Beyond the Cusp

December 20, 2013

The Looming Economic Time Bomb

There is a theory that has been the backbone of President Obama and his economic administers that the government can stimulate and generally manage the economy. This is known as Keynesian Stimulus Theory. The basis of Keynesian economics is that government stimulus will give greater returns in tax revenues over time as the local multiplier effect produces many times the velocity of money in a local economy where government funding has been injected thus raising the general economic activity which will presumably return more tax revenue to government covering the cost of the stimulus and everybody gains. This interventionist economic theory was proposed during the Great Depression by economist John Maynard Keynes and was implemented in various forms and schemes by the Roosevelt administration. Many history studies on economics credit the use of the theories and principles from John Maynard Keynes for the recovery that pulled the United States out of the Great Depression. These studies were mostly written by economists and others who supported and believed that the Keynesian theories were the greatest thing since the invention of coinage which ended the barter system and made modern economic theory possible. The one small fact overlooked by most of these erudite studies was the difference of the effects of the Great Depressions in the United States where Keynesian theories were widely applied and Europe where they were not. Where in the United States it is remembered as the Great Depression, in Europe it was a hard but brief recession simply due to the fact that their governments could not agree on what should be done so their governments ended up doing nothing and the economic cycle continued normally and the bust was followed by the inevitable boom.

 

The argument often put forward to those who prefer the Laissez-faire Economic Principles has been to point out that even though most of Europe did recover more readily from the 1930s recessions there was still Germany which remained in economic collapse which led to World War II. That argument is not entirely honest as the main problems faced by Germany were not due to their economic practices as they were endemic results from the punitive strangling economic restrictions place upon Germany in the Versailles Treaty at the end of World War I. Some others attempt to deride those who prefer that the economy be permitted to naturally go through the peaks and valleys alternately which is the natural procession of any economic system by claiming that this system is the property solely of the Republican Party and that it favors the rich and big business as that is what the Republicans are known to do. Whether the Republicans are any more favorable to big business and the wealthy than the Democrats is a debatable subject and totally outside this discussion other than the attempt to paint those who disagree with government stimulated economic growth as troglodytic Republicans attempting to return everybody to the days of the Robber Baron Industrialists. This is a powerful argument due to one quote from President Ronald Reagan where he said “Government is not a solution to our problem, government is the problem.” As long as we are quoting President Reagan I will throw in an additional just because I like this one myself and it does pertain to government’s treatment of the economy which goes, “Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”

 

Another economic truth which has been lost in all the noise was that there was no Federal Reserve and there were economic ups and downs all without government meddling and without a great depression. There must have been something added to the air and water in 1913 in the United States as this was the year that the Federal Reserve was established and also Amendment XVI and XVII which established the income tax and made the Senators directly elected taking away the representation of the individual States in the Federal Government. Maybe if we were to simply undo everything that American History Professors teach as the most enlightened year in all of America’s history, 1913, then many of the problems America faces today would begin to resolve themselves. Meanwhile, the administration of President Obama is completely committed to Keynesian Economic Theory and have been pumping stimulus monies into the economy mostly through having the Federal Reserve but Treasury Bonds using the cash made electronically which results in basically doing the same as if they simply printed up thousands of hundred dollar bills and made a present of them to the Federal Reserve assisting them to buy the Treasury Notes. This can be simply described by calling it what it is, America is buying its own debt as they are no longer able to find another nation willing to buy Treasury Notes to finance the growing national debt. What makes this even more suspect is that the Treasury Notes are kept in some of the leading banks and used to qualify for loans which is how they buy the next release of Treasury Notes by the Federal Reserve which is a private agency and not actually part of the government. The Federal Reserve is, at best, a quasi-government agency made up of the Presidents and major holders of interest in some of the largest banks in the United States and the World. That is the makeup of the group which has been assisting President Obama and advising the bailouts for the banks, insurance and mortgage industries, the very same industries from which the Federal Reserve gets their membership.

 

So, what is the result of this scheme where the Federal Reserve uses its holdings of Treasury Notes as the collateral for their next purchase of Treasury Notes each and every month? This operation has greatly increased the amount of dollars theoretically in circulation by a multiple of anywhere from estimates of quadruple to as high as ten-fold. As long as these cash reserves remain stagnant in the banks then all will be well. Should the economy pick up and the banks find they can make larger profits by loaning these reserves they will give the money what economists call velocity and thus pump all the reserve extra dollars into the economy. Such an influx of money into the economy can only have one result, inflation. When the economy realizes that instead of one to two trillion dollars in circulation it has six or twelve trillion dollars in circulation prices will begin to rise to balance with the larger cash flowing through the economy. Once inflation sets in there will be pressure to slow the inflation by raising the interest rates. Once the interests start to rise a problem which will need to be faced will rear up and threaten to destroy the entirety of the American economy. As it stands now the interest payment on the debt is relatively affordable with interest rates remaining steady for the past decade under four percent. For the last few years the interest rate on the national debt has remained comfortably below three percent. What will happen once the interest rates rise to six or eight percent and higher? The Congressional Budget Office projects that once interest rates go up, the combination of rising debt and rising interest rates is projected to cause net interest payments to balloon to nearly $800 billion, or 3.4 percent of GDP, by 2020 and approach one fourth to one third of the Federal budget. The real question becomes what if interest rates rise higher which they very likely might? There will come a point where the interest payments on servicing the debt will impinge on all other spending. What will happen should the interest rates cause the servicing payment on the debt squeeze government allocations to everything else and the government can no longer finance the nation’s military and it is forced to downsize to an extent similar to the Europeans. What if the government is forced to end payments on Social Security, Medicare, and Medicaid and threatens the national healthcare system in whatever form the Affordable Care Act resembles in another decade. The increased national debt and the resultant service payment on the interest supersedes any reasonably affordable portion of the budget. Where will the government find the necessary funds, raise taxes to over fifty percent and even approaching ninety percent on higher income levels? Will services be cut to the point that many programs no longer serve sufficiently the peoples they are intended to help and government has cut every program to the point of being next to useless? And what will be the effect on the economy, will it likely crush economic growth and even cause a downturn that will only make the situation more dire? The rising of interest rates is the time-bomb sitting waiting to ambush the American economy and people sometime in the near future. Perhaps somebody will present a vision that will rescue though what such a vision might be escapes this mere mortal. May the future find a kinder path than what some have predicted.

 

Beyond the Cusp

 

About these ads

1 Comment »

  1. Reblogged this on Oyia Brown.

    Comment by OyiaBrown — December 20, 2013 @ 5:02 AM | Reply


RSS feed for comments on this post. TrackBack URI

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

The Rubric Theme. Create a free website or blog at WordPress.com.

%d bloggers like this: