When Will the United States Budget Crash?

The dirty little secret in the halls of Congress and the spacious rooms of the White House is that the United States budget has already gone over the theoretical fiscal cliff and all are simply waiting for the crash that is coming when it hits the rocks at the bottom. All the fuss over whether or not a budget is made and how many billions of dollars they can save by raising funding of departments by less than they theoretically might have raised them had the economy and everything else been robust is all noise without substance. The honest truth is the United States spending problem went critical during the first term of President George W. Bush and was simply piling on more debt in his second term. The unbelievable spending which occurred during President Barack Obama’s first term in the White House only served to speed the train towards the end of the tracks and the great dive into the canyon beyond. Even if President Obama had simply continued with the increases as the government suffered under President George W. Bush we would be facing the same problem. All the unparalleled spending which President Barack Obama has done has simply increased the train’s speed so that we will crash a little further out into the canyons and hit the bottom simply going somewhat faster. So, the important questions that need to be asked are first, when will we hit the end of the tracks; second, what will be some of the early signs that all is lost; third, what will be the sign that the end is nigh; and fourth, what can we do to avoid total ruin; and lastly, what will happen to the world when the collapse comes?

Let us take each question in turn. The first is when will we hit the end of the tracks? Technically speaking, we have already hit the end of solid ground and the tracks we are running on are suspended over the canyon with only air between the train and the long drop. As for what is keeping us suspended in the air, mostly forward momentum, heavy rust on the tracks, and we are in that position the coyote gets when he goes off the cliff chasing the roadrunner and he waves as he pauses suspended in midair just before the perilous drop to a puff of desert sand or splash of water when he hits the bottom. What is keeping us up is a false situation where interest rates are being unnaturally held low and money is being invented electronically just in time to avoid defaults. There is nothing right now between the United States and most of the nations of the European Union and the final crash of their collective economies. The difference between the United State and Greece is one of degree and not one of inevitable ends.

Second, what will be some of the early signs that all is lost? The very first signs will be those countries that have a salvageable economy and comparatively sound fiscal policies will begin to place distance between themselves and the countries that are doomed to fail. Their initial move will be to remove any assets they have in the countries they are concerned and hold doubts of their fiscal futures and then they will attempt to call in any debts and get whatever payments they are able before the economy of the failing countries completely collapse and their currency worthless. If any of these nations are partnered in the European Union and are using the Euro as their currency, they will begin to print their original currency notes and coins and keep them in preparation for exchanging their currency for the Euros upon its failure for their citizens and only their citizens. Another step the healthier countries are likely to take somewhat further in front of the coming problems is to cash in any currencies of countries with suspect fiscal situations for Gold or in payment for commodities and solid assets such as lumber, gold, silver, other building materials and anything that will retain its value. There might even be a selling off of any realestate holding of the presumed stricken nations. You would see actions like that of Germany recently where they demanded their gold held in two foreign countries be returned with all possible haste. The two countries from which Germany demanded their gold be returned were France and the United States. This move would make one conclude that Germany has suspicions about the continued value of the Euro and the American dollar.

Third, what will be the sign that the end is nigh? This sign is actually rather strange as most will interpret this as the end of the difficulties, but it will be a temporary reprieve unless handled with great finesse and care. The end will actually be signaled by an improvement in the economy with rising employment and the appearance that things are finally going to improve. When this begins the leadership and those who monitor and adjust the controls of the economy and such things as the money supply and interest rates will immediately need to address the fourth question, namely what can we do to avoid total ruin? When the economy begins to pick up steam there is going to have to be mechanisms utilized to draw back much of the monies which were used to finance government spending during the lean periods. All the monies which were almost magically invented by raising the debt ceiling or printing and selling bonds to the Federal Reserve who bought them with electronically produced monies which in a more difficult time would have actually needed to be printed but in the electronic age we simply invent it on the ledgers and then spend it. It actually works in exactly the same manner as actually printing the bills and placing them into circulation. Currently, the vast amount of electronically injected monies put into circulation through the Federal Reserve buying new government equities with this new money is largely sitting in financial institutions not being lent or utilized on any real manner. Money lacking what is called velocity does not cause inflation or have much of an effect on the economy. Eventually, when the economy starts to pick up steam there will be more of a demand to take out loans to meet the rising demand for goods and services. Once the money begins to be lent and spent, then it has velocity and as there is a much greater amount of money available than existed when we entered the downturn in the economy, it has a deleterious effect on prices. As per the laws of supply and demand, having an oversupply of money drives up prices. That in turn will drive up the demand for higher wages which are possible due to the inflated money supply. This could potentially start a rapid spiral which is referred to as hyper-inflation which is what drove the Weimar Republic into insolvency which led to the rise of the Nazis who promised to repair the monetary insolvency caused by the hyper-inflation. In order to control the inflation and keep it from driving the economy into a ravenous feeding beast with prices raising almost hourly the people responsible for fiscal policies need to draw as much of the invented monies back out of the economy as quickly as they can without upsetting the recovery. The two most utilized methods are either to increase taxes or to increase interest rates. This is where the problem comes in for any country which has significant debt; they cannot survive rising interest rates. This is the position the United States has reached along with numerous European Union members. If your interest payments are $500,000,000.⁰⁰ when the interest rate is a very low rate between 1% and 3%, you are fine and can manage your debt as long as the interest rates remain at that level. But when the economy picks up steam and the excess monies begin to have velocity, you likely will have to raise interest rates in order to prevent runaway inflation, especially the huge amount that has been produced by many Western countries. When that interest rate climbs to 5% to 8% your interest payment rapidly increases to upwards of over one-trillion dollars. Should the interest rate triple or worse, get many multiples higher, then the interest on the debt reaches the point where it becomes un-payable and your economy collapses. That is what is approaching if things are not handled very delicately and with great finesse. Does anybody have faith that the politicians in their state, county, city or country have the wherewithal to handle anything deftly and with finesse grounded in reason, logic, and self-control? Neither do I.

Lastly, what will happen to the world when the collapse comes? Well, for examples of what the end looks like, all we need do is look back at history for similar events. There was the depression of the 1930s which followed the free-running economic over-inflated 1920s which pushed at least Germany beyond solvency and into a case of hyper-inflation which was one of the main triggers for World War II. Shaving the currency led to the failure of the Roman coins which brought on an extended period of failed economy in much of Europe. There have been numerous civil wars triggered by the financial collapse of the currency and thus the economy of numerous countries and societies. The most usual result of financial collapses is either war or governmental collapse into chaos and anarchy resulting in violent lawlessness. Whatever comes after hyper-inflation, it will be very unpleasant and many will die from malnutrition or disease. The only consolation I can offer is that it is very possible if this next economic challenge can be managed and the other side is reached, it will be because of a transformation coming to much of the world’s societies which will relatively quickly even reach and liberate everybody on the planet. There is a distinct possibility that a new age is coming in the near future which will be a revolution that will make the industrial revolution look like a small tick upward in the development of mankind and our societies. All that will be required is sufficient bravery from sufficient numbers of communities and those who will initially control the mechanisms initially that will bring on this new age to allow it to attain its highest of possibilities and capabilities. There is great hope.

Beyond the Cusp

What Actually Predicated the Fiscal Cliff?

The media, talking heads, politicians and presumed experts have been feeding the public the story that the Fiscal Cliff was made possible, if not inevitable, by the Congress and the President put on hold addressing the deficit spending and debt ceiling difficulties and all the rest of the economic woes by passing a resolution setting this New Year as the deadline where the Bush Tax Cuts would automatically be rescinded and sequestration would cut spending across the board with a significantly larger cut being imposed on the Military parts of the budget. Unfortunately, this simplistic view leaves untold the reason that we are running more than a trillion dollar per year deficit spending. The rush to blame the other party or the other branch or house of government has obscured the springboard that launched the budget into this predicament. The truth is there is more than enough discrediting blame to go around and cover both the Democrat and Republican Parties. The originating start that placed us on the path to eventually hit a wall where spending would outstrip any possibility of taxes and fees being able to cover the spending by the Federal Government once allowed to spend outside of the Constitutional limits began almost from the inception of the constitution replacing the Articles of Confederation. This diversion from the strict limitations placed by the Constitution began very early in the history of the United States but the egregious disregard for Constitutional limitations began with the legislations and Presidential executive orders implemented to address the Great Depression of the 1930s.

The three signature programs that got their start as part of the New Deal under the economic policies of President Franklin Delano Roosevelt were Social Security, Unemployment Insurance and the Minimum Wage. The next major damage done by the politicians in Washington were enacted as parts of the Great Society proposed by President Lyndon Baines Johnson with much of it touted as instrumental in the War on Poverty. After these two initial significant increases in the social spending by the Federal Government and the companion spending which was required or adopted by the individual States we have simply added additional coverage under these laws and programs with the occasional new program but as these existing programs had such an enormous cost that each addition seemed minor in comparison. Of course there were some programs which did add significant cost or set up situations which would eventually explode and destroying the societal economic wellbeing. One such program was the Community Reinvestment Act which was passed into law and signed by President Jimmy Carter. This law was used to intimidate banks and other mortgage lenders to make loans to marginally qualified buyers. Under President Clinton the CRA was expanded which set the housing market on the fast-track to forming a bubble which would crash in 2008. Under President George W. Bush we were given the Medicare Prescription Drug, Improvement, and Modernization Act which added excessively to the costs of Medicare. The latest major spending program is still being implemented and is the signature program put forth by President Barack Obama, called the Affordable Care Act. The full impact of this legislation will not be felt until later in this decade when it becomes fully implemented and all of its institutions and coverage have been instituted. These were just some of the most costly of the many new programs that have been instituted by the Federal government almost nonstop since the 1930s with the purpose of eradicating poverty in the United States or providing the social and financial safety net for all.

All of the above and the other items instituted over the years have had their individual and collective effect in pushing spending by the Federal Government beyond the ability of the economy to cover no matter what the tax rate. There is one last action which has to be discussed and is very likely the single most important contribution in causing the Fiscal Cliff yet has been overlooked by the majority of pundits, journalists and the rest of the coverage of the presumed coming disaster. This event was more of a procedure which was executed over the first eighteen months of President Barack Obama’s first term in office. It all is a part of the disregard for the financial, fiscal, and budgetary requirements of the Constitution by President Obama, his administration and the totally controlled Democrat Congress as they did not pass an actual budget during his first term. Instead of meeting this requirement the Congress in cooperation with President Obama passed individual spending bills which made allotments by department or program without forming an all-encompassing budget which covered and identified a budget for each department, program and other expenditures. This allowed for President Obama to stipulate a series of spending increases for those departments of the Federal Government which he favored large spending increases. Through this subterfuge that the President committed with the willing cooperation of a rubber-stamp Congress enabled for an increase of as much as thirty percent increase in the baseline budget of virtually every social program and their overseeing agencies. This forever increased spending in these selected departments and programs without ever needing to actually propose additional spending as the initial increase was used as the new baseline spending onto which the COLA annual increases would be applied as well as whatever the standard increase was applied to the entire budget if and when the Federal Government returns to actually passing budgets as required by the United States Constitution.

These slyly placed spending increases are a major portion of the items which have pushed spending causing the United States Federal Government to be running over a trillion dollar per year deficit which also resulted in constantly crashing into the debt ceiling. The main reason that the taxation and spending consequences were put off in such a way that the time would eventually arrive where the Democrats would get everything they dreamed of and the blame would be placed on the Republicans, what could be better? What is interesting is if one inspects the previous times when similar fiscal difficulties have struck the Federal Government and where the blames have been placed. When there was a budgetary war fought between the Democrat Congress and Republican President Ronald Reagan the media laid the blame for the impasse on President Reagan and allowed the Democrat Congress to get a pass. The next conflict over a budget came as a disagreement between Speaker of the House Newt Gingrich and President Clinton. The entire fault was reportedly due to the intransigence of Republican Speaker of the House Gingrich and no blame fell upon Democrat President Clinton. Now we are facing the dreaded Fiscal Cliff and once again it is the Republicans in the House of Representatives who are to blame while Democrat President Obama along with a Democrat majority Senate are given a pass. There does appear to be a pattern here.

Meanwhile, back to the perfect situation the media is giving the Democrats and President Obama by placing all the blame for the lack of an agreement on the Republican House as if the President would approve any budget and solution the Republicans would send to him. In some manner that is a true statement but solely because even if Speaker of the House Boehner managed to marshal the votes to pass a budget, it would never even get heard in the Senate as per the promise of the Democrat Majority Leader of the Senate Harry Reid. Between the protective shield provided by Senator Reid and the Senate and the media and their favorable reporting gladly placing all blame for anything fiscal at any time squarely on the Republicans, the President can afford to take a vacation and grandstand claiming to return early to get serious when the only seriousness the President will demonstrate is rolling up his proverbial sleeves. Otherwise, the only actions that President Obama has taken has been to demand that he get everything he demands and anything in the way of a compromise is out of the question.

Looking at the situation which directly caused the Fiscal Cliff we get a far different picture than the media has laid out for us to consume. The initial steps on the path which has gotten us to the precipice of a cliff were made a long time ago. This extra-Constitutional spending by the Federal government started long ago even before President Theodore Roosevelt began purchasing lands placing them under Federal Government ownership as Federal Parks denying the sovereign States of their right to utilize the lands within their borders as they saw fit. The huge steps taken which was the base-work in establishing the concept of social spending being under the purview of the Federal Government were done under President Franklin Delano Roosevelt and subsequently by President Lyndon Baines Johnson. The problem has been further expanded and exasperated by virtually every President and Congress since LBJ. The Community Reinvestment Act was instrumental in setting up specific criteria which would be expanded eventually leading to massive failures to pay on loans leading to a run of foreclosures which resulted in a crash of the real estate market causing bank and other financial institutions to fail as they held what had become toxic mortgages where the properties were worth a mere percentage of the loan value. This difficulty was handled in what may prove to have been the worst possible manner by initiating a Federal Bailout which was the brainchild of President George W. Bush. Doubling down on this troublesome solution was reapplied to cover even larger sectors of the economy of the United States was initiated by President Obama. At the same time, President Obama used the existence of a super majority in the Congress which precluded any possible meaningful opposition by the Republican minorities in his plan to vastly increase social spending. President Obama managed to repeal all the reforms placed on welfare, food stamps and other Federally mandated social programs that had been passed in compromises between a Republican Congress largely led by Speaker of the House Newt Gingrich and President Clinton during his second term. President Obama then directed that these programs begin a special enlistment project to maximize their coverage rolls. This push became most noticeable in the increase in Food Stamp recipients. President Obama also pushed to increase spending in every program he favors and tasked others to perform some forms of social functions replacing their previous primary functions with these new priorities. The special additional investments in social programs led to an unusually large increase in the spending on these programs and subsequently on their parent departments. This set a new inflated base spending in these areas which has now led to the problem in balancing the new baseline budgets with the available funding. Procrastination was used to set a trap that is now about to be triggered. When facing this fiscal nightmare the Congress along with the President decided that it might be easier to address the new budget slowly and with greater care and thought and so the trap was set. The trap agreed to was that if the Congress and the President were unable to find a compromise by the end of the year, then the Bush tax cuts would be allowed to expire, a Democrat dream objective ever since these lower tax rates were passed, and sequestration cuts would be made across the board in every department with an extra measure to be taken from the Pentagon and military budgets. Now we are facing the consequence of this agreement and time is growing short. What to expect?

Either we will go over the Fiscal Cliff, a meaningless consequence that has been pumped up and made into a huge and scary monster, or the Republicans will compromise and be censured by the media for not giving in sooner and their constituents for compromising their principles. The question people need to remember the answer to is why would the Democrats compromise when what they really desire is for huge cuts to the military, NASA and other nonsocial budgets with minimal cuts to welfare, food stamps, and other social spending along with tax increases on everybody. The Democrats get their wildest dreams coming true simply by doing nothing but refusing to cooperate and they can count on a media which will absolve them of any blame while thoroughly scorning and condemning the Republicans as solely responsible for the refusal of a compromise being attained. After this pretend emergency has passed, just like the pretend disasters previously when shutting down the government because of lack of agreement on a budget was supposed to bring on the apocalypse, life will continue and the consequences of the miserable handling of the economy and spending will still not yet be evident. All the hoopla and grandstanding about the Fiscal Cliff is much ado about nothing and the consequences that led to this situation will continue unmentioned by the media because they are adverse to reporting the shortcomings and shenanigans committed by their hero, President Obama.

Eventually the consequences of the fiscal extravagances that have been the main fare of the Federal Government for much of the last century will come crashing down upon our heads and thin out our wallets. Thus far we have been spared by another group whose irresponsible actions have facilitated the extravagant overspending by the Federal Government simply by keeping the interest rates deceptively at their current low level. This charade cannot be kept up forever and eventually the rates will need to rise to their natural level. The only reason the Federal Reserve has escaped harm from their deceptive ploy keeping interest rates so low is because the Federal government has adjusted how inflation is measured in order to obscure their real levels. Why else did the measurement of inflation be adjusted in such a way that food, energy, and petroleum prices were not considered as essential elements of our lives and thus not included? I know I eat and use energy and have to feed my vehicle, but apparently the Government does not believe I have any need to purchase such things. This sin of forcing the interest rates to remain low is not only the fault of the United States as Europe and much of the rest of the world gladly goes along with the charade as they also get to enjoy cheap money due to low rates on their loans. When the future point is passed and the interest rates must rise or inflation will destroy every economy and there is no longer any choice, then everybody will pay for their sins. Whenever this event comes to fruition it will be best if you have absolutely no outstanding loans, especially credit cards. Long term loans such as car loans and mortgages which have fixed rates will be safe but any adjustable rate debt will become unaffordable as interest rates are very likely to become prohibitively high, possibly reaching or exceeding twenty percent. Let this be a wise warning that the day will soon arrive when adjustable debt will become an anchor that drags your finances into the deep and they will drown you. The governments of the world will pay for their excesses but there is no reason that we as individuals must be as irresponsible as our governments have been.

Beyond the Cusp

The Secret Behind President Obama Plan to Tax Only the Rich

We are all familiar with one of President Obama’s signature proposals, “Tax the rich.” We have all heard how the rich needs to pay their fair share. And who can forget President Obama exclaiming that we all must play by the same rules or that Warren Buffet, the multi-billionaire, pays a lower tax rate than does his poor secretary who, by the way, collects a six figure income. But there is one item that has always intrigued me, namely that the dividing line between we the normal people and them, those wealthy slackers who need to pay more, is set at $250,000 a year in earnings. I have spent some time considering this arbitrary dividing line, or was it so arbitrary? Well, as it turns out, the $250,000 threshold may as well be an arbitrary line pulled out of the thin air when one finally realized the truth of why the tipping point is completely unimportant. The only difference the dividing line between those who are doing their fair share and the evil rich in the end will only determine how soon everybody, even those on Government support such as unemployment, welfare, or disability, will cross into the classification as rich and having to pay their fair share. The real story will become more evident with time but has, for now, been dampened and kept in check as if what is coming in our future had gotten out of control before the election, President Obama would never have had even the slightest chance of reelection. So, what is this coming catastrophe?

Most of us have heard of Quantitative Easing, especially if you have been reading BTC for some time. Quantitative Easing is usually abbreviated as QE followed by a number to denote which version one is referring. In QE1 the Federal Reserve took control of $175 billion of agency debt securities, $1.25 trillion of mortgage-backed securities and additionally some Treasury Notes. This was done in order to relieve the banking system of questionable and bad securities allowing them to climb out from under the dead weight of these mostly defaulted debts. As bad as QE1 may have appeared, at least there existed some equity in these debts which, where it did not totally offset the entirety of the debts owed, did provide some cushion guarding against a total loss which could have made recovery impossible without severe consequences.

When QE1 proved insufficient stimulus and the economy began to run out of steam, the Federal Reserve felt the need to act again. Initially they remonetized the equities they held from QE1 and purchased Treasury Notes thus supplying the government with additional funds. This expanded its balance sheet by $600 billion, all of which was new monies invented electronically out of thin air as the securities utilized to make this purchase of dollars was basically worthless by this time. It was taking a loan on the assets which you had previously used for a loan elsewhere, which is illegal for you or me to do. Thus far all of these additional dollars have been left sitting in the regional banks and kept from being introduced into the money supply but instead sitting idle supposedly in reserve. Eventually, when the economy really begins a true recovery the pressure for releasing these monies into the local banks allowing it to be loaned and thus giving it the initial shove resulting in it now having velocity. We can picture QE1 and QE2 funds as a huge rounded bolder sitting above our country on a high plateau really close to the edge but still safely in place. When the monies from QE1, QE2, and also QE3 (we will get to this in a moment) are made available for loans and injected into our economy, then somebody is going to give that bolder a little shove. The shove will continue to be more vigorous as more and more of the new monies are injected into circulation. This will eventually push the bolder past the flat and onto the steep slope leading directly into our country and its economy. Once this starts it will gain a life of its own just like the bolder picks up speed rolling down the hill. Now, this would have a limited effect if the bolder was not too large compared to the size of our GDP and other economic indicators and measurements. This is where QE3 comes into play.

Now we are in the middle of QE3 which is an ongoing purchase of bonds, presumably mortgage bonds, at the rate of $40 billion a month, every month until there is a sizeable downturn in the unemployment numbers, the real unemployment numbers and not the relative numbers used to make us believe things are not as dire as they actually are. The second half of this one two punch is that at the same time there is an intent to force the interest rates for banks to remain at or just above zero through 2015. At some point these actions will trigger a burst in the economy which will appear to catch fire and simply take off. This will initially appear to be the end of the doldrums that the economy has been suffering through for the last five years, but this elation will be short lived. This burst of activity will begin the charging of all these additional dollars that were invented electronically (the way we print money in this computer age) out of thin air giving them velocity which will then begin doing what any healthy economy does, act as a multiplier on the available money supply as it gets deeper into the economy. So, what does all this mean?

As the economy recovers with the increased money supply grown through each stage of QE1, QE2, and especially QE3, these dollars become active and get loaned, increasing economic growth which makes those funds available for loaning again and again speeding the economy wildly due to the millions of injected dollars. Now, when there is a great amount of additional money and the economy grows leading to increased purchasing, what happens to the prices of items we will purchase? Their process will begin to increase and they will increase at a rate proportional to the available money supply which has been greatly expanded by the Federal Reserve and our Government through QE1, QE2, and QE3. As prices begin to run away there will be a demand by employees for greater pay and salaries will begin to increase. This will allow more purchasing leading to more inflation and the circle begins to spin faster and faster. This leads to hyper-inflation which is a situation where people begin to realize that saving money is counter-productive and spend every penny they earn. These additional purchasing speeds everything further and eventually the whole thing spins completely out of control, unless there has been some check put in place to draw off these excess dollars and calm the excited economy bringing it back under control. There are two main routes which can be utilized to remove the extra dollars, either raised interest rates or higher tax rates. With everybody’s salaries increasing due to inflation they all pass the minimum qualification for being amongst the rich and this is where making the rich pay their fair share comes in to play. If President Obama could have his way, he would likely raise the tax rates on the rich by setting new tax rate levels, likely every $250,000. So what we would have is a tax rate of 40% on salaries from $250,000 to 499,999; tax rate of 55% on salaries from 500,000 to 749,999; tax rate of 80% on salaries from 750,000 to 999,999; and a tax rate of 99% on all salaries over 1,000,000. Oddly enough, such a system might actually work to prevent the runaway hyper-inflation even though I have my doubts that this was part of President Obama’s actual plan. President Obama is using class warfare to separate Americans into different groups at each other’s throats as it is easier to conquer a divided people. That his tax warfare system might inadvertently have a positive result, it is not likely President Obama planned a check be put in place to counter the reckless financial decisions made by himself, his administration, and the Federal Reserve.

Beyond the Cusp