Leaked IMF Report Shows Dangers For US Economy

By Daniel R. Amerman, CFA

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IMF Discovery & False Dichotomy

When we look at the results of the EU and IMF austerity experiment in Greece, what we learn is that the budget deficits in the United States likely can't just be suddenly stopped in their tracks in an act of fiscal responsibility, without triggering major economic changes that are also likely to lead to a political earthquake.

The surface-level picture of the US economy that's generally presented via the government and the media is that while we went through a very tough time, we're right on the verge of everything getting better and returning to normal. The consistent message that comes out is not to worry, because happy days will be here again, the former economy is just a little ways away from kicking in and generating more jobs and economic growth, and that's why you need to buy stocks again for long-term investment.

That is the mainstream narrative, and it fits very well into what I've termed the false dichotomy that's described in my article, "Political Economy Collapses False Dichotomy Of Mainstream vs Doomers".


The problem with this perspective is that it is demonstrably not true, as can easily be shown. For here we have $1.3 trillion of the private economy that disappeared in 2008-2009, and it hasn't returned on a percentage basis. And if we were to stop running fantastic budget deficits and instead, in a measure of newfound fiscal responsibility, try to impose Greek-style austerity on the US government and its people, we're liable to trigger a massive contraction in the US economy that could then trigger a major upwards spike in unemployment.

Ironically, the overarching issue is that the very act of covering over the damage creates a situation where it becomes extremely difficult for the real, private economy to recover. That is because there is no "free lunch". The entire economy has been distorted, with 43% of it now dependent on government spending. Thus there is less money to go around to the private sector, and indeed, much of the former wealth of the private sector – and that of retirement investors in particular – has been redistributed to, and consumed by, the government, through a process of Financial Repression that is not understood by the general public.

Now on the other side of this false dichotomy are those who many consider to be in the "gloom and doom" camp. They look at the economic statistics, they see what the US government is doing, and they conclude that the United States must be on the verge of collapse. Well, while that could certainly happen and with surprising speed, there is something else going on as well that is not being taken into account.

That hole in the economy has been there for going on five years now, with the government not being able to pay its bills in any way shape or form if we look at things from a fiscal responsibility perspective – and with the private economy not being strong enough to support the spending that's necessary to keep the fiscal multiplier from kicking in.

Yet here we are and the world hasn't ended. To the contrary, the shopping malls are full, real estate is soaring, the stock market is jumping, and interest rates are still quite low even with a nearly openly "bankrupt" country.

Now perhaps the single most important financial question a person can ask then becomes, if the United States appears to be going through catastrophic economic problems, but we're not seeing it in the financial markets, and we're not seeing it in bread lines and massive open unemployment – then what the heck is actually going on?

What is going on has to do with massive changes that have absolutely transformed this country, and which are the only reason we're still afloat four and a half years later.

But these are not fiscal changes. These are not based on the way money used to work. These are not based on the way investments used to work.

The US economy is still afloat, despite what's going on behind all the headlines and underneath the surface, because of unprecedented monetary and political changes that have already occurred, with even bigger changes likely to come.

The implications for US citizens and others around the world, whether we're looking at workers or investors, are extraordinary.

And let me suggest that the best chance that an investor has to come through this turmoil with their assets intact – other than happenstance – is to first understand what has actually happened, along with what is occurring right now, so that one can anticipate what some likely paths for the nation and world might be in the future. Which will require looking at the world through a quite different prism than either the mainstream or contrarians do, which is that of monetary and political risk.