Beyond the Cusp

December 20, 2013

The Looming Economic Time Bomb

There is a theory that has been the backbone of President Obama and his economic administers that the government can stimulate and generally manage the economy. This is known as Keynesian Stimulus Theory. The basis of Keynesian economics is that government stimulus will give greater returns in tax revenues over time as the local multiplier effect produces many times the velocity of money in a local economy where government funding has been injected thus raising the general economic activity which will presumably return more tax revenue to government covering the cost of the stimulus and everybody gains. This interventionist economic theory was proposed during the Great Depression by economist John Maynard Keynes and was implemented in various forms and schemes by the Roosevelt administration. Many history studies on economics credit the use of the theories and principles from John Maynard Keynes for the recovery that pulled the United States out of the Great Depression. These studies were mostly written by economists and others who supported and believed that the Keynesian theories were the greatest thing since the invention of coinage which ended the barter system and made modern economic theory possible. The one small fact overlooked by most of these erudite studies was the difference of the effects of the Great Depressions in the United States where Keynesian theories were widely applied and Europe where they were not. Where in the United States it is remembered as the Great Depression, in Europe it was a hard but brief recession simply due to the fact that their governments could not agree on what should be done so their governments ended up doing nothing and the economic cycle continued normally and the bust was followed by the inevitable boom.

 

The argument often put forward to those who prefer the Laissez-faire Economic Principles has been to point out that even though most of Europe did recover more readily from the 1930s recessions there was still Germany which remained in economic collapse which led to World War II. That argument is not entirely honest as the main problems faced by Germany were not due to their economic practices as they were endemic results from the punitive strangling economic restrictions place upon Germany in the Versailles Treaty at the end of World War I. Some others attempt to deride those who prefer that the economy be permitted to naturally go through the peaks and valleys alternately which is the natural procession of any economic system by claiming that this system is the property solely of the Republican Party and that it favors the rich and big business as that is what the Republicans are known to do. Whether the Republicans are any more favorable to big business and the wealthy than the Democrats is a debatable subject and totally outside this discussion other than the attempt to paint those who disagree with government stimulated economic growth as troglodytic Republicans attempting to return everybody to the days of the Robber Baron Industrialists. This is a powerful argument due to one quote from President Ronald Reagan where he said “Government is not a solution to our problem, government is the problem.” As long as we are quoting President Reagan I will throw in an additional just because I like this one myself and it does pertain to government’s treatment of the economy which goes, “Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”

 

Another economic truth which has been lost in all the noise was that there was no Federal Reserve and there were economic ups and downs all without government meddling and without a great depression. There must have been something added to the air and water in 1913 in the United States as this was the year that the Federal Reserve was established and also Amendment XVI and XVII which established the income tax and made the Senators directly elected taking away the representation of the individual States in the Federal Government. Maybe if we were to simply undo everything that American History Professors teach as the most enlightened year in all of America’s history, 1913, then many of the problems America faces today would begin to resolve themselves. Meanwhile, the administration of President Obama is completely committed to Keynesian Economic Theory and have been pumping stimulus monies into the economy mostly through having the Federal Reserve but Treasury Bonds using the cash made electronically which results in basically doing the same as if they simply printed up thousands of hundred dollar bills and made a present of them to the Federal Reserve assisting them to buy the Treasury Notes. This can be simply described by calling it what it is, America is buying its own debt as they are no longer able to find another nation willing to buy Treasury Notes to finance the growing national debt. What makes this even more suspect is that the Treasury Notes are kept in some of the leading banks and used to qualify for loans which is how they buy the next release of Treasury Notes by the Federal Reserve which is a private agency and not actually part of the government. The Federal Reserve is, at best, a quasi-government agency made up of the Presidents and major holders of interest in some of the largest banks in the United States and the World. That is the makeup of the group which has been assisting President Obama and advising the bailouts for the banks, insurance and mortgage industries, the very same industries from which the Federal Reserve gets their membership.

 

So, what is the result of this scheme where the Federal Reserve uses its holdings of Treasury Notes as the collateral for their next purchase of Treasury Notes each and every month? This operation has greatly increased the amount of dollars theoretically in circulation by a multiple of anywhere from estimates of quadruple to as high as ten-fold. As long as these cash reserves remain stagnant in the banks then all will be well. Should the economy pick up and the banks find they can make larger profits by loaning these reserves they will give the money what economists call velocity and thus pump all the reserve extra dollars into the economy. Such an influx of money into the economy can only have one result, inflation. When the economy realizes that instead of one to two trillion dollars in circulation it has six or twelve trillion dollars in circulation prices will begin to rise to balance with the larger cash flowing through the economy. Once inflation sets in there will be pressure to slow the inflation by raising the interest rates. Once the interests start to rise a problem which will need to be faced will rear up and threaten to destroy the entirety of the American economy. As it stands now the interest payment on the debt is relatively affordable with interest rates remaining steady for the past decade under four percent. For the last few years the interest rate on the national debt has remained comfortably below three percent. What will happen once the interest rates rise to six or eight percent and higher? The Congressional Budget Office projects that once interest rates go up, the combination of rising debt and rising interest rates is projected to cause net interest payments to balloon to nearly $800 billion, or 3.4 percent of GDP, by 2020 and approach one fourth to one third of the Federal budget. The real question becomes what if interest rates rise higher which they very likely might? There will come a point where the interest payments on servicing the debt will impinge on all other spending. What will happen should the interest rates cause the servicing payment on the debt squeeze government allocations to everything else and the government can no longer finance the nation’s military and it is forced to downsize to an extent similar to the Europeans. What if the government is forced to end payments on Social Security, Medicare, and Medicaid and threatens the national healthcare system in whatever form the Affordable Care Act resembles in another decade. The increased national debt and the resultant service payment on the interest supersedes any reasonably affordable portion of the budget. Where will the government find the necessary funds, raise taxes to over fifty percent and even approaching ninety percent on higher income levels? Will services be cut to the point that many programs no longer serve sufficiently the peoples they are intended to help and government has cut every program to the point of being next to useless? And what will be the effect on the economy, will it likely crush economic growth and even cause a downturn that will only make the situation more dire? The rising of interest rates is the time-bomb sitting waiting to ambush the American economy and people sometime in the near future. Perhaps somebody will present a vision that will rescue though what such a vision might be escapes this mere mortal. May the future find a kinder path than what some have predicted.

 

Beyond the Cusp

 

October 1, 2013

October Could Result as a Teaching Month for America

This month of October may end up teaching both Americans and anybody who wishes to pay attention some lessons in what has gone wrong with the United States Federal Government. These lessons could potentially be far more fright inducing than even the scariest Halloween costume and may have consequences far worse than even the nastiest prank gone bad. The lesson plan looks something like this; first lesson is the not so smooth rollout of Obama Care today, second lesson will be the shut-down of all nonessential government functions and the final lesson later this month could be what happens when the government runs completely out of borrowed monies as that is basically what the United States runs the government on, borrowed money. So, what are we to take from each of these examples of how not to run a business, organization or even a government?

 

The rollout of Obama Care today was supposed to feature health exchanges where people could go and find affordable, government approved health insurance. Anybody attempting to get in early and avoid the potential long lines as the deadline for having insurance approaches at the beginning of the new year, the very beginning as in right after the ball drops in Times Square or whichever time zone one resides, are going to probably be unhappy as at least thirty-five states have claimed they will not be ready on October 1 to issue health insurance through the exchange system and the majority claim it will be mid to late November before they will be even close to prepared to be up and limping. The Federal Government also is saying they will not quite be ready either and will also require at least six weeks before their system can be put to the test. The more that everybody looks at the difficulties the many separate appendages of the layers of government are having in getting even the basics out and ready in order to facilitate the start of Obama Care, perhaps the idea floated by some Republicans in Congress of simply postponing everything to do with Obama Care for one year, you know, just like all those businesses, unions, and others who were given one year waivers, so that then everybody will be on the same page instead of pushing a half-baked program on the people while allowing the President and Congress to play favorites with waivers and exemptions. I do believe that somewhere in the Amendments to the Constitution there is this cute little idea of equal protection and application of the law; I believe it is in the Fourteenth Amendment. One thing for sure, we can also gain a lesson on how the connected, powerful, wealthy and privileged classes are all dancing their way around being constrained by Obama Care while the ordinary Joe like most of us are being subjected to the whims of an untried system and we are going to be the guinea pigs who get to suffer the bumps, bruises and every trail first run error that this system that has been patched together on the fly just to even get it out over a month late. Does anybody really believe that the government will have even the slightest idea what they are doing by Christmas? I did not think so.

 

The second lesson could follow right on the heels of the rolling fiasco releasing Obama Care before its fully ready and functioning which would be a government shutdown due to the lack of funding set aside to run the Federal Government. The whole idea that we have been running the Federal Government of the United States on continuing spending bills is absolutely ludicrous and embarrassing in that our Federal representatives along with the President have been unable to agree on a budget to fund the Federal Government.  Producing an annual budget is presumably the first item of business the Congress is supposed to accomplish before they tackle anything else. The problem is partisan bickering or at least that has been the excuse for no budget being passed since the 2010 elections. The reason the excuse is not used for the two previous budgets not being agreed to and forcing continuing resolution be the manner for funding the government before then is simply because during the first two years of no budget both houses of Congress were so overwhelmingly Democrat that President Obama had a filibuster proof echo chamber for a Congress made up of members of his own party to an extent most Presidents could only dream about. Even with such a majority in both houses, the President and the Congress still were unable to produce a single budget. Truth is there has not been a budget passed since President Obama was sworn into office. There have been numerous theories and excuses pushed to try and explain why no budget has been passed during the Obama Presidency with the overt partisanship having become the number one excuse despite the inconvenient fact that even with an overwhelmingly Democrat Congress supporting President Obama there was no agreement and thus no budget. I have my own pet reason for there not being a budget and it even works for those first two years when there really was no other excuse not to have submitted and passed a formal budget. As long as there is no annual budget there can be no evaluations as to what the level of spending is related to other years by comparing the budgets. Furthermore, by using continuing resolution the spending for separate items can be passed separately and there can be numerous schedules such that there is no easily discerned way to total government expenditures for each year. One can also hide larger than normal increases in those areas and departments while using the lack of straightforwardness to deny increases or even make actual cuts to those areas where the President and his allies are inclined to do so. An example would be if you wished to increase a particular program’s spending allowance in the budget more than the usual say ten percent, all one need do is schedule it for receiving its funding monthly by continuing resolution and each month increase the spending by what at first appears to be the same ten percent but just as compound interest boosts your savings account and compound interest adds significantly to your mortgage total payment, it also greatly increases the budget well past the ten percent that you are claiming to use. Simply put, continuing resolutions as the method for approving government spending allows for far greater amounts of spending than would otherwise be budgeted if an annual budget were debated and enacted.

 

Should the Federal Government actually shutdown we would be treated to a lesson many of us should have already learned long ago, namely how little such a shutdown affects our daily lives. The Republicans are worried that they will get the blame for any government shutdown and they are therefore very likely to not find their spines and fold to whatever the President and the Democrat leadership demand just to avoid a partial shutdown. Partial, that is the word that everybody needs to put the emphasis on, not shutdown. If the Republicans were at all savvy they could utilize such a shutdown as a public learning experience in much the same way as the sequester turned out. President Obama spent weeks upon weeks warning how the sequester cuts would bring life as we know it to a standstill. He predicted near collisions due to no air traffic controllers, potential disasters from lack of health and other inspectors and the one item he got almost correct, long waits at airports for the TSA inspections. The thing was the lines at the airports were not any longer than normal but by simply having news crews and their cameras at some of the busiest airports during the busiest part of the day and the supervisor being instructed to send a number of his people on break at that time, instant photo-op of the sequester making life impossible. A government shutdown which only places what are deemed unessential personnel on leave, with pay if things are as they have been in past shutdowns as we cannot have these poor unfortunates go without their paychecks just because they are not working as it is not their fault their job is considered unessential, thus all essential services continue unfettered and hopefully smoothly. The Social Security checks, Food Stamps vouchers cards, Welfare payments, Air Traffic Controllers, FBI, CIA, IRS, BATFE and other enforcement personnel and all military personnel will remain at their posts doing their jobs. There is an inconvenience one might face, that would be the Federal Parks being closed, but the State Parks would still be operating as usual for an alternative. While I am aware that some of the Federal Government workers who fall under the classification of nonessential actually provide valuable services or are performing research and other tasks which are quite necessary; still, it does get one to thinking as to whether or not all of the nonessential Federal Government employees are really needed or could we actually do without some percentage and not notice any real difference? When one reads those articles which appear every so often which list some of the inane, insane, and utterly absurd items the Federal Government has either purchased or is researching and you just know that whoever approved these items we would have been better served had that unessential employee been dismissed before that fateful decision on how to waste our tax dollars. In all honesty, could we possibly get by without hiring any more unessential Federal Government employees for say five years and then just cut those positions that went vacant through attrition and start from there?

 

The final lesson coming in October is actually the culmination of our budgetary woes. Once again we have hit the debt ceiling which means that there is simply no money, in theory, to continue government. This problem has grown to the point where it has become a dangerous threat to the future and well-being of the United States. Up until approximately four years ago when the Federal Government reached the debt ceiling the Congress, usually at the behest of the President, had raised the debt ceiling and then the United States borrowed cash by selling bonds to foreign governments, most often this meant China. China reached their tipping point where should they buy additional United States bonds they risked those purchases having a negative effect on their economy. As China was the buyer of last resort for any large issuance of United States bonds, this caused difficulty in marketing additional bond releases. This resulted in a new and riskier arrangement where the Federal Reserve purchased the bonds. This becomes a problem for a myriad of reasons, many are very complicated and difficult to explain. Thomas Sowell has written a number of articles which explain some of these difficulties and is able to explain them such that they are understandable, or at least more so than most textbooks’ explanations. The first problem is the makeup of the Federal Reserve. Despite the inference in their name, the Federal Reserve is not an arm of the government. The Federal Reserve is a board made up of leading international bankers or at least board members and significant people of holdings in the world’s major banks. When they buy the United States Treasury Bonds, they are using the money which they hold which was supplied by the United States Treasury. This results in basically the Treasury printing money that this cabal of the world’s leading bankers and money manipulators then utilize to buy the Treasury Bonds thus returning the money to the Treasury who now place that money into the supply for the banks and markets as well as financing the Federal Government. This is often simply referred to as monetizing one’s debt which has always led eventually to, at best, simple inflation, and at worst, hyper-inflation such as what destroyed the Weimar Republic and has ruined other national economies throughout history including Rome. The other side of the coin is that if the debt ceiling is not raised, then it is possible that the United States would default on our interest payment on the debt. Contrary to what many believe, the only payments that have been made on the United States national debt have been payments to cover only the interest, the principle continues to grow ever larger and has not been paid down since before World War II. Should the United States default on their interest payments on the national debt, the credit rating would instantly drop below anything imaginable and the United States would be facing demands of payment on the principle, the actual debt which we back with our natural resources. The ensuing chaos and destruction would inevitably lead to only one thing, a war where the United States stood alone against the rest of the world, or at least those nations to whom we owe gold, money, or whatever. There would be no full faith and credit of the United States and the dollar would become worthless on the international exchanges. The full ramifications of such an event are unthinkable which is why there is absolutely no possibility that the fight to raise the debt ceiling will go any further than just before the next debt payment comes due. October should be a good month for those journalists who have their degrees in economics. I know I for one will be following Thomas Sowell very closely.

 

Beyond the Cusp

 

July 24, 2013

What is the Real Story Behind Detroit?

If anything about Detroit is true, it was no surprise and everybody has watched this train wreck coming down the tracks for at least a decade or two if not longer. Detroit is not the first city to declare bankruptcy nor is it the first major city to go broke, but it may be the first major city to die from severe bankruptcy. One of the first cities of the modern era in the United States to dance around bankruptcy was Flint, Michigan which reinvented itself and made a comeback. There have been a number of the old steel mill cities which have found it necessary to reinvent themselves and come close to destitution. New York City is the largest of American cities to experience the threat of bankruptcy and received some assistance from the Federal Government in order to redirect the way the city was managed and adjusted the manner that the city government acted and its direction and New York City made a successful comeback. But Detroit is the first major city to not only go financially bankrupt but has also fallen to a level of collapse in the areas of population, functioning infrastructure, employment opportunities, functional education system, or anything which is considered as a basic service or property any modern city would possess. Detroit has few remaining operative emergency vehicles, the police take close to an hour to respond to an emergency situation, the majority of the citizenry are functionally illiterate, and it has an unfunded mandate in the form of retirement funds owed that would bankrupt most cities which have functioning systems. Detroit has slipped beyond the cusp and may very well never make a comeback. We may only have one choice concerning Detroit, plow it under and see if it can be transformed into a productive piece of farmland.

 

But enough about Detroit as there is a larger problem which has been made all the more evident by the calamity that has struck Detroit, and that is the financial disaster that is the National Government which is very close to bankrupt. We have been observing the Federal Government slowly circling the whirlpool of unfunded liabilities which is being enlarged through deficit spending that has risen beyond anything even imaginable just a few decades ago. We have heard for as long as can be remembered about how Social Security is almost broke, how Medicare costs are spiraling beyond the Government’s ability to fund, Government employee retirement benefit payments are ballooning out of control, and among other items, just the interest payment on the national debt is taking an ever larger chunk percentage wise from the national budget despite the inflated amount being spent. There is one thing which is allowing the United States to avoid the imminent financial doom that the payments of only the interest of the debt should have and that is the low interest rates. This is much of the reasoning at the Federal Reserve which is twisting and contorting monetary policy to near the breaking point in order to keep the interest rates at a level which allows payment of the interest on the debt to remain manageable. The government has even found it necessary to manipulate the definition of inflation in such a way as to hide the real rate of inflation which would require interest rates to be increased. What other reason can one give for omitting the cost of fuel, electricity, and food from the cost of living for the determination of the inflation rate? This has been done in order to cherry pick what items are used to measure inflation rates so as to minimize the official measure of inflation rates thus allowing the Federal Reserve to claim there is no measurable inflation that requires an increase in the interest rates allowing the Federal Government to make the payments on the debt.

 

Eventually the interest rates will have to be adjusted higher when the Federal Reserve finally reaches the point where they can no longer keep the lie that inflation rate is minimal if not negligible and they have to take steps to prevent inflation from hitting runaway rates. The Federal Reserve will find that necessity will require a fairly healthy rise in interest rates simply because the inflation resulting from the printing of money required under the Quantitative Easing, of which there have been three separate injections of which the third is one that has been spread over many months for as long as it was deemed necessary and is still being implemented each month. When the interest rates take off they will toll the knell of reckoning because should the interest double, the payments on the debt would double, if they triple the debt payments will triple, and should they grow by more the debt payments will rise accordingly. There have been pessimistic estimates that because of the games being implemented pretending to be a financial strategy that when the interest rates increase and the piper must be paid, the interest rates could rise by a multiple of five or more, that would mean at least a fivefold increase in the interest rates taking them from one and a half percent to seven and a half percent. There is no possible way the Federal Government will be able to operate should the interest rates have any sizeable increase and such an increase appears each day to be more and more inevitable. One has to worry of what happens when the United States follows the model of Detroit and hangs the sign on the doors reading, “Gone Out of Business.”

 

Beyond the Cusp

 

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