Beyond the Cusp

January 3, 2014

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

 

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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

 

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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