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Black hole of debt threatens economy

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Saturday, Oct. 27, 2012, 8:54 p.m.

Black holes in space have remained somewhat of a mystery since they were first conceived of by a German mathematician serving in the trenches of World War I. This is because inside a black hole many laws of physics are thrown into disarray.

What is known is that the bigger the collapsed star, the more powerful and devastating the black hole.

The U.S. economy, still the world's largest, is like a gigantic star. Congress and the Federal Reserve have created black-hole-like spending that threatens severe damage to American and world economies.

Last week, U.S. treasury debt topped $16.2 trillion. America's total debt, including unfunded obligations for programs such as Medicare, Social Security and unfunded government grants, is estimated at between $120 trillion and $200 trillion. If America would fall from recession into depression, it would create a massive black hole of debt dragging the world economy into chaos.

Early 1900s economist Irving Fisher developed the classic equation that describes how money moves through the economy: GDP = M x m x V.

It means that the nation's Gross Domestic Product (GDP) is determined by how quickly money is loaned, deployed or leveraged by banks, corporations, other businessses and government. M equals money, multiplied by the number of times it is leveraged (m), multiplied by the number of times it changes hands (V).

Clearly, the Fed can control the amount of monetary base. But in a free economy, it cannot control how much or in what form money is deployed by financial institutions. Nor can it control either the demand for money or the rate at which it changes hands among consumers.

Since 2008, Fed statistics show it increased the monetary base by more than five times, from $500 billion to $2.6 trillion. But, the deployment of money by financial institutions has plummeted over the same period, from 9.3 to 3.9 times.

Bureau of Economic Statistics analyses show that the velocity of money circulation has fallen by 26 percent from 2.12 times in 1997 to 1.57 — a five-decade low.

The Fed is conducting its third effort to stimulate the economy, known as quantitative easings, where it prints money to increase the monetary base. This unprecedented action has created financial concern, prompting an unwanted reaction: decreased lending and spending.

The Fed's actions have eroded the “real” value of the dollar, sending prices of precious metals and commodities, such as food and energy higher. This has reduced further the real value of savings and incomes, particularly among the poor, who traditionally spend the highest portion of their money on food and energy.

The Department of Agriculture reports 46.7 Americans were on food stamps as of June 30 — a substantial increase over four years ago.

The reduction in money circulating within the economy has caused the real economy (GDP) to stall. Federal spending continues to increase, but the manufacturing sector is declining, reducing business confidence and adding to the millions of unemployed.

Congressional inaction threatens to drive the economy over a “fiscal cliff” of $1 trillion in spending cuts and tax increases. It is urgent that Congress acts to avoid that cliff, creating international economic calamity.

John Browne, a former member of Britain's Parliament, is a financial and economics columnist for Trib Total Media. Email him at

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