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It is sad to say there are just two reasons why the
U.S. is not yet a banana republic. The first reason is that the US dollar has
not yet lost its world's reserve currency status, which is helping to keep
interest rates at record low levels. If the dollar, yen and euro were not
involved in a currency war, the dollar's intrinsic decline would become much
more evident, causing domestic inflation to soar, and our bond market to
immediately collapse.
However, the perpetual erosion of fiat currencies will
eventually cause investors to eschew the sovereign debt issued by the
over-indebted nations of America, Japan and Europe--even if the dollar's
decline does not manifest itself against the euro and the yen.
The other reason why we have not been declared a banana
republic is because America is not located between the Tropics of Cancer and
Capricorn.
The Definition of a banana republic is a nation that
suffers from chronic inflation, high unemployment and low growth; primarily
due to massive government debt and deficits that are purchased by its central
bank. There is no doubt that the U.S. has suffered from structurally high
unemployment, stubbornly high aggregate price levels, and low growth for the
past five years, which is the direct result of our debt-saturated economy.
So let's just assume there exists a country located 15
degrees north of the equator that had amassed $7.5 trillion of new debt in
the last 5 years alone. This nation also has nearly $17 trillion in issued
debt outstanding, a debt to GDP ratio above 106%, and has clearly shown it is
incapable of preventing that ratio from rising.
The central bank of this tropical land artificially
pegged interest rates at 0% for over 4 years, has pledged to keep them there
for at least three more years, owns $1.8 trillion of government debt and has
pledged to buy $1 trillion more during 2013. Let's not forget that $1
trillion worth of central bank buying just happens to coincide perfectly with
the projected annual deficits of $1 trillion for the foreseeable future. What
adjective would you use to describe this country? Of course, any objective
observer would designate it a bona fide banana republic!
This is the reality of the economic backdrop of the
U.S. But, as mentioned previously, the legacy effects of having the world's
reserve currency postpones the most pernicious effects of such economic
fundamentals that exist in our country. Nevertheless, even though the
Japanese and European economies also suffer from debt and stagflation, this
isn't enough to purge the U.S. economy from its insolvency; nor will it save
our bond market from that inevitable historic rise in yields.
The problem is now even the mere normalization of bond
yields would send interest payments on our unprecedented amount of debt
soaring. This could force the Fed to step up its dollar creation far in
excess of what the BOJ or ECB would dare to create in order to stem that rise;
and this could be the catalyst to send the dollar and bond market crashing
even further.
While some love to speak about the return of "King
Dollar," the truth is any nation that seeks to remain viable through the
life support provided by its central bank purchases of sovereign debt should
be designated a banana republic--regardless of its geographic location. That
is why the U.S. is headed down the road to serfdom...or fruitdom
as it is in this case.
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