Taking In the Big Picture

03/13/2012 8:30 am EST

Focus: MARKETS

Mary Anne & Pamela Aden

Co-Editors, The Aden Forecast

Sometimes investors get lost in the minituae of the markets, but it’s very advantageous to step back and put our current situation in perspective, say Mary Anne and Pam Aden of The Aden Forecast.

It’s been a while since we’ve talked about what’s most important for the markets…that is, the big picture. With the volatility we’re again seeing, combined with the extreme focus on the daily news, this is a good time to review this…

As most of you know, many investors feel they’re well informed if they stay abreast of the business news. That’s fine, but it’s really just the tip of the iceberg.

Far more important is the historical view, which is what we call the big picture, and it’s fascinating. The big picture is truly the story and it explains why the markets are moving the way they are, but this is rarely discussed in the mainstream press.

In a nutshell, here’s the primary backdrop, which got us to where we are today…

Around the time of World War II, several of the big countries agreed to keep their exchange rates pegged in terms of gold. The US dollar became the world’s reserve currency, but international payments could also be made in gold.

This worked for some years, but the US spent too much money in the 1960s on the Vietnam War and social spending. So more countries then wanted their payments in gold, which sharply reduced the US’s gold reserves.

Finally, in 1971 Nixon stopped the gold payments and the world went off the gold standard. In essence, countries were then free to spend and inflate because gold’s discipline was gone. Overall, this situation seemed okay until about 2000.

At that point, a new era began. The tech bubble burst, recession took over and the War on Terror began. This resulted in the most spending ever, and the debt simply skyrocketed.

Money was created on a massive scale to pay for all the surging expenses. It happened throughout the world, and it’s still happening.

The ultimate effect is that Europe’s big trouble is ongoing, and it’s the same in the US. Top officials, from the IMF to Bernanke, are warning that the global debt crisis could derail the world economy at any time.

How bad is it? The Western world is literally drowning in debt. It’s out of control and very scary. Here are the facts…

Using the US as an example, because it’s the world’s largest debtor: it took more than 200 years for the US to reach the $1 trillion debt level. But in the past four years, the debt has soared by over $5 trillion.

In other words, by running deficits of over $1 trillion per year—which is currently the case—this amount gets added to the debt, so it keeps growing. How much is $1 trillion? After a while, the numbers become meaningless, but putting it in perspective…it would take over 30,000 years to spend $1 trillion at $1 per second.

Shocking? Yes, and it’s likely going to get worse.

Millions of baby boomers are reaching retirement age, and this will continue over the next 20 years or so. These people will be drawing on Social Security and they’ll need health care, which only guarantees the debt will grow even faster than it has over the past four years.

Morgan Stanley notes there’s no historical precedent for an economy that goes over 250% of its debt to GDP ratio without a crisis or huge inflation. Taking all debt into account, the US is now at about 400%, so anything is possible.

What’s going to happen? We don’t know. The politicians are skirting over these fundamental issues. They’re offering to help Europe when the US situation is actually worse than Europe’s.

Our guess is, they’ll probably keep doing what they’ve been doing. That is, printing money to pay the expenses, which will continue to make the dollar worth less until another crisis hits, and then they’ll try to patch it up. We’re sorry to say, but the 2008 crisis was probably just a preview of things to come.

As the very least, standards of living will deteriorate, but we don’t expect to see harsh measures taken. Why?

Because it’s not popular and there are few options…higher taxes, big cuts in social benefits or military spending. It’s not easy, and one needs to only look at Angela Merkel, who’s trying to impose austerity in Greece. The result has been riots, violence and burning. Basically, no one has the nerve to bite the bullet.

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