What Happens When the Money Runs Out?

As 2011 is coming to a close, we are left to consider what will happen in 2012. But first, let’s take a quick look at where we are, or better yet where the trends are going. The unemployment rate in the U.S.this past month was lower than the previous; however, this was due to more people having given up the hope of getting a job. GDP is grinding lower, forecasted to be only 1.8% in the U.S., which is dangerously close to “stall” speed. An economy must grow at a fast enough GDP rate to allow for increased levels of job growth, which ultimately drives consumer demand, or you’re left with a deep financial crisis. As we all know, the U.S. is a consumer-driven economy.

But won’t China come to the rescue? That is a common thought, asChinahas been the main driver for growth over the last decade. While GDP has averaged 10% a year growth,China has seen GDP levels of up to 13% in 2007. Much of the commodities and materials in the world are being gobbled up by the seemingly insatiable appetite of the Chinese economic engine. That engine seems to be misfiring lately with potential for flooding the engine. Growth is reasonably strong, estimated to be nine percent GDP growth in 2012, but it is below trend, which is worrisome. The Chinese economy has a higher level of GDP growth that needs to be met for them to avoid a financial crisis. If the central bank in China is worried about unrest and ensuring people there have jobs, the last thing they will care about is the U.S. citizen and American GDP levels.

Europe is a mess. The people reading this article are intelligent enough to realize that the problems there won’t be fixed in one quarter, but rather many quarters, if not years. Economic activity in the eurozone as measured by GDP is expected to be a meager a rate of 1.6%.

In light of these sub-par world GDP figures, you might be thinking that all of the problems will be solved with yet another round of quantitative easing. Not so fast. We’ve gone through two massive rounds of quantitative easing with the result that we’re only at stall speed. If we didn’t have the support of such historic levels of quantitative easing, the U.S. GDP rates would be quite a bit lower. This is a scary thought that signals significant structural problems with the world economy. If you can only maintain your level of spending by purchasing stuff on your credit card, then that level of buying cannot continue forever.

Since the current crisis began, the Federal Reserve has added over $2.0 trillion in government debt and mortgage-backed securities to its balance sheet. All in an effort to keep interest rates low, trying to stimulate the economy and larger GDP growth levels. New reports indicate that the Federal Reserve actually was ready to provide emergency loans and funding of almost $8.0 trillion!

The U.S. economy can’t be considered to be built on a solid foundation if the Federal Reserve needs to provide what amounts to approximately 50% of the GDP for the entire country in emergency loans! What worries me is what happens when you run out of bullets and your credit card is maxed. When investors realize that the Federal Reserve is purchasing assets with plain, old paper, international investors are going to run for the hills. A house built on paper won’t be able to withstand a storm for very long.

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