United States Potentially About to Fall

 

The United States is precariously balancing between solvency and being revealed as bankrupt. The United States has mortgaged thousands of acres of virgin lands which hold resources above and below the ground. The resources include but are not limited to coal, uranium, lumber, wheat, grazing lands and potential oil deposits or precious metals etc. There are other questions which are relegated to conspiracy theorists and fear mongers but the fact that China has been purchasing gold and could be said to be hoarding gold for quite some time as the gold buying by China in a graph from 2012 displaying the situation in raw numbers as shown below.

 

 

China Gold Purchases of 2012

 

 

The graph in and of itself is a solid display of a potentially damaging effect on the balance of gold holdings but in all honesty we need to make a confession; the number in metric tons is used as an alarmist shock figure which is a form of deception as taken as a percentage of the total holdings of all nations and one immediately realizes the minor difference eight-hundred-thirty-five metric tons is but three and a third percent of the over well over twenty-five-thousand metric tons owned by all the nations of the world. Perhaps a listing of the top ten nations in gold holdings according to the International Monetary Fund’s records will make a difference and put everything into perspective. Below is a list of the top ten national gold holdings listed below.

 

1) United States   with gold holdings of   8,133.5 metric tons
2) Germany          with gold holdings of   3,391.3 metric tons
3) Italy               with gold holdings of   2,451.8 metric tons
4) France            with gold holdings of   2,435.4metric tons
5) China              with gold holdings of   1,054.1 metric tons
6) Switzerland      with gold holdings of   1,040.1 metric tons
7) Russia             with gold holdings of     937.8 metric tons
8) Japan              with gold holdings of     765.2 metric tons
9) Netherlands      with gold holdings of     937.8 metric tons
10) India             with gold holdings of     557.7 metric tons

 

As can be note, 835 metric tons are a mere drop in the bucket providing these are the sole gold acquisitions made by China. There are claims that China has, as well as bringing in the amounts of gold in the graph through Hong Kong, has also established a surreptitious route through the gold markets in Shanghai and that they have acquired an additional 7,000 metric tons through this untraceable route over the past half a decade making China the largest gold reserve on the planet, providing these claims are valid and not just the ravings of conspiracy mongers living in some basement, likely their own basement, but basement all the same (we are located in a basement free apartment, so we can be trusted, well, that along with our track record of opinions over the past half a decade plus). The main problem with the seven thousand metric tons theory would be that such purchases would exceed the amount of gold available for purchase each year. The only way that China could have amassed that seven thousand metric tons would be if a state holding, or a number of state holdings, were to be being liquidated or transferred to China as payment of debts but being done under the radar through gold merchants in Shanghai, but even then one would expect the trade of such amounts would raise some suspicions and keeping them under wraps would be the best kept secret since the hiding of the Ark of the Covenant, itself constitutes a good amount of gold and things far more valuable than mere gold. That would beg the question as to who might be selling gold in such quantities.

 

This aside, China is on a definite path to acquire as much gold as they are able to buy and mine in efforts to improve its position and possibly having delusions that they could one day exceed the gold holdings of the United States, providing that China has not already cashed in their bank notes and other United States debt holdings, demanding payment in gold and routed this through trusted merchants in Shanghai who are actually Chinese government employees, high level Chinese government employees holding really cushy positions living the life in Shanghai. There was an increase in the interest rates charged by the lenders to top line banks by one-fourth-of-one-percent which some are claiming is a sign that the all but free money supplies are about to be tightened over the next year or so. While this very well may be in the plans, it is not what this tightening was about.

 

 

 

 

We can expect the Federal Reserve to hike the rates again this coming spring by as much as one-half-of-one-percent which will send panic waves through a fair number of investors and exactly the opposite through the other bulk of investors as there are going to be arguments that this is the end of expansion of the stock market and a slowing of business as lending will have become tighter and more expensive. Wrong again. These maneuvers are all being manipulated for political reasons and have absolutely nothing to do with the economy as that picture has not changed. After raising the interest rates the Federal Reserve will drop them announcing a reversal of policy claiming there was a misreading of economic indicators and it has become obvious that tightening the money supply is unwarranted and thus the return to the lower rate or an even lower rate. This announcement will be made about mid-September and will unleash a flurry of activity as stocks will soar, jobs will magically appear, most to deal with the holiday seasonal employment jump plus the coming available jobs held by students over their summer breaks. These replacement workers will demand a slightly higher rate of pay than did the summer employees working for near or at minimum wages. This will show a marked improvement in the jobs rate, lowering unemployment and even bringing some who had been dropped from the employment picture may return making the numbers all around look far better going into the fall campaign season. The improved picture will be claimed by President Obama as validation of his handling of the economy and his approach to growing jobs through government investment in the economy, also known as corporate welfare and crony capitalism. This will also make the Democratic candidates claims that theirs is the correct path to a bright future appear less Pollyannish and the claims that the tightening of the belt on government spending is actually necessary. This has been the path the Federal Reserve has taken ever since President Clinton needed a jobs, finances, and general boost in order to gain reelection and is now being extended when there is no President seeking reelections, more specifically a Democrat President seeking reelection, and the hope is to provide the best possible scenario for the election of another Democrat and keeping the republican Party out of the White House.

 

I can hear the skeptics already writing their comments screaming for us to quit with all of the conspiracy craziness and return to planet Earth. The problem is this has gone from crazed theory to actual reality as the economic health of the Western world depends on there never coming to fruition the exploding of the debt bubble. What the Western world, especially Europe and almost as deeply indebted United States, are facing is a huge and unpayable debt which has gotten to the point that there are no longer any credible sources of funding. This has caused these governments to do something which is euphemistically called Quantitative Easing which is where a loop is invented where one party loans funds they do not presently have to the government and then buy that money from the government in order to repay their debt but instead the monies are instead invested by distributing it to banks to lean and thus stimulate the economy. This might have functioned far more efficiently if the Federal Reserve had not already lowered the interest rates to where any corporate venture could be financed almost fee free thus there was no demand for these funds and the banks saw no upside to lending the funds anyways. Thus these funds which have come from a series of Quantitative Easings have basically sat in the larger banks vaults collecting electronic dust as these funds exist solely in the computers which run the economic system. This is known as stagnation of funds and means that the cash has no velocity, simply put the cash is not flowing through the system and thus has had absolutely no effect on the system which is good for keeping inflation low as had these funds been forced into the system then prices would have risen commensurate to the amount of increase is available monies for purchasing of goods and services.

 

So, when will these funds enter the system and what will be their effects? Well, they will come into play when the interest rates rise sufficiently that it becomes advantageous to the banks holding these funds to let them flow into the lending market. The situation will come about most likely when the prime interest rate set by the Federal Reserve reaches around four-and-a-half to five-percent which will mean rates of anywhere from six percent on up depending on one’s credit rating, the amount borrowed and whether the loan is backed by hard goods as in a mortgage or many business loans or if it is unbacked as are investment loans and purchases. There is a side problem which does not often figure into your or my daily life, and that is the Federal Debt which has about exceeded five-trillion dollars for the United States and a similar level in Europe which will only grow worse as more countries end up like Greece where the money flows in but nothing ever comes back including payments on these debts, they have become economic black holes where they take in but even small change cannot escape their borders. Once the IMF along with the Federal Reserve increase the interest rate it will effect an enormous upward jump in the short term interest rates which nations and the European Union all use to finance their debts and this will mean a jump in the interest payments, the minimum payment required for solvency.

 

The current rate is around one-half-of-one-percent for the best rates nations to probably two-percent for the riskiest of nations say Greece. Should the rate on these loans increase as expected for each level of increase in the prime rate, then the best rated nations could be looking at four or even five-percent and the worst risk nations clearing ten percent. Imagine if the United States, as a prime example, faced a change in their interest rates. Currently they receive a generously low rate, let us say one percent to make the numbers easy. Should the rate increase to one-and-one-fourth the United States would see their interest payment on their debt increase accordingly by one-quarter-of-one-percent, something easily handled. But what if the rate increased to around five-percent? Currently the United States uses approximately fifteen percent of their budget to pay their interest on the debt. Should that increase five-fold they would be spending seventy-five-percent of their budget on paying interest on their debt and thus they would reach the point of no return as this could not be sustained and still pay the salaries of the Federal Employees nor could they pay for the vast majority of programs and the military would be necessarily decimated to such an extent as to being unable to even be capable of protecting the mainland from attack. This would be the end of the United State and along with them the world economy as Europe would crash and the only way out for the world would be a total reset. The other definition for a total reset is a world war at whatever level of destruction required allowing for a complete restarting of all economies and the cancellations of all debts. The individual nations would then be dependent on their gold reserves to demand their seating as viable powers in this new world and this may be behind China, Russia, India and Brazil all buying gold and other precious metal and gems at a dizzying rate. Perhaps they know something the rest of us would be wise to note and understand.

 

Beyond the Cusp

 

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

 

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