Our Economic World is Shakier Than We’ve Been Told

 

The mainstream media, especially the European Media, are all the news all the time covering the Greek economic meltdown. Some of the more honest media has also included the crises that could be soon to topple as if dominoes all in a row of which Greece is but the first domino to be tripped to fall and they have shown how Spain and Portugal would be precariously hanging and soon toppled partly as a result of Greece’s defaulting though it might be likely they would have fallen eventually all on their own. These would trigger a crisis in Ireland and Italy as to which would be the fourth victim and which would follow as the fifth victim signaling the end of the most endangered Eurozone nations too close to default to be comforting. The real horrific effect of these five weaker economies finally tripping the default cable and snagging the economic webbing, which has held the European Union and the Euro together since 1999, doing irreparable damage to the delicate webbing, more fragile than the most slightly laced spider’s web, tearing enormous holes in its intricate weaves slashing at the most vital threads and upsetting the ever so precarious balance that underlies its supporting structures threatening to unbalance and collapse even the previously though stable economies of France, Poland and many of the other east European economies possibly pushing them right to the cliff-face and potentially tipping them beyond the cusp and into default thus lacerating the last remnants of the Eurozone and possibly taking with them Germany and the ECB (European Central Bank) causing unimaginable damage to the financial structure of Europe and beyond, the ripple effect causing a second deep recession well more serious and taking longer to tank-out and hit bottom and then begin a long sluggish scent clawing for every single Red Cent and Dollar and Euro after having taken its toll on Asia and beyond. But the Euro, Greece, and the rest of the European Union and the Eurozone is but one whirlpool looking to sink every last economic boat.

 

The Euro is what we have been led to believe is the only threat. Where previously economic ships only had to worry about rising and falling tides, now they are adrift and facing not just one whirlpool representing the Euro dying, but now there is a second even more massive whirlpool coming from deep within Asia. China has hit the road’s end and is attempting to push its enormous mountain of debt using a garden trowel while piling on fresh debt using Caterpillar 990K series front end loader shoveling an additional $19.3 billion in an effort to end their three week slide totaling $3.2 trillion downturn in the past three weeks alone. These losses were the result of a Chinese Stock Market where as many as two-thirds of the stocks were frozen in a further attempt to stem the torrents of dollars flowing from their stock market and their economy like the icy waters which flooded the lower decks of the Titanic as she slowly but inexorably fell beneath the waves, something somewhat prophetic for the Chinese markets and economy. There is actually a comparison between the situation in Greece and the downturn in China as one must remember that Greece is as socialist as a nation can be without being either fascist or Communist and Greece has retained their spirit of a democratic Parliamentary system despite it all but China has taken socialism that one final step to communism, the addition of mostly state owned corporations and central planning of the economic engines and manufacturing. Chinese leaders had been attempting to liberalize their economic sectors, though not all of them, selling a number of previously State run businesses and even permitted competition between companies in the same market hoping this would charge their economy further and it had been working but even free-market economic liberalization was unable to stave off this meltdown. The problem obviously is what will this mean for the liberalization of the Chinese economy as the leadership are still Communists who serve the Party and depend on the Party, may decide that much of their financial woes are the result of these new policies and curtail or even reverse some or all of the liberalized companies, markets and take a giant leap backwards to increased government control over every iota of the economy and the manufacturing and sales etc.

 

United States Treasury Secretary Jack Lew commented Wednesday on the current crisis in China stating at the Brookings Institution, that the economies of the United States and China are “still pretty much separated.” In further testimony Secretary Lew queried, “I think the concern … it is a real one … is what does it mean about long term growth in China?” Further in his speech he pointed to the main potential impacts which could emerge as a result to the Chinese Stock Market bleeding financially leaving the leadership seeing ‘Red’ in more ways than one. The leading question is to figure out as soon as possible what the reaction of the leaders of the Communist Party is and whether they may decide that the problem dictates such as appointing new leadership, freezing prices, injecting even more dollars into the markets through the banks and state owned businesses or closing the banks and Stock Market for a week or two cool down and reset to normalcy again; the choices and potential marrying of any two or three makes predictions near to impossible. The one thing which can be computed and predicted as long as the numbers being released and any steps taken are done so in plain view then the impact of the Stock Market freefall on the Chinese economy’s core condition and whether it appears that it will have much elasticity and dynamics when the end is finally reached and the rollercoaster slides on in to the station signaling the end of the ride, and what a ride it was with vigorous growth only to drop who knows how large a percentage of that growth in this correction, and what a correction. Secretary Lew’s closing thoughts are worthy of being repeated as he emphasized, “The question isn’t their commitment to the goal; the question is the pace at which they implemented it, and do they do it fast enough for it to be effective. I hope this is not something that slows down the pace of reform. If the reaction is to put the brakes on reforms, that will slow that process.”

 

With China making a long overdue correction which will be far more severe than it should or could have been if the leadership was not so intent on what numbers they released to the world and on making their predicted economic increase and meet all targets set within the government as to fail was unthinkable and would have been a terrible loss of face thus undermining faith in the economy. This has caused the Chinese to follow the example first used by President George W. Bush and turbocharged by President Barack Hussein Obama which was in the old school simply called a ‘stimulus package’ but is now known by a more enigmatic phrase of ‘Quantitative Easing,’ either of which hides the actual result and method being implemented as who would stand for the government announcing they were devaluing the money supply and taxing every single American by a minimum percentage directly proportional to the percentage increase the total added funding was doled out in stacks of hundred dollar bills, literally thousands of such stacks in the United States and unknown amounts though what is known is the Chinese leadership pumped close to twice the percentage of GDP as did the United States. Just as the United States took their hit starting back in late 2008 and continuing through 2011 and briefly relieved with another round of ‘Quantitative Easing,’ this was like the third pitcher of beer at a table trying to drink their way sober. The economic burst from that mid and late 2011 ‘Quantitative Easing’ gave the economy a burst of hope which appeared to continue due to lowered interest rates and the paring down and mostly neutering of the Dodd-Frank Wall Street Reform Act gave the economy the needed push for President Obama’s reelection as he could run his campaign claiming to have turned the economy around and that great times lie ahead. Well, as far as that goes I’ll point to Greece and China and point out that the United States has followed similar patterns of fueling the economy and especially the Stock Market with borrowed monies and when loans were unavailable the Federal Reserve would electronically buy Treasury Bonds with funds they imagined into existence as a few strokes on a Federal Reserve keyboard and one produces and completed sale with funny money in that the receipt for the Treasury Bonds was used to balance the books as it represented the electronically derived cash used. This is a very convenient way to purchase items this way when you are the government or a very clever fraudster as just try using the sales slip from one register, say men’s clothing from a department store as cash at the Jewelry Counter and see how far that takes you. The catch, and there is always a catch, to ‘Quantitative Easing’ is that eventually you either have to pay back the money that was invented which can only be done some combination of these three methods, first is retire actual money from circulation which can also be done electronically by retiring any electronic payment made on credit cards, second is to remove the funds through higher taxes taking the money directly from the supply, and lastly one could raise the interest rates and siphon off a percentage of each loan to pay the Piper so to speak. The problem is that each of these methods actually hurt the consumer the most; it is the public that pays the price for the economic and financial misdeeds and ill-advised policies.

 

There are but a few redeeming features out of all of this and one serious and potentially unavoidable problem, and it is a big one. So, we will leave the bad news for last and the good news which will cause doom’s day to come and come quickly first. The best of news is that the meltdown in China is most likely to be relatively unfelt even amongst their Asian markets as China does not purchase many goods from outside and the few major needs she has will continue even if slightly abated, things essential like coal and petroleum. Further, the only nation carrying a trade deficit of any note is the United States and even should quotas be placed on any goods currently purchased from China will very likely have ten other sources with some popping up due to China cutting production. The European crisis is more likely to hit the United States harder than anything else on the economic horizon. Should the Eurozone break apart due to the collapse of several of their nations having financial difficulties and teetering at the edge of financial Armageddon plus one, Greece, which has in all honesty gone beyond the cusp and is currently running with his feet well away from solid ground just hanging there for that brief Wiley Coyote moment before collapsing into the darkness below only to make a small puff of dust rising depicting his hitting bottom. Even should the entire Eurozone collapse it may actually serve to keep a lid on inflation and allow for low interests rates, a necessity for the United States. That brings us back to the one thing that at first everyone would be glad to see, a real recovery with rising workforce participation which in the United States is down to approximately 63%, one of the lowest figures since the mid-1970s. This would also bring jobs, especially higher end job market opening up once again which would allow for a ripple effect. As the overqualified people working at menial or minimum wage jobs would leave those as jobs in their field became available and they gain employment thus making room for these other positions to employ more of the nations’ work force and soon inflation will return, something there has been no worry about as even the few months where such measurements showed a possibility for inflation to develop only for indicators to slide back the next couple of months with it often seeming like one big step forward and all promise breaking out only to be followed by three or four months of small to moderate steps backwards and everything gained to be lost and often more. When inflation does finally return for real then there will be a really bad situation. Once inflation starts to threaten then the interest rates will rise as a counter to inflation. Rising inflation takes a bigger bite out of people’s pockets all but actual theft. Inflation also helps with making the national debt somewhat more manageable by deflating the value of the currency taking the currency to new lows and the lessening to of the value of the debt and the purchasing power of that coinage. This was where Greece and the other nations in the Eurozone faced; they no longer had control over their coinage, their monetary worth so they were unable to simply lessen the value in order to get a handle on their debts and also make their nation more attractive to investors and new businesses. Perhaps leaving the Eurozone for a set period of possibly not less than two years and no longer than a decade or quarter century at which point they can reapply at the short end or must face a permanent decision at the longer end. Granted, this will possibly make some nations more reckless but the consequence is the only alternative to having the Eurozone nations turn their entire control of monetary and fiscal planning over to Brussels, they already control the monetary which is part of the problem, and most nations will refuse to be relieved of the power of the purse even if they are no longer able to control the coinage of said purse. Perhaps even a rotating schedule where every nation has to spend a decade using their own coinage would be another compromise. Until the Eurozone finds the answer they will be facing little impossible challenges as is Greece right now and others down the line. Let’s just hope their mistakes don’t become global economic-mines blowing the world markets haywire.

 

Beyond the Cusp

 

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

 

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