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Why the Fed has made our eventual fall more painful

Editor’s Note: Ten years ago, Chris Martenson was an executive in the pharmaceutical industry, living in a five-bathroom house on the Connecticut shore. Today, he’s “happier, healthier and wealthier” living in Western Massachusetts, where his family grows their own vegetables, and he runs PeakProsperity.com as an “econoblogger.” But he gets out of the garden, too, speaking to state legislatures around the country and consulting for the United Nations.

As the creator of a video seminar, “The Crash Course,” he’s been in many Americans’ living rooms. The Ph.D. neuroscientist, who also has an MBA, picked up his family and headed for the hills, selling off everything, because he was worried America was living beyond its means. Now, after the recession, his dire economic predictions haven’t let up.

As he explains to Paul Solman in the web exclusive video above, the power of exponential growth means that the American economy is constantly multiplying in size. But since the 1980s, so have our debts. In fact, debts have grown at nearly twice the rate of economic growth. What’s even more worrisome to Martenson is that no one, certainly not the Fed, seems to be doing anything about it.

Read the transcript of Paul’s conversation with Martenson below and watch their full interview, which aired on the NewsHour in January, at the bottom of this post.

Simone Pathe, Making Sen$e Editor

Chris Martenson: So, here’s the story. We have an economy that’s based on growth. We want to grow all the time. Not a lot — 3 percent real, maybe 5 percent nominal growth. We want jobs to grow; we’d like to see more auto sales next year, we want more houses sold. And it’s always on a percentage basis. Whenever anything is growing by some percent amount over a unit of time, it sort of takes this characteristic curve shape. It’s not a straight growth, right.

Paul Solman: Right. It takes off.

Chris Martenson: It takes off and it’s really powerful. So if we said we want our town to grow by 5 percent a year, in 14 years, that means twice as many people are going to be living in that town.

So even if our economy’s growing at just 3 percent a year, we’re going to be doubling it every 24 years, right. When your child grows up from an infant and is 24 years old — a young adult with still a lot of life in front of them — the world is twice as big. So how many more times can the world be twice as big?

Now, I started looking at things like energy and non-renewable natural resources that we pull out. Forget even about things like bluefin tuna, which there are no more of in the ocean; we’ve scraped all of the oceans clean. … I’m talking about things like phosphorous, tin, bauxite, copper — things that, when we look at where we are, we discover that half of all the copper that’s ever been mined has been pulled out in just the last 30 years. We’ve been mining copper for 5,000 years as a species, so it’s amazing to think about how much our economy requires that to continue forever. Well, any sixth grader with a napkin and a crayon can tell you that you can’t constantly pull out something that’s finite at ever increasing rates forever. Sooner or later those rates nose over and then what happens?

And so now I have to wander back over to the economic side of the story. There are a lot of different money systems out there. We happen to have one that’s based on the idea that every dollar, every yen, every Euro, every ruble in circulation has been loaned into existence. That’s fine. What do we know about loans? Two pieces — they have the principal component and they have interest. Interest stated is usually some percent over unit of time. That means we have a compounding, exponential money system.

You can see it in all the data. If you look at a graph of money growth in the United States from 1970 to currently — you can get this data from the Federal Reserve — it makes this perfect little curvy shaped line. Do a curve fit against that, a scientific fit, to ask: How perfectly exponential is that? And the answer is, almost perfect: 0.99 out of a possible 1.0. It’s a perfect exponential system.

Paul Solman: Meaning that it’s growing at a constant rate?

Chris Martenson: Let’s not use constant; it’s not exactly constant because it does vary. It might be 3, it might be 6, it might be 7 percent. You know, it’s not a perfect math function, but it’s, for all practical purposes, if you gave me this data and said, I’m not going to tell you what this is, what can you tell me about this system? I would say, it’s behaving exponentially. It’s been growing exponentially. Whether that has to be true forever, I don’t know, but the past 40 years have been absolutely true.

And [we see] the same thing when we look at the credit markets. All total credit market debt — state, federal, local, household, corporate — it’s been growing exponentially as well. And here’s where the story got a little odd for me: it’s really only been since the early 1980s that we and most of the OECD countries, but the United States [especially], started doing something really uniquely different. We started growing our debts at a rate roughly twice what the underlying economy was growing at. We were growing our debts at somewhere between 8 and 9 percent per year, and the underlying economy was about half that.

All I know as an individual, you say, Chris, your income is fixed or, it’s going to grow at this rate and you’re going to take on credit card debt at a much faster rate. Sooner or later, Paul, I get in trouble. If my whole town does that, my town gets in trouble. If the whole nation does that, how does the nation not get in trouble? And I’m absolutely mathematically certain about this, that if we do not willingly on our own terms as a nation get our debt levels under control, eventually those chickens will come home to roost and we’ll pay for that, probably in a pretty ugly bond market situation, probably with some pretty unpleasant side effects on unemployment, shredded federal and state budgets, pensions ruined — things like that. Those were the concerns I had.

Paul Solman: Didn’t you think that was already going to have happened?

Chris Martenson: I think it has happened. I think it’s happened in Detroit. I think it’s happened in Stockton (California). I believe that it’s happening already. I know this is going to be a very long process. It’s already happening. Did I think it might happen a little faster? Yes, absolutely. You take me from 10 years ago, drop me in this chair and tell me what the Federal Reserve’s done in the last two years, my hair would catch on fire and I’d run out the door.

Paul Solman:You wouldn’t believe it.

Chris Martenson: I wouldn’t believe it would be possible, no. These are so unprecedented; what the Federal Reserve is doing is running the biggest social monetary experiment ever, and I say “social experiment” because money is the glue of any society. It’s an act of trust. They are eroding that trust consciously and I believe with precious little training or history to guide them.

Paul Solman:But so far it’s worked fine.

Chris Martenson: Define fine.

Paul Solman: Well, the bond market has not revolted lately. It’s certainly charging the United States more to borrow money than it did, say, a month or six months ago. But it’s still, by historical terms, an extremely low rate of interest that the United States is paying, almost unprecedentedly low.

Chris Martenson: To me, the jury’s really out on that because we have very stubbornly high unemployment levels at this point. We’ve got absolutely exploding fiscal deficits and federal debt levels. I see all the central banks acting in cahoots at this point in time to maintain this apparent stability that we’ve got, but the pressures are building, not relieving, is how I look at it.

Paul Solman: Suppose you’re wrong about the debt. What evidence would you then offer to suggest that we’re not on the right track?

Chris Martenson: If I had to just give one a word summary of where I see us heading as a culture, but also as a species — this is kind of a global story — it’s unsustainable.

I’m going to spot D.C. and the Fed full credit. They get everything they want, right — interest rates stay low, the economy comes roaring back, joblessness rates just plummet and we get back to 3 percent unemployment rate. We’re like North Dakota all of a sudden across the whole country. I’ll give you all of that and I think that that just lands us in hot water sooner than later around a lot of these other issues that we’re talking about.

The time I wish, like 2008 — that was the moment to have the conversation with ourselves. It wasn’t a housing bubble; it wasn’t Lehman. Those were symptoms.
It was a 40-year-long credit bubble experiment where we thought we could borrow faster and more than we were earning and that would have been the moment to say: How do we get back in line here?

Paul Solman: So you think that what the Fed did and what the European Central Bank did, and so forth, was just paper over the problem, literally in the sense of creating new currency to make everything OK for the time being and just all that means is we’re going to have a worse fall when we do fall.

Chris Martenson: I think we went another rung up the step ladder instead of taking a step down. We fall from a slightly higher position than a lower one. And look at the levels of sovereign indebtedness — what the Fed has done by monetizing more than half of all the new issuances of Treasuries that have come out of the federal budget deficits over the last six years…

Paul Solman: Monetizing meaning creating money to pay for those deficits.

Chris Martenson: Creating money out of thin air to pay for those deficits; so they’ve enabled the federal government to get deeper in debt, right. We didn’t spend that money on the right stuff to get towards the future.

As long as we’re just perpetuating the status quo, papering over, saying: let’s just get joblessness down and then we’ll open this up to conversation. Listen, an emergency’s no time to have a hard conversation. What they’re really doing here is they’re denying us the opportunity to say, what should we be doing differently?

Paul Solman spoke with Martenson and his wife for the NewsHour earlier this year. Watch their full interview below.

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