Beyond the Cusp

January 3, 2014

Enough with the Peace Process Already

There has been a rumor around the office that some people might be getting tired of endless repetition of the same basic material just from a slightly more oblique angle covering on the failures that are the Israeli-Palestinian Peace Process and the potential damage Secretary of State and his boss, President Obama, are planning to do to Israel with full knowledge and vile intent. That possibly being true, and our own recognition that we may have exhausted the subject for maybe a number of hours, maybe even a day or two, so don’t say we never heed suggestions. So, without much further ado, on we go to today’s subject.

 

First up, let’s tackle the reputed economic recovery in the United States. We have been told that the housing market has begun to return to a healthier outlook as more houses are selling. Prices of homes for resale have still not returned to the inflated prices of early 2008 but they are moving from their low points. The Christmas sales were still less than hoped but still showed some signs for hope. Unemployment is still a disaster as there is now an entire class of young people who are probably permanently unemployed with little or no hope of reentering the workforce. There have been more jobs available to replace the positions lost during the bust which started in 2008. The difficulty is that these new job opportunities are either part time or low paying service sector positions and some are offered only as the employee acting as a sub-contractor thus freeing the employer from any healthcare requirements which will result from Obamacare going forward. The real sign of a recovery that almost every report relies upon is the records being set by Wall Street. So, what is the truth about the economic recovery and should we feel that perhaps the worst of the economic downturn is over.

 

First up, we should address the increasing home prices. The reality is whether the increasing prices of housing is simply responding to inflation because of the weak dollar or are houses actually accruing real equity. There is an easy way to compute whether or not houses are accruing equity or simply responding to the weakness of the dollar. Choose some commodity which has proven value other than gold, silver or other precious metals. My particular favorite is a top of the line Mercedes; but Porches, Bentleys or even gemstones also work well. You find how many of whatever metric you have chosen if you sell your house and spend all of the proceeds on that item, Mercedes, two carrot diamonds, Porsche 911 GT3 or whatever item you chose. Then allow a period of time to pass and repeat the procedure with the new price your house will sell for say after a year or two. If you are able to buy more of the same model but the New Year’s model, not the two year old model as it has to be new car to new car comparison. My bet is that most items you will discover that you will not be able to purchase any more of your control item than you had at the earlier price. The same test can be used to rate stocks or anything else that one uses for investments for the future. Much of what is currently appearing to be gained equity and profits is really simply the result of a devaluing dollar. But even if this is true, the fact that housing sales are increasing is something to be glad to see and that is very true.

 

The real question is what the prospects are going forward. With the appointment of another follower of the principles of Keynesian economics to head the Federal Reserve we can expect that Janet Yellen will fully support the continuation of President Obama’s stimulus policies trying to utilize Federal Government spending as the best way to invest in the economy. One might think that the past seven years of Presidents Bush and Obama stimulus spending with no real economic recovery to show for what has resulted in almost one trillion dollars per month added to the debt that at least a few would have figured out something was not working and the policy might have been flawed. The debt has risen to dangerous levels and as soon as a real recovery should begin the rising interest rates will make the debt payments untenable. There have been estimates that should the interest rates reach five percent the payments on the debt would approach a minimum of one third of the Federal budget. That should be a sobering truth that should worry any economist who desires to be honest and considers their predictions to have any realism. The real problem would be if the economy began to show signs of runaway inflation, then the Federal Reserve would need to consider some way in which they could reduce the speed of the increasing economic engines in order to corral inflation. The quickest and easiest way available to the Federal Reserve to slow runaway inflation is to raise interest rates. This is where the Federal Government runs into a problem as increasing interest rates will soon make the debt payments unmanageable. The Federal Government could influence the Federal Reserve to keep interest rates at the lower rates but only if they are willing to hike taxes significantly. Either through higher interest rates or seriously higher taxes are the sole solutions to runaway inflation as it is necessary to remove available levels of funds in order to curb inflation. Inflation is often the result when there is more cash available in the market which can occur when government increases spending in order to stimulate the economy. The problem during this economic period of lethargy has been that despite huge injections of cash into the system, there has been only a slow recovery. Eventually the economy has to respond to the available cash which currently is sitting in many of the major banks, the same banks whose top officials make up the Federal Reserve Board. Once the banks see that they can make gains investing their money by loaning as the interest rates increase the funds sitting in the banks will be loaned and thus enter the market. This inflow of additional funds into the economy will cause inflation, and the amount of funds currently sitting in banks could pose a huge influx of available funds which would give velocity to great volumes of monies thus pushing inflation. Things could become interesting as never before in history has such a reserve of available funds been resting in banks not circulating but with a potential to almost quadruple the amount of funds currently in circulation. That will result in rapid inflation and a perceived economic emergency which will require a miracle to solve without forcing a default on the debt.

 

Another problem we can talk about that is not part of the Middle East is the expanding influence which Russia is gathering. Russian President Putin appears to be steadily putting the Warsaw Pact back together under a different name. The current victim is the Ukraine which had been negotiating with the European Union. This caused Russian President Putin great amounts of consternation. In an attempt to ease his discomfort, Putin threatened the Ukraine to cut off all trade including any petroleum and natural gas sales and flow in or out of the Ukraine unless they rejected the trade agreement they had worked on for more than a year with the European Union and instead signed a trade partnership with Russia and basically gave Russia reserved status and sole trade partner. Putin’s threat worked and this has been a repeat occurrence of late. The people of the Ukraine have been protesting in the thousands to the point that they have closed down the central areas of the capital, Kiev. The leadership of the protests has requested assistance from the European Union and the United States. They have listed the questionable and outright illegal financial transactions on line hoping that the Western powers would assist their protests by freezing these funds of Ukrainian President Viktor Yushchenko. Where expecting the European Union to stand up against Putin is a fool’s game, the United States in normal times would be a reliable friend who could place some pressures on President Putin preventing his bullying the neighboring nations into strictly Russian oriented trade relations. In the past the United States had, somewhat foolishly, gone to the furthest corners of the planet in order to foster democracy with varying levels of disaster. The Ukraine is actually one place where democracy might have had a decent chance of succeeding but, alas, the United States is sitting this decade under President Obama (OK, only eight years) on the sidelines refusing to act in any conflict, situation or even golden opportunity. We are so sorry Ukraine as you will now face the same rejection from the Obama Administration which the Green Revolution leadership and the hopes of the thousands of Iranians which included businessmen for the first time ever in numbers who also hoped for assistance against the Ayatollahs from President Obama who refused to even discuss their plight, it did not serve his agenda of fundamentally transforming the United States from a beacon of hope into a dark recess of silence in the face of any challenge in the wide world. President Obama not only sat emotionless while the hopes in Iran were snuffed out violently, and is doing a repeat performance on the hopes of the people in the Ukraine, but also turned steady and solid former allies of the United States into snubbed and insulted nations wondering why their friend had turned so cold. The American people have not turned cold, only the resident of the White House has forsaken America’s friends. Unfortunately, so many believed the hype and were deprived of a truthful press as much of the liberal press decided that supporting the greatest domestic realignment and permanent change of government responsibilities completely disregarding almost every Constitutional limitation on the Federal Government rather than report anything that might have hurt the chosen one from reelection. That only required a complete ignorance of all things foreign policy and also ignoring the known disasters coming down the pike due to Obamacare. The foreign policy attitude of President Obama was made evident very early, like within the first few months, with his treatments of one of the United States longest and strongest allies, Britain, by sending back the present from the British in the form of a bust of Winston Churchill, giving presents which were completely inappropriate such as recordings of his own speeches to the Queen and video tapes which were unplayable on European video players to the Prime Minister. But what’s a few snubs between friends.

 

Beyond the Cusp

 

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