

Dr. M, thanks for helping me understand that. Your answer makes me wonder if the unwinding of QE will be inflationary (instead of deflationary), since credit seems to fuel inflation in our monetary system.

Thanks again…Jeff


Part 2 to iDoc’s video:

Kudos to Mr. Hendry

[/quote]When it comes to regulating banks and investigating them Joseph Stiglitz is nothing short of pure genius. When it comes to advising Greece they would have been much better off with Hugh. Good watch!

I ran across this new flash this morning. Interesting.

Love it.

a different set of choices from David Merkel: (excerpt)
Default, Inflation, Higher Taxes — Choose One - The Federal budget is hopelessly out-of-whack, with 4-5% of GDP deficits out as far as the eye can see.  So, what do we do about it? 1) Raise Taxes.  I don’t like this idea, because the US Government has entered many areas where it should not be…  2) Inflate the currency.  Ugh.  Oppress the elderly, who cannot work to make up the difference?  Create a new inflation mindset that has all of us focusing on the short-term.  Inflationary economies by their nature become more and more short term… 3) Default on obligations.  There are several forms of this:

  • a) Total default: anyone with a Treasury Note is a sucker.  Global depression ensues.
  • b) External default: we do not honor external obligations, but honor internal ones.  Global depression ensues, but the US does relatively well.
  • c) Internal default: what, are you joking?  Why do we pay off the losers who lent to us?

Please someone who has followed CM investment advice for longer than a few months…when he say’s “physical gold”- does he mean he is entirely out of paper?
We are in the process of cashing in IRAs, money market account, but also have an annuity…afraid to do nothing. Also afraid to own all gold.  Anyone else in this boat?


Yeah, so I bought silver too!! LOL

Thanks Earthwise…
funny thats what my husband is doing!

Hi Romans12.2-
   I can’t speak for Chris, but I believe when he says physical gold he means as in “the real thing”: coins, bullion (bars, rounds), and such.  Not something that (supposedly?) represents the real thing.  A lot of people on the site have real concerns about paper gold and silver.  I won’t go into it here, but if you do a search for GLD on this site or COMEX gold futures, you’ll find threads that discuss concerns. 

   Best of luck (sounds like you’re already making your own! good luck!)


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