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


March 5, 2013

Solution for United States, Back to Basics, the Constitution

The United States has managed since the turn of the century to take a budgetary surplus and strong economy and turn the economy on its head while having two Presidents, one from each the Democrats and the Republicans, spend the nation into depths of deficit spending and rising national debt rivaling that of the worst of Europe. With the spiraling increases in the debt of the United States reaching levels that have required a number of increases in the established debt ceiling simply to make interest payments and meet salaries and other budget necessities, the United States has found itself in the position of having to monetize its own debt as China and much of the rest of the world refuse to invest in what is seen as a lost cause driving headlong into financial oblivion. Despite predictions from leading economists, the public does not appear to hold much trepidation towards the financial catastrophe which is looming if something is not done to address the ever bulging deficit spending and the massive amounts being added to the national debt. The manufactured crisis at the end of last year labeled the Fiscal Cliff turned into more of a showcase for pontificating politicians and gasping talking heads all attempting to work up some concern with the public mostly to no avail. Then, even when the politicians simply kicked the can down the road for a few months, there was no eruption of shock or anger but simply a collective shrug of indifference. The neglect shown towards fiscal responsibility by the Washington elite has been a perfect representation of indifference and replete with total disregard to any consequences or warning which predicted the potential doom that would eventually result if spending was continued with such disregard.


The one semi-amusing side effect of the fiscal mismanagement has been the many disparate solutions, warnings, predictions, and long winded prognostications given from all fronts and political orientations which managed to cover almost every angle one could imagine. There have been those who claim that the government was executing the correct fiscal plan by applying increased government spending which would boost the economy resulting in collected taxes covering the increased spending and then some thus solving the problems. Others have called for austerity measures and universal spending cuts across the board as the only way to address the deficit problems. There have been calls to increase taxes, decrease taxes, end many tax deductions, go to a flat tax, and just about any other tax program ever invented, all of them come replete with graphs, spread sheets, and pages of justifications which show that each and every solution should produce the desired results. Perhaps the complete idiocy existing in the economic and fiscal debate where every possible solution can be shown to work despite many being polar opposites, it is no wonder that the public has simply disowned the problem and just walked away. How can anybody care when everything is claimed to be the solution and everything that is done simply makes the problem that much worse.


What is needed is a vision which has a historic record of proven fiscal success which cannot be dismissed. Oddly enough, the United States has what might be the best guide to fiscal and economic success and productivity. The really strange thing about this guide is that even though it has never been followed to the letter, simply making a concerted and honest effort to run the government by its dictates and restrictions have resulted in nearly one-hundred-fifty years of economic stability and low, often no, taxes. This guideline is what may eventually be proven to be the greatest single document providing a blueprint for responsible governance. The document, of course, is the Constitution of the United States. The Constitution was not followed to the letter from the very start but it did act as a restraint for over a century. The initial serious onslaught on the United States Constitution was in the 1860’s with the onset of the American Civil War.  President Lincoln suspended many provisions of the Constitution and placed unrivaled power in the hands of the President and neutralized the power of the other two branches. Unsurprisingly, by the end of the Civil War the United States had run up a healthy deficit. Despite that deficit, the return to Constitutionally guided and limited government following the Civil War the United States rebuilt and even spread her territories and soon had paid off all of the debt. The final daggers into the heart of the Constitution came in 1913 with the enactment of two Amendments, Amendment XVI and Amendment XVII. The Sixteenth Amendment established the personal Income Tax Amendment which was supposed to never rise above a paltry three percent nor be applied to anyone below the top ten percent of earners. All of these guarantees soon proved to be completely false. The Seventeenth Amendment provided for the direct election of Senators which removed the last vestiges of power which the Constitution had allocated solely for the States. This was the final nail which would lead directly to the over-centralization of power being stolen by the central Federal Government in Washington. Even with this death knell the Constitution still retained sufficient restraining power to beat back the onslaughts against its original intents that it would take another fifty years before the final assault destroyed any restraint on Federal spending. It was these ideals and ideas which began with Franklin Delano Roosevelt with Social Security and Unemployment Insurance that brought on the end. With Lyndon Baines Johnson and his Great Society, the Constitution gave out its last gasp and the financial difficulties that accompany unrestrained, undisciplined, expansive spending slowly led to the financial difficulties currently plaguing the United States. Perhaps a return to the ideals and ideas first instituted with the original Constitution could forge the necessary restraint that would lead the United States back to fiscal solvency and responsibility. By showing such restraint and self-discipline the Americans would be rewarded with a growing economy and a positive and promising outlook for the future. That is the power of the United States Constitution and the promise the writers left to their countrymen into the future.


Beyond the Cusp


October 14, 2012

What Happens when the Party Ends?

The signs are all around that the party is beginning to wind down and the end is near. The music has slowed and the volume has been lowered, the lights are slowly being brought back to full illumination and the satellite bars have closed. Soon everybody will wander out into the parking lot and realize that while they were partying like it was the middle of the summer, outside it is cold and a blizzard has hit town. The party I am talking about is this false realm we are living in where everything is sunshine and we act like there is no storm brewing just outside the door. We have our fancy hats on and celebrate the low inflation and interest rates at such a level that borrowing is virtually free; and borrow we have. We have borrowed in about every manner that is conceivable to record levels. The National Debt in the United States is at levels never even imagined possible a mere decade ago and much of Europe has reached similar levels though they have been building their debt steadily while the United States seems to have caught up and passed them almost overnight. Personal debt in the Western World is at unprecedented levels and student loan debt is being touted as very likely the next overly inflated bubble to burst taking many banks down with it. This is the real reason that the government has taken over the student loan industry, they can force the payment for this unfunded, collateral free indebtedness onto the American taxpayer when the defaults hit the fan. Add to all of this that many cities, counties and states are at debt levels that they are unable to contain and even keep up on paying the interest. All of this debt is being managed solely because the interest rates have been held down by false pretenses mostly because if it were allowed to rise even slightly the entire house of credit cards would come a tumbling down around our ears. The music slows and sounds even more distant and the lights are coming back on.

Currently the interest rate on much of the national debt is below 2%, much is actually at 1%. We can afford our debt at this level, but even at this bargain rate it takes all we can just to keep up with the interest payments. Eventually there is going to be a real economic recovery. A good thing, right? Well, not entirely. When the recovery takes hold in earnest and that causes prices to start to climb, that is when the Federal Reserve, actually a group of unnamed bankers who have little or nothing to do with the government except they can sway elections with their policies, will have to address the inflationary tendencies. The normal way to nip inflation in the bud is to raise interest rates at the first signs which will act to keep the lid on and force a slower rate of increases in prices as credit becomes more expensive. The reason the inflation is guaranteed to come as soon as a real and true recovery starts in earnest is because of the massive increase to the money supply. Right now, much of that cash is simply sitting in banks and other repositories and not being used to finance or buy goods. When the recovery gets into gear it will cause businesses and individuals to begin to invest more in production and other mediums. This will require more active cash flow which will force all of these funds from lying around and not flowing through the economic picture to begin to be moved into the economic picture giving it what is called velocity. This extra influx of capital will cause an excess of money in the system which will necessitate an increase in prices. Hopefully, it will also be reflected in salaries or we will have additional problems. As soon as the velocity hits a certain point it will cause undesirable levels of inflation to set in which will necessitate higher interest rates. This is done as a method of removing some of the now activated excess cash which we had printed in order to pay for some of the government programs which were intended to stimulate the economy but had thus far failed to produce, actually we do not print new money as much as simply invent it electronically which makes it way too easy to do and thus so tempting. There are only three methods of balancing the economic equations once you have infused trillions upon trillions of dollars into the mix, either you increase interest rates, increase taxes, or inflate prices or some combination of these three. Since the Federal Reserve can control the interest rate and they wish to prevent runaway inflation at virtually any cost, they will necessarily raise interest rates. Government, on the other hand, cannot afford to have the interest rates go up too steeply as that would make the interest payments on the debt unmanageable which would cause default, ask Greece how that works. This gives government, especially the Federal Government, a strong shove to increase taxes across the boards so that the Federal Reserve does not have to raise the interest rates as much as the government is also removing excess monies that had been infused to carry through bad times but are now a threat in good times. The one problem is that both increased taxes and higher interest rates take time to pull the excess money out of the system. So, what that means is that initially, until the increased taxes and interest rates balance the economic equations, everything in this world had its own equations, prices will rise as a reaction to the additional cash flowing in the system.

Oddly enough, the inflation will prove to be the least of the problems initially. In the end the inflation will necessarily run rampant as there is one huge elephant in the living-room that everybody is doing their best to ignore. What is going to happen when the interest rates go from ranging between 1% and 2% to the 4% to 7% range? This will cause the interest payments on government debt to necessarily double. And what happens if government faces a shortfall and finds itself unable to pay the interest on the outstanding loans? Well, they will do exactly what they did to “invest” in stimulating the economy which got us all into this mess; they will wind up the old computers and electronically invent the needed monies to pay the increased debt interest payments. Once the government, in this case it would be the Federal Government as the States are forbidden by the constitution from making money out of the thin air, once again resorts to increasing the money supply it will cause the same conditions that forced the interest payments to rise in the first place. Soon we will face interest rates between 9% and 15% which will redouble the interest payments if not triple them. If you want to see where this all ends, simply find a book or research the Weimar Republic of Germany from 1919 to 1923 and then continue your research until you find references to Adolph Hitler and the Nazis and you will be at the end result of the Weimar Republic and its fiscal mismanagement. Pay particular attention to their wonderful cure-all for fiscal insolvency and you might see some similarities to the United States under Presidents George W. Bush and Barack Obama.

If you wish to see an adult approach to facing such a problem, read about the years under President Jimmy Carter to see how we faced a similar predicament in the late 1970s and then read about the first term of President Ronald Reagan. Today everybody tends to remember the last five years under President Reagan, which were particularly nice and comfortable economically. In order to get our economic scales balanced and everything running as it is hoped for by every person in a position responsible for the economic wellbeing of the United States or any other country or entity, President Reagan faced all resistance to taking our lumps as they came in order to allow the situation to work itself through to a balanced and proper end. President Reagan did the most difficult thing any leader can do in a situation of dire fiscal troubles, he set the course that would eventually even everything into balance and then did absolutely nothing and waited for it to reach equilibrium. Sometimes doing nothing is both the correct solution and also likely the most difficult solution. The problem with waiting out the storm is that the public is often not that lenient so as to allow you the moment’s peace to take such an approach. The worst thing that government can do when facing fiscal difficulties is to try something new every few weeks expecting immediate results as this makes for an uncertainty in the rules of the game which forces those who invest or run large or small companies to shore up, store whatever cash they can, and wait until the madness ends and somebody sets the rules and promises not to further adjust them. Those constant and repeated changes in policy as a reaction to the public’s demands to do something, anything, are what I call Panic Policies.

Well, looks like the party is almost at an end and it is almost time to go out into that blizzard. Let us hope that whomever takes control as the next President has enough sense or his advisors have the sense to set a path forward, announce it and promise all will be well if we all have faith and stick to the plan, and really mean that and then just keep reassuring those who may panic and wait for balance to return which is almost always followed by a period of wealth and optimism. In the meantime, button up as it is going to get nasty for quite a while.

Beyond the Cusp

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