Beyond the Cusp

March 9, 2014

The Coming Inflation and Its Hidden Damage

Inflation has effects beyond the obvious of making the item we buy, especially the necessities which we cannot live without, more expensive eating away at what little money we have after the various levels of government take their overtly large share. What has not been discussed much are some of the many hidden side effects caused by inflation and what are some of the driving causes of inflation. One of the surest causes of inflation comes when the money supply is increased no matter the reason. When the government prints or electronically invents money in order to finance government spending, especially deficit spending, then eventually this gets represented by rising prices. The United States since sometime during the second term of President George W. Bush began printing money electronically. This was used in order to fund the original “bailout” of two-thirds of the American auto industry, kudos to Ford who actually turned down any bailout monies as they had taken a precaution and downsized two years earlier in anticipation to trends they predicted that the other two major companies, General Motors and Chrysler, had ignored. Of course, once the Federal Government found that it could boost a lagging economy by injecting more and more monies an addiction set in and every problem became just an opportunity to throw good money after bad. When it also turned out that throwing more money into the economy also had the effect of pushing the stock market higher and higher, well, what’s not to love?

 

The problem is these increases in the value of the stock market were nothing more than inflationary effects caused by the increased money supply. What basically resulted in the increases was that each stock is actually a value of a percentage of the total money supply which is presumably driven by GDP and production. When the government simply pushes more money into the supply and there has been no increase in actual goods, services and other tangible assets, then it is reflected in higher prices, inflation, as the price of commodities and even stocks are what their worth is in the total of production times the total money supply. If produced goods have not increased and there are additional monies in circulation, then everything rises in price to restore its value in percent of the available money proportional to its actual percentage of the total value of goods. The goods and services have not changed in their actual value, but instead are now revalued to equal a larger money supply. Much, if not all, of the higher prices in stocks is not representative of increased worth but reflects cheaper money as the total money has been increased through Quantitative Easing, a fancy pair of words that actually mean printing money except they can now make money simply by pressing the appropriate keys on a computer keyboard and presto, increased money supply leading to higher stock market gains and eventually inflation which will eat up an equivalent percentage of everybody’s wealth as inflation will eventually even everything back to represent the ratio of total goods and services against the total amount of monies in circulation whether it is in higher stock prices or bundles of dollars at the Federal Reserve or individual banks and corporations who received bailouts.

 

So, what could be the most damaging effect of inflation? There is the obvious effect of increasing prices at the grocery store, the service station and everywhere else but that would theoretically work itself out as salaries would also rise to reflect the inflation, though somehow the salaries never quite keep pace with inflation, or at least that has been my experience. But the effects of inflation within any nation’s borders according to economic theory pretty much equal a zero sum game where everything rises proportionally. The real difficulties come when we look at trade between nations. As inflation forces prices up on goods and on the processes that manufacture the goods, the price on the international market rises and remains higher until the balance of currencies eventually works itself out in the exchange rates. The rebalancing of the currencies is always a lagging indicator and thus inflation has an initial effect of damaging trade of the nation under its effects. Inflation also will eventually cause all imported goods to increase in price, though this is a lagging indicator that represents the changing balance of currencies. So, when inflation first strikes it takes its toll on exports but eventually takes a permanent hit on imports.

 

As noted earlier, inflation is directly proportional to increased money supply that exceeds the increase in total goods and services within the national economy, it is a ratio. Thus, there is only one solution to prevent inflation from heating up, which is to remove the excess monies from the total supply. The reason the United States has not experienced excessive inflation from the large amounts of monies pushed into the total money supply starting with President George W. Bush and continued by President Obama is because the vast amount of the monies is being sat on and kept from circulating as the banks have been woe to put it in circulation through making loans. Another reason has been that a fair share of the cash has been invested in European banks and institutions in order to prop up numerous European economies which were in varied amounts of distress. The effect this has had is to allow banks to keep the interest rates low and inflation in check, but such a game cannot last forever. Eventually the economies will begin to recover and the banks will begin to make more loans as the interest rates increase. As the interest rates increase, so will the required payments on national debt increase even if all that is being paid is the interest payment and no principle is paid off, exactly what the United States has practiced for a very long time. As the interest rates increase thus pushing debt payments higher then taxes will also be increased in order to pay off the debt and still finance the government including any inflation. As rough and difficult as such may be, this distressed situation actually will have an eventual benefit, it will remove a portion of the excess monies in circulation. Eventually an equilibrium point will be attained and inflation will slow or even virtually stop and the interest rates will stabilize and possibly lower for a while. Unfortunately, do not expect the government to lower anybody’s taxes when this occurs as the government is very adept at finding ways to waste inordinate amounts of money thus never cutting its ability to take more from the people and the engines of production. Actually, the one eternal hidden cause of inflation is government spending and government largess simply makes for higher inflation as government spending seldom adds to the total amount of goods and services provided in the national total production. An interesting ride is in the makings as the economies of the world adjust to the policies of the past decade and there may not be very many winners.

 

Beyond the Cusp

 

March 23, 2013

The Real Reasons Behind the Cypress Problems

The current crisis of the moment is what to do and how to rescue the Cypriot banking system which is carrying an unsecured debt load of between seventy-five and one-hundred thousand Euros. This is approximately the amount of new debt added each month to the United States total debt due to excess spending which pretty much puts the Cypriot bank debt in perspective. The European Union has much deeper financial crises than the Cyprus situation which include but are not limited to Greece, Spain, Portugal, Italy and even possibly France. What makes the Cyprus problem seem even less of a potential catastrophic disaster is that much of the Cypriot banks difficulties are derived directly from the financial crises in Greece as the Cypriot banks purchased significant amounts of Greek bonds and notes which are now greatly devalued as Greece collapses. Should the European Union find some path to resolving the Greek debt and financial crises, then such a problem, if it paid off Greece’s creditors, would go a long way to alleviating the Cypriot bank debt situation. So, if the Cyprus situation is not quite as dire as it is being made out to be, then why are the Cypriot banks and thus the country and people of Cyprus being subjected to such a severe crisis situation? What exactly is behind all this hyperventilating causing tremors to ripple through the financial world?

The first item that comes to mind is that Cyprus recently became a partner sharing some of the substantial oil and gas finds under the Mediterranean Sea sharing this coming boon with Israel as these fields are drilled and come on-line. What is at play here is partly an attempt to force Cyprus to place their shares in the oil fields up for bids so that all of the European Union can share equally in the benefits and cheap energy which these finds promise. The European Union partners of Cyprus simply wish to play a share the wealth card forcing Cyprus to share its coming wealth with all of the European Union and not simply keep the profits and energy gains to itself. After all, is this not what socialist governance is all about, taking from those who have and giving to those who need so that nobody makes any gains but rather share the wealth, or in this case, share the energy. This is simply a ploy to alleviate Cyprus from the responsibility for selling their energy finds and instead will allow for all of the nations in the European Union to the responsibility for distributing this energy thus making them all equal partners in the Cypriot energy boon which is on the horizon.

Another side of the Cyprus dilemma comes from the well backed rumors that the Cypriot banks had been utilized by numerous Russian oligarchs to launder their ill-gotten gains and that many of these Russians very well might have left serious amounts of wealth in Cypriot banks. These monies may very well have been the main target of the attempted wealth surcharge on the accounts held in the Cypriot banks. Does it not seem to stretch credulity to solve the problem of the Cyprus banks being insolvent by taxing the monies they hold in accounts? If the Cypriot banks have sufficient cash on hand in accounts to cover the required shared burden to facilitate their bailout by taking up to ten percent, then shouldn’t they also have sufficient funds to be solvent? This has all the evidence of a forced run on the Cypriot banks by the European Union in order to leverage influence over Cypriot financial affairs and making a stab to get at a percentage of the Russian monies which are suspected of being on deposit in the very same Cypriot banks that are insolvent. This would also explain why Russia jumped in so fast to offer to also bail out the Cypriot banks. Perhaps the Russians have something in these banks in Cyprus which they prefer does not become under public scrutiny.

Then there is the one entity which made their bid to bail out the Cypriot banking system may have validated both of the above theories of what is occurring with what hints at being a manufactured problem. The giant Russian energy company Gazprom jumped up noticeably quickly offering to bail out the Cypriot banks in exchange for a percentage of the oil fields resources recently found in Cypriot and Israeli waters in the Mediterranean Sea. Having Gazprom receive rights to segments of the Cypriot energy finds would serve both dilemmas detailed above, the Russian laundered funds in Cypriot banks could remain conveniently unrevealed and the Russian energy sector would be granted rights to oil and gas reserves recently found within Cypriot waters. Sometimes one singular event from within an entire plethora of events addressing a situation by itself defines the whole of the reality driving the events and in this case Gazprom definitely appears to be such an answering event. Hopefully, for Cyprus and its people’s sake one would hope that they find some path to resolve the demands now being foist upon them that allows Cyprus to retain their natural resources and also does not set a precedent of stealing funds from the accounts in banks, especially accounts of individual people. This situation should be treated as a learning experience by all the people in Europe, the United States and the rest of the industrialized world as it may be the precursor of things to come. After all, the Cypriot predicament threatening the people, their bank accounts, and the natural reserves of Cyprus is over less than one-hundred-billion Euros, a paltry sum when considered against the debts of many other European Union countries and definitely a miniscule sum when compared to the debts and unfunded liabilities threatening to choke the economic life of the United States. If this is the fuss over this relatively minute amount of debt, imagine the imbroglio which will result when some of these other indebted countries are called upon to settle their, by comparison, enormous indebtedness.

Beyond the Cusp

June 22, 2012

Consequences for United States Bailing Out European Union Countries

The United States has already quietly taken the initial steps to assist in easing the financial problems being experienced by some countries within the European Union. This was done by, believe it or not, exchanging dollars for equal value of Euros thus tying the two currencies to the other to some extent. Who knew that the dollar was considered to be more stable a currency than any other in this crazy world. So, in order to repair this strength in the dollar, or for whatever reason the politicians and experts are claiming, we have exchanged straight up, charging no exchange fees, of dollars for Euros in order to share the pain. As for which side is sharing whose pain might still be up for debate but it is being sold as assisting the European Union through some rough periods with members’ economies ranging from imminent default to relatively healthy considering the current world economic situations. This will in effect ally the United States with Germany, possibly France and any other country with sufficient economic strength to support and pull the countries suffering from poor economic times, some claim caused by their overly socialist policies, without having any fall into default on their debts. The amount of funding this project will require is currently uncertain, we simply know that it is going to take more and more going into the future. The outlook seems bleak to us but some have said they see the light at the end of the tunnel. Some claim that light is on the onrushing runaway train coming at us in the tunnel.

So, exactly what are the risks being taken by the United States through stepping up to join in the efforts to save the Euro and the European Union from economic disaster? The most obvious risk is that it is possible that pulling the likes of Greece, Spain, Ireland, and possibly Italy and even France through to better times may be a futile endeavor that will simply pull everybody else down with the others. This may end up being the straw that breaks the camel’s back, or the investment that tips the economy into a ruinous spiral. What makes this even more risky is that neither Germany nor the United States nor any of the others who might be called upon to finance those countries in jeopardy will simply not have sufficient treasure to succeed and thus will simply collapse along with those they were supposedly saving. This is made evident due to the facts that in order to make the necessary loans to those desperate countries, the healthy countries are taking out loans as they do not have the money on hand. The United States already has budgetary deficits such that there is insufficient cash to pay for their own bills, let alone make loans to cover other countries’ shortfalls. This leads to the big question, where can the United States turn in order to get loans in order to loan the needy European countries. Who, in their right mind, would make a loan to the United States so the United States can loan the same monies to a country to which the loaning country would not make that same loan? Simply, why would China loan Greece money via the United States when they refuse to loan money directly to Greece; or for that matter even to the United States as things stand.

The simple answer is that nobody is going to loan more to the United States simply so the United States is enabled to make the same loan to a European country in danger of default. Now we have the United States already obligating themselves to assist the European Union’s weaker nations over their current problems by extending them new loans. The United States does not have the money for the loan and nobody is offering to loan the United States the necessary funds. So, what do you think those financial wizards in Washington DC have hit upon as the solution? Believe it or not, they are suggesting that we have another round of printing money under the guise of Quantitative Easing. So, here comes QE3, and no, that is not a new Queen Elizabeth Cruise Ship. Actually, a new Queen Elizabeth Cruise Ship would be both cheaper and very likely a better investment.

So, to give a quick overview of what it means when they say Quantitative Easing as the method to ease our budgetary needs or, as in the current so-called emergency, producing funding to loan as a bailout for the European Union Euro using nations experiencing fiscal difficulties and in danger of default, the mechanisms are that the Federal Reserve instructs the Treasury Department to print money which the Federal Reserve buys and then loans out. The reality is that the money is created electronically and simply added into the currency in circulation totals. This is painless as long as the new money does not gain velocity, another way of saying actually being spent in the economy. The problem comes when all this newly created money begins to be used by the banks to make loans and such which then places the money into actual circulation. Currently, the banks are sitting on most of the invented money resulting from QE1 and QE2. The money in QE3 will not be sitting idle in any banks; it will be used to pay loan interest from one country to another country. These transactions will involve banks but also will be made available to the crediting country to use to pay their debts and fund programs or pay salaries. This will place the QE3 into circulation rather rapidly and beyond the control of our Federal Reserve bankers or the Treasury Department. The result of this will be the beginning of sharper inflation and rising prices as the dollar will be devalued by the percentage of the QE3 totals against the current currency in the economy. This will very likely spark the banks to resume loaning in a more invigorated manner thus placing the rest of the QE1 and QE2 monies into circulation which will result in even faster rising inflation. So, the result of bailing out Europe will be higher prices here at home. Sometimes it pains to be so helpful.

Beyond the Cusp

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