Beyond the Cusp

October 14, 2012

What Happens when the Party Ends?

The signs are all around that the party is beginning to wind down and the end is near. The music has slowed and the volume has been lowered, the lights are slowly being brought back to full illumination and the satellite bars have closed. Soon everybody will wander out into the parking lot and realize that while they were partying like it was the middle of the summer, outside it is cold and a blizzard has hit town. The party I am talking about is this false realm we are living in where everything is sunshine and we act like there is no storm brewing just outside the door. We have our fancy hats on and celebrate the low inflation and interest rates at such a level that borrowing is virtually free; and borrow we have. We have borrowed in about every manner that is conceivable to record levels. The National Debt in the United States is at levels never even imagined possible a mere decade ago and much of Europe has reached similar levels though they have been building their debt steadily while the United States seems to have caught up and passed them almost overnight. Personal debt in the Western World is at unprecedented levels and student loan debt is being touted as very likely the next overly inflated bubble to burst taking many banks down with it. This is the real reason that the government has taken over the student loan industry, they can force the payment for this unfunded, collateral free indebtedness onto the American taxpayer when the defaults hit the fan. Add to all of this that many cities, counties and states are at debt levels that they are unable to contain and even keep up on paying the interest. All of this debt is being managed solely because the interest rates have been held down by false pretenses mostly because if it were allowed to rise even slightly the entire house of credit cards would come a tumbling down around our ears. The music slows and sounds even more distant and the lights are coming back on.

Currently the interest rate on much of the national debt is below 2%, much is actually at 1%. We can afford our debt at this level, but even at this bargain rate it takes all we can just to keep up with the interest payments. Eventually there is going to be a real economic recovery. A good thing, right? Well, not entirely. When the recovery takes hold in earnest and that causes prices to start to climb, that is when the Federal Reserve, actually a group of unnamed bankers who have little or nothing to do with the government except they can sway elections with their policies, will have to address the inflationary tendencies. The normal way to nip inflation in the bud is to raise interest rates at the first signs which will act to keep the lid on and force a slower rate of increases in prices as credit becomes more expensive. The reason the inflation is guaranteed to come as soon as a real and true recovery starts in earnest is because of the massive increase to the money supply. Right now, much of that cash is simply sitting in banks and other repositories and not being used to finance or buy goods. When the recovery gets into gear it will cause businesses and individuals to begin to invest more in production and other mediums. This will require more active cash flow which will force all of these funds from lying around and not flowing through the economic picture to begin to be moved into the economic picture giving it what is called velocity. This extra influx of capital will cause an excess of money in the system which will necessitate an increase in prices. Hopefully, it will also be reflected in salaries or we will have additional problems. As soon as the velocity hits a certain point it will cause undesirable levels of inflation to set in which will necessitate higher interest rates. This is done as a method of removing some of the now activated excess cash which we had printed in order to pay for some of the government programs which were intended to stimulate the economy but had thus far failed to produce, actually we do not print new money as much as simply invent it electronically which makes it way too easy to do and thus so tempting. There are only three methods of balancing the economic equations once you have infused trillions upon trillions of dollars into the mix, either you increase interest rates, increase taxes, or inflate prices or some combination of these three. Since the Federal Reserve can control the interest rate and they wish to prevent runaway inflation at virtually any cost, they will necessarily raise interest rates. Government, on the other hand, cannot afford to have the interest rates go up too steeply as that would make the interest payments on the debt unmanageable which would cause default, ask Greece how that works. This gives government, especially the Federal Government, a strong shove to increase taxes across the boards so that the Federal Reserve does not have to raise the interest rates as much as the government is also removing excess monies that had been infused to carry through bad times but are now a threat in good times. The one problem is that both increased taxes and higher interest rates take time to pull the excess money out of the system. So, what that means is that initially, until the increased taxes and interest rates balance the economic equations, everything in this world had its own equations, prices will rise as a reaction to the additional cash flowing in the system.

Oddly enough, the inflation will prove to be the least of the problems initially. In the end the inflation will necessarily run rampant as there is one huge elephant in the living-room that everybody is doing their best to ignore. What is going to happen when the interest rates go from ranging between 1% and 2% to the 4% to 7% range? This will cause the interest payments on government debt to necessarily double. And what happens if government faces a shortfall and finds itself unable to pay the interest on the outstanding loans? Well, they will do exactly what they did to “invest” in stimulating the economy which got us all into this mess; they will wind up the old computers and electronically invent the needed monies to pay the increased debt interest payments. Once the government, in this case it would be the Federal Government as the States are forbidden by the constitution from making money out of the thin air, once again resorts to increasing the money supply it will cause the same conditions that forced the interest payments to rise in the first place. Soon we will face interest rates between 9% and 15% which will redouble the interest payments if not triple them. If you want to see where this all ends, simply find a book or research the Weimar Republic of Germany from 1919 to 1923 and then continue your research until you find references to Adolph Hitler and the Nazis and you will be at the end result of the Weimar Republic and its fiscal mismanagement. Pay particular attention to their wonderful cure-all for fiscal insolvency and you might see some similarities to the United States under Presidents George W. Bush and Barack Obama.

If you wish to see an adult approach to facing such a problem, read about the years under President Jimmy Carter to see how we faced a similar predicament in the late 1970s and then read about the first term of President Ronald Reagan. Today everybody tends to remember the last five years under President Reagan, which were particularly nice and comfortable economically. In order to get our economic scales balanced and everything running as it is hoped for by every person in a position responsible for the economic wellbeing of the United States or any other country or entity, President Reagan faced all resistance to taking our lumps as they came in order to allow the situation to work itself through to a balanced and proper end. President Reagan did the most difficult thing any leader can do in a situation of dire fiscal troubles, he set the course that would eventually even everything into balance and then did absolutely nothing and waited for it to reach equilibrium. Sometimes doing nothing is both the correct solution and also likely the most difficult solution. The problem with waiting out the storm is that the public is often not that lenient so as to allow you the moment’s peace to take such an approach. The worst thing that government can do when facing fiscal difficulties is to try something new every few weeks expecting immediate results as this makes for an uncertainty in the rules of the game which forces those who invest or run large or small companies to shore up, store whatever cash they can, and wait until the madness ends and somebody sets the rules and promises not to further adjust them. Those constant and repeated changes in policy as a reaction to the public’s demands to do something, anything, are what I call Panic Policies.

Well, looks like the party is almost at an end and it is almost time to go out into that blizzard. Let us hope that whomever takes control as the next President has enough sense or his advisors have the sense to set a path forward, announce it and promise all will be well if we all have faith and stick to the plan, and really mean that and then just keep reassuring those who may panic and wait for balance to return which is almost always followed by a period of wealth and optimism. In the meantime, button up as it is going to get nasty for quite a while.

Beyond the Cusp

June 7, 2012

Is There a Magic Economic Formula?

Ask this question of an economist and he will begin to spell out all kinds of formulae used in either Macro or Micro economics. Believe it or not, these two sectors of economics do have numbers of formulas which apply solely to one or the other and a select few which are used in both. That about exhausts my memory of my ECON 202 and 102 courses I took longer ago than I care to admit. As for what these formulae are, I can fortunately claim not to remember a single one of them and do not feel the slightest remorse for having apparently wasted my time on required elective credits. Looking back on life and what courses were required is another of the mysteries of life, especially since they had changed by the time my children entered college. Apparently required knowledge is flexible entity dependent upon when and where you attain said knowledge. But if we were to ask if there is some magic economic formula that will spur the recovery and speed up the creations of jobs, we are not asking for anything learned in a basic economic course, we are looking for a political answer which is often completely dependent upon your political outlook. As we have seen in fairly recent history, a conservative believes the formula is to remove regulations and free up as many options as possible for what they call the entrepreneurial class while a progressive will call for government to spend stimulus money in selected areas to spur growth which will repay on the investment through increased tax collections. They didn’t exactly teach this in the economics classes I took, at least as far as I remember.

The importance of this particular question is directly related to the choices we will be making in the November elections, both for the Presidency, our Senators and our Representatives. The two parties offer two competing and opposite approaches to the economy. Oddly enough, I have an even simpler idea which would likely have a better result than either Romney or Obama will offer. We have been told that Romney has this legacy of great business sense. The truth is that Romney has been able to choose companies which with a measured infusion of capital and a set of adjustments made, most often to either management or procedural, and the company would turn around. Sometimes it was as simple as modernizing the equipment, other times the overhaul might have required changing personnel or business models. President Obama has already shown his business outlook and it has been defined as quantitative easing and stimulus plans. The stimulus plans are of the Progressive nature where government spending will result in an improved economic outlook as business spend the stimulus monies and this leads to a more active economy. Of course, this also depends on where one invests the stimulus monies. Apparently, stimulating the green industries, two of the three major car makers, Wall Street investors, failing banks, and ecology enterprises were the wrong choices. That aside, we know that President Obama will likely continue with the same model and hopefully, should he be reelected, let’s pray he chooses better in his next term.

Well, now for what may be the most preposterous plan to save the American economy and get things moving in a positive direction you will likely hear this campaign cycle. If any politicians were to make this their plan, they would get my vote, but fear not, nobody would ever recommend this. The promise is to do nothing, allow nothing, change nothing, and leave everything exactly as it is for the foreseeable future. The biggest problem we have in the economy at the moment is not sufficient stimulus monies available; Lord knows we have made more than sufficient available. Currently, the government is putting out as many as a thousand new regulations per month. This rate is without the full implementation of Obama Care which commands that the Secretary of the Department of Health and Human Services fill out the regulations necessary to enact the desired ends of the legislation. This is also before the 2,300-page Dodd-Frank finance industry regulation legislation which directs the regulation writing to the Treasury Department bureaucrats. This is the real problem facing the economy as well as many other things in our lives, endless, uncountable, confusing and unenforceable collection of regulations. If a President could declare a hiatus from new regulations and bring the regulation factory that are the alphabet soup of extra-Constitutional cabinet departments to a screeching halt, businesses and investors would have a known field of play with stable conditions for that period of time. We do not need more investment. We do not necessarily need to undo any number of regulations, though that would not hurt. We do not need to play artificially with the interest rates. We need nothing. Simply nothing. That’s my plan, have the government take a nice long holiday, we’ll even keep paying them. Paying them not to do anything could be looked at as paying them to do no more harm. Just let everybody catch up with all the garbage that has already been enacted and regulated before loading up even more crushing our incentive to be productive. Nothing, what a concept.

Beyond the Cusp

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