Is Our Money Safe?

The answer all depends on how much money you have, where you have it invested, and how aware you are of the various and diverse challenges which can devalue your money other than straight confiscation. The Cyprus bank debacle introduced the world to the unthinkable, the bald-faced theft of people’s and business’s monies from their bank accounts. The current story on the great Cypriot bank robbery is that the European Union (EU) and the International Monetary Fund (IMF) have agreed to take as much as half of the money in any account above the guaranteed insured deposit amount of one-hundred-thousand Euros. This larceny has redefined the presumed safety of our bank accounts if we have over the government guaranteed deposit insurance amount which is dependent upon the country that has jurisdiction over your bank. The next obvious question is what would happen if the government reached a deal with the IMF in order to receive a bailout and changed the amount they guarantee after they had frozen all accounts, as was done in Cyprus, and instead of guaranteeing $250,000.00, as the FDIC does in the United States, and lowered it to a mere $50,000.00 allowing the world banking powers of the IMF to take even a larger amount of money? The answer is there is nothing which would prevent such a move. So, this makes every penny you have in even a presumably guaranteed deposit of a bank or other financial institution could be adjusted overnight while also denying you access to your account in order to take your money out and keep it safe.

But there are far more devious ways that governments and world organizations can steal your money. What we have to remember is our money is all relative and only worth what the world market allows it to be worth. The usual worth of any particular monetary unit be it Dollars, Euros, Shekels, Rubles or Yen is how it measures with all of the other currencies. This can often be figured by comparing the worth of an ounce of gold in two currencies and figuring out the ratio will give you their relative worth. The current system recognized in much of the world is every currency is weighed against the Dollar as the United States currency is taking its turn as the standard reserve currency. In previous periods the standard reserve currency has been the English Pound Sterling, the Spanish Dollar, and in ancient times it was the coinage of the preeminent empire be it Rome, Greek, Persia, Babylonia, or Egypt. At some times in history salt was used as currency and in the earliest of times there was straight barter which made trade difficult which is what led to making forms of currencies. Gold has been a standard which has withstood the test of time and will likely be recognized along with silver and other precious and semi-precious metals for the foreseeable future. For much of history most countries held their currency value against a set amount of Gold which was presumed to be the amount of Gold and other precious metals in their vaults, in the United States the vault was presumed to be at Ft. Knox. Currently currencies are all relative in value and are no longer pegged to Gold or other forms of set and measurable value. This is what is implied by guaranteeing a currency like the Dollar is backed by the full faith and credit of the United States, whatever that actually means.

One manner in which our monies become devalued is inflation. We all have probably seen the effects of inflation most evident when doing the weekly food shopping. Over time the price of the grocery bill rises despite the fact that we are eating the same amount of food. The prices have gone up because the money we are paying with has less buying power. When inflation gets out of control it can become something called hyper-inflation where the amount of food or other items you can buy with a set amount of money changes weekly if not daily and in the most egregious cases, hourly. When the hyper-inflation was at its worst in Zimbabwe employers would pay their employees daily at lunch time for the whole day and allow them to shop for food and then return to work as if they waited until the end of the day to shop the prices would have gone even higher than they had been at lunch time. The rise of the Nazis before World War II was facilitated by hyper-inflation which befell the German economy after World War I during the Weimar Republic.

But there are policies which governments can willingly pursue which will cause inflationary practices and devalue the people’s monies eventually making saving money counter-productive which only serves to exacerbate the problems as a certain amount of savings are necessary for investment to be possible. The most obvious of these policies is when government introduces additional monies into distribution. This can be accomplished in numerous ways. Government can print more money which will devalue the currency in a direct amount equal to the percentage of the newly printed monies to the previous total amount in circulation. Government can run deficit spending actually borrowing through selling bonds to a foreign or private interest that purchases these bonds as an investment. This is another way that the government has invented more money into the money supply though it has less of an effect as the bonds accrue value over time which spreads the effect out over time. The final path to devaluing a currency is to have the government monetize their deficit spending which means that they simply spend money without taking any money from accounts and without actually selling assets or bonds to outside entities. This can be accomplished by the government or semi-governmental institution buying bonds in order to literally invent new money. This acts exactly the same way as printing more money and placing it in circulation. This is a dangerous risk to run as the effects can easily run out of control which can lead to a period of hyper-inflation and cause the currency to crash in value compared to the rest of the world currencies. This makes import of goods prohibitively expensive and weakens the country’s place in the world directly proportional to the devalued worth of their currency.

With the economic crisis befalling countries in Europe spreading slowly across most of the Euro Zone nations and the repeated crises addressed by the United States Congress recently are signs that both the Dollar and the Euro are in trouble and difficult decisions are going to have to be made going forward. There have been rumors and mention that similar actions to those utilized to bailout Cyprus may be taken in the future in order to stabilize other countries within the Euro Zone such as Spain, Italy, Greece and possibly France. Should this theft become accepted practice, the world can expect banks to become more frail and subject to failure as the people take their monies out of banking institutions and put them elsewhere to keep them safe possibly including their mattresses. Though it has not been mentioned as an alternative approach that may be used in the United States, it does not mean that there are not people in positions of power considering a similar theft of American’s bank accounts. This theft in Cyprus may have a ripple effect far wider and more severe than anybody may have calculated. One can only hope that the potential reaction to this bold sacrifice of trust in the financial system was not something the powers who executed this potential disaster were counting on in order to facilitate some even more draconian and sinister act in the near future. This has the stench of a strong poke at the people with the intent to threaten the sensitive trust upon which our banks and financial institutions use as their foundation. That begs the question of what is the goal that these actions are aiming to attain and what is the desired result. Danger abounds and Europe is under financial attack while the Middle East and North Africa are being politically targeted and governances completely transformed. Perhaps this is simply coincidence but what if it is intentional and there exists some devious change being formulated and thrush upon the peoples of the world?

Beyond the Cusp

When Will the United States Budget Crash?

The dirty little secret in the halls of Congress and the spacious rooms of the White House is that the United States budget has already gone over the theoretical fiscal cliff and all are simply waiting for the crash that is coming when it hits the rocks at the bottom. All the fuss over whether or not a budget is made and how many billions of dollars they can save by raising funding of departments by less than they theoretically might have raised them had the economy and everything else been robust is all noise without substance. The honest truth is the United States spending problem went critical during the first term of President George W. Bush and was simply piling on more debt in his second term. The unbelievable spending which occurred during President Barack Obama’s first term in the White House only served to speed the train towards the end of the tracks and the great dive into the canyon beyond. Even if President Obama had simply continued with the increases as the government suffered under President George W. Bush we would be facing the same problem. All the unparalleled spending which President Barack Obama has done has simply increased the train’s speed so that we will crash a little further out into the canyons and hit the bottom simply going somewhat faster. So, the important questions that need to be asked are first, when will we hit the end of the tracks; second, what will be some of the early signs that all is lost; third, what will be the sign that the end is nigh; and fourth, what can we do to avoid total ruin; and lastly, what will happen to the world when the collapse comes?

Let us take each question in turn. The first is when will we hit the end of the tracks? Technically speaking, we have already hit the end of solid ground and the tracks we are running on are suspended over the canyon with only air between the train and the long drop. As for what is keeping us suspended in the air, mostly forward momentum, heavy rust on the tracks, and we are in that position the coyote gets when he goes off the cliff chasing the roadrunner and he waves as he pauses suspended in midair just before the perilous drop to a puff of desert sand or splash of water when he hits the bottom. What is keeping us up is a false situation where interest rates are being unnaturally held low and money is being invented electronically just in time to avoid defaults. There is nothing right now between the United States and most of the nations of the European Union and the final crash of their collective economies. The difference between the United State and Greece is one of degree and not one of inevitable ends.

Second, what will be some of the early signs that all is lost? The very first signs will be those countries that have a salvageable economy and comparatively sound fiscal policies will begin to place distance between themselves and the countries that are doomed to fail. Their initial move will be to remove any assets they have in the countries they are concerned and hold doubts of their fiscal futures and then they will attempt to call in any debts and get whatever payments they are able before the economy of the failing countries completely collapse and their currency worthless. If any of these nations are partnered in the European Union and are using the Euro as their currency, they will begin to print their original currency notes and coins and keep them in preparation for exchanging their currency for the Euros upon its failure for their citizens and only their citizens. Another step the healthier countries are likely to take somewhat further in front of the coming problems is to cash in any currencies of countries with suspect fiscal situations for Gold or in payment for commodities and solid assets such as lumber, gold, silver, other building materials and anything that will retain its value. There might even be a selling off of any realestate holding of the presumed stricken nations. You would see actions like that of Germany recently where they demanded their gold held in two foreign countries be returned with all possible haste. The two countries from which Germany demanded their gold be returned were France and the United States. This move would make one conclude that Germany has suspicions about the continued value of the Euro and the American dollar.

Third, what will be the sign that the end is nigh? This sign is actually rather strange as most will interpret this as the end of the difficulties, but it will be a temporary reprieve unless handled with great finesse and care. The end will actually be signaled by an improvement in the economy with rising employment and the appearance that things are finally going to improve. When this begins the leadership and those who monitor and adjust the controls of the economy and such things as the money supply and interest rates will immediately need to address the fourth question, namely what can we do to avoid total ruin? When the economy begins to pick up steam there is going to have to be mechanisms utilized to draw back much of the monies which were used to finance government spending during the lean periods. All the monies which were almost magically invented by raising the debt ceiling or printing and selling bonds to the Federal Reserve who bought them with electronically produced monies which in a more difficult time would have actually needed to be printed but in the electronic age we simply invent it on the ledgers and then spend it. It actually works in exactly the same manner as actually printing the bills and placing them into circulation. Currently, the vast amount of electronically injected monies put into circulation through the Federal Reserve buying new government equities with this new money is largely sitting in financial institutions not being lent or utilized on any real manner. Money lacking what is called velocity does not cause inflation or have much of an effect on the economy. Eventually, when the economy starts to pick up steam there will be more of a demand to take out loans to meet the rising demand for goods and services. Once the money begins to be lent and spent, then it has velocity and as there is a much greater amount of money available than existed when we entered the downturn in the economy, it has a deleterious effect on prices. As per the laws of supply and demand, having an oversupply of money drives up prices. That in turn will drive up the demand for higher wages which are possible due to the inflated money supply. This could potentially start a rapid spiral which is referred to as hyper-inflation which is what drove the Weimar Republic into insolvency which led to the rise of the Nazis who promised to repair the monetary insolvency caused by the hyper-inflation. In order to control the inflation and keep it from driving the economy into a ravenous feeding beast with prices raising almost hourly the people responsible for fiscal policies need to draw as much of the invented monies back out of the economy as quickly as they can without upsetting the recovery. The two most utilized methods are either to increase taxes or to increase interest rates. This is where the problem comes in for any country which has significant debt; they cannot survive rising interest rates. This is the position the United States has reached along with numerous European Union members. If your interest payments are $500,000,000.⁰⁰ when the interest rate is a very low rate between 1% and 3%, you are fine and can manage your debt as long as the interest rates remain at that level. But when the economy picks up steam and the excess monies begin to have velocity, you likely will have to raise interest rates in order to prevent runaway inflation, especially the huge amount that has been produced by many Western countries. When that interest rate climbs to 5% to 8% your interest payment rapidly increases to upwards of over one-trillion dollars. Should the interest rate triple or worse, get many multiples higher, then the interest on the debt reaches the point where it becomes un-payable and your economy collapses. That is what is approaching if things are not handled very delicately and with great finesse. Does anybody have faith that the politicians in their state, county, city or country have the wherewithal to handle anything deftly and with finesse grounded in reason, logic, and self-control? Neither do I.

Lastly, what will happen to the world when the collapse comes? Well, for examples of what the end looks like, all we need do is look back at history for similar events. There was the depression of the 1930s which followed the free-running economic over-inflated 1920s which pushed at least Germany beyond solvency and into a case of hyper-inflation which was one of the main triggers for World War II. Shaving the currency led to the failure of the Roman coins which brought on an extended period of failed economy in much of Europe. There have been numerous civil wars triggered by the financial collapse of the currency and thus the economy of numerous countries and societies. The most usual result of financial collapses is either war or governmental collapse into chaos and anarchy resulting in violent lawlessness. Whatever comes after hyper-inflation, it will be very unpleasant and many will die from malnutrition or disease. The only consolation I can offer is that it is very possible if this next economic challenge can be managed and the other side is reached, it will be because of a transformation coming to much of the world’s societies which will relatively quickly even reach and liberate everybody on the planet. There is a distinct possibility that a new age is coming in the near future which will be a revolution that will make the industrial revolution look like a small tick upward in the development of mankind and our societies. All that will be required is sufficient bravery from sufficient numbers of communities and those who will initially control the mechanisms initially that will bring on this new age to allow it to attain its highest of possibilities and capabilities. There is great hope.

Beyond the Cusp

The Federal Reserve’s Great Plan in Everyday Terms

The Federal Reserve is touted as this nebulous body of super bankers who determine interest rates, monetary supplies, and virtually every other action one expects from some nameless, faceless, enigmatic cabal acting as our monetary overlords. Ask most economists to define the powers, manipulations, purview, and machinations of the Federal Reserve and their answer usually takes on terms that make you question what language they are speaking. The latest term of confusion is, “Quantitative Easing”. Many have defined this as a method for monetizing the country’s debt. But what does all this mean and how can we relate it to something more understandable by those of us, like me, who are not econo-verbage literate.

From what I have read, many economists describe Quantitative Easing as paying your credit card bills with a new credit card. Confused yet? I was, as this still left me not really understanding how really bad, evil even, Quantitative Easing was going to be for our economy. As long as you were able to pay the payments of that last credit card, then you would still find your way out of the depths of your debt. I did some more research into Quantitative Easing and think I might be able to give a more descriptive and possibly accurate analogy showing the destructive side of the Federal Reserve plan to “save” the economy.

Here goes. Initially, you buy a house that is near the limit your of ability to meet the mortgage payments. Eventually, other bills make the mortgage payment impossible to meet every month. To cover your shortfall, you take out one credit card after another and use them to pay your mortgage every few months. Initially, things seem stable and you believe this plan is working. Eventually, the credit card bills reach a point where even using them to pay all your mortgage payments, you still are unable to meet the credit card bills. It’s time to take a wild gamble to get out of this predicament, so you refinance your house lumping the balances of all your credit cards into the new mortgage. Now you have an even larger mortgage payment, so once again you use the recently paid off credit cards to pay your mortgage payment, now two out of every three months. Soon, the credit cards are maxed out and you are unable to meet the payments of the mortgage and the credit cards. Once again, you arrange new financing on your house, except this time the loan is for much more than the house is actually worth. This is a desperate bet that you can manage to pay off this new mortgage providing the surrounding economy grew sufficiently, driving up your income. Again, to cover you until the economy heats up, you use these same credit cards to make even more of your mortgage payments. This is where our country now sits as we have just completed what has been called QE2, Quantitative Easing for a second time.

Some economists have predicted another round, QE3, will be necessitated before the economy recovers. Eventually, this making money out of thin air, electronically, will catch up with us and put pressure on prices and/or interest rates to rise unbelievably rapidly, completely out of control. The one obvious outcome will be the use once again of the Misery Index that was invented during the Carter Administration malaise. A few have predicted possible hyperinflation in our near future. The best-known example of hyperinflation occurred during the disastrous and complete meltdown of the economy of Zimbabwe. At its worst, it was a picture of people needing the proverbial wheelbarrow of money to buy a loaf of bread. One truth that depicted exactly how monstrous hyperinflation is, many employers in Zimbabwe began paying their employees daily at noon so they could run out and buy their food for dinner a few hours earlier as prices changed by the hour, sometimes even minutes, Imagine watching the price of the carton of milk and loaf of bread in your hands get more expensive as you wait in line to reach the checkout. This is the reality that the most extreme opinions warn is coming.

In all honesty, I cannot pretend to know what the future holds. I do know that there are a multitude of frightening events of late and the economy does seem to have a volatile uncertainty. Will we see a collapse of our currency as happened in Iceland? For one possibility, research the events before and after October 8, 2008 in Iceland. The Iceland example proves that virtually unimaginable fluctuations can occur and collapse a country’s currency literally overnight. I hope that the American economy never does resemble either the hyperinflation of Zimbabwe or the collapse of the currency as in Iceland. Honestly, I do not trust the Government or the Federal Reserve and actually believe that should they simply not interfere, not hold up failing companies, meddle with the money supply, or any other risky gamble. Just do what is known to work, cut taxes, severely slash government spending, and leave business to private enterprise and Adam Smith’s invisible hand. I often get the feeling that the government and the Federal Reserve playing with the valves of our economy is a big game of blind man’s bluff with them blindfolded swatting at a piñata hoping to get lucky and spill goodies for all around.

Beyond the Cusp