Beyond the Cusp

November 15, 2012

The Secret Behind President Obama Plan to Tax Only the Rich

We are all familiar with one of President Obama’s signature proposals, “Tax the rich.” We have all heard how the rich needs to pay their fair share. And who can forget President Obama exclaiming that we all must play by the same rules or that Warren Buffet, the multi-billionaire, pays a lower tax rate than does his poor secretary who, by the way, collects a six figure income. But there is one item that has always intrigued me, namely that the dividing line between we the normal people and them, those wealthy slackers who need to pay more, is set at $250,000 a year in earnings. I have spent some time considering this arbitrary dividing line, or was it so arbitrary? Well, as it turns out, the $250,000 threshold may as well be an arbitrary line pulled out of the thin air when one finally realized the truth of why the tipping point is completely unimportant. The only difference the dividing line between those who are doing their fair share and the evil rich in the end will only determine how soon everybody, even those on Government support such as unemployment, welfare, or disability, will cross into the classification as rich and having to pay their fair share. The real story will become more evident with time but has, for now, been dampened and kept in check as if what is coming in our future had gotten out of control before the election, President Obama would never have had even the slightest chance of reelection. So, what is this coming catastrophe?

Most of us have heard of Quantitative Easing, especially if you have been reading BTC for some time. Quantitative Easing is usually abbreviated as QE followed by a number to denote which version one is referring. In QE1 the Federal Reserve took control of $175 billion of agency debt securities, $1.25 trillion of mortgage-backed securities and additionally some Treasury Notes. This was done in order to relieve the banking system of questionable and bad securities allowing them to climb out from under the dead weight of these mostly defaulted debts. As bad as QE1 may have appeared, at least there existed some equity in these debts which, where it did not totally offset the entirety of the debts owed, did provide some cushion guarding against a total loss which could have made recovery impossible without severe consequences.

When QE1 proved insufficient stimulus and the economy began to run out of steam, the Federal Reserve felt the need to act again. Initially they remonetized the equities they held from QE1 and purchased Treasury Notes thus supplying the government with additional funds. This expanded its balance sheet by $600 billion, all of which was new monies invented electronically out of thin air as the securities utilized to make this purchase of dollars was basically worthless by this time. It was taking a loan on the assets which you had previously used for a loan elsewhere, which is illegal for you or me to do. Thus far all of these additional dollars have been left sitting in the regional banks and kept from being introduced into the money supply but instead sitting idle supposedly in reserve. Eventually, when the economy really begins a true recovery the pressure for releasing these monies into the local banks allowing it to be loaned and thus giving it the initial shove resulting in it now having velocity. We can picture QE1 and QE2 funds as a huge rounded bolder sitting above our country on a high plateau really close to the edge but still safely in place. When the monies from QE1, QE2, and also QE3 (we will get to this in a moment) are made available for loans and injected into our economy, then somebody is going to give that bolder a little shove. The shove will continue to be more vigorous as more and more of the new monies are injected into circulation. This will eventually push the bolder past the flat and onto the steep slope leading directly into our country and its economy. Once this starts it will gain a life of its own just like the bolder picks up speed rolling down the hill. Now, this would have a limited effect if the bolder was not too large compared to the size of our GDP and other economic indicators and measurements. This is where QE3 comes into play.

Now we are in the middle of QE3 which is an ongoing purchase of bonds, presumably mortgage bonds, at the rate of $40 billion a month, every month until there is a sizeable downturn in the unemployment numbers, the real unemployment numbers and not the relative numbers used to make us believe things are not as dire as they actually are. The second half of this one two punch is that at the same time there is an intent to force the interest rates for banks to remain at or just above zero through 2015. At some point these actions will trigger a burst in the economy which will appear to catch fire and simply take off. This will initially appear to be the end of the doldrums that the economy has been suffering through for the last five years, but this elation will be short lived. This burst of activity will begin the charging of all these additional dollars that were invented electronically (the way we print money in this computer age) out of thin air giving them velocity which will then begin doing what any healthy economy does, act as a multiplier on the available money supply as it gets deeper into the economy. So, what does all this mean?

As the economy recovers with the increased money supply grown through each stage of QE1, QE2, and especially QE3, these dollars become active and get loaned, increasing economic growth which makes those funds available for loaning again and again speeding the economy wildly due to the millions of injected dollars. Now, when there is a great amount of additional money and the economy grows leading to increased purchasing, what happens to the prices of items we will purchase? Their process will begin to increase and they will increase at a rate proportional to the available money supply which has been greatly expanded by the Federal Reserve and our Government through QE1, QE2, and QE3. As prices begin to run away there will be a demand by employees for greater pay and salaries will begin to increase. This will allow more purchasing leading to more inflation and the circle begins to spin faster and faster. This leads to hyper-inflation which is a situation where people begin to realize that saving money is counter-productive and spend every penny they earn. These additional purchasing speeds everything further and eventually the whole thing spins completely out of control, unless there has been some check put in place to draw off these excess dollars and calm the excited economy bringing it back under control. There are two main routes which can be utilized to remove the extra dollars, either raised interest rates or higher tax rates. With everybody’s salaries increasing due to inflation they all pass the minimum qualification for being amongst the rich and this is where making the rich pay their fair share comes in to play. If President Obama could have his way, he would likely raise the tax rates on the rich by setting new tax rate levels, likely every $250,000. So what we would have is a tax rate of 40% on salaries from $250,000 to 499,999; tax rate of 55% on salaries from 500,000 to 749,999; tax rate of 80% on salaries from 750,000 to 999,999; and a tax rate of 99% on all salaries over 1,000,000. Oddly enough, such a system might actually work to prevent the runaway hyper-inflation even though I have my doubts that this was part of President Obama’s actual plan. President Obama is using class warfare to separate Americans into different groups at each other’s throats as it is easier to conquer a divided people. That his tax warfare system might inadvertently have a positive result, it is not likely President Obama planned a check be put in place to counter the reckless financial decisions made by himself, his administration, and the Federal Reserve.

Beyond the Cusp

September 17, 2012

The Real Reason for the Latest Quantitative Easing, QE3

With the usual lack of explanation, Federal Reserve Chairman Ben Bernanke coldly announced to the Press that the Federal Reserve was going to enact another round of Quantitative Easing, QE3. What this has meant in the past is that the Federal Reserve buys up a set amount of Government Debt which places ready cash in the hands of the Federal Government. What makes this so wrong is that in order for the Federal Reserve to buy these debts is that they have the Federal Treasury print the money that is necessary to buy up the debt. As stated, in both of the previous Quantitative Easings, QE1 and QE2, the Federal Reserve set an upper limit to the amount of debt they were going to acquire, and needless to say, they did buy the maximum they had set. This time it is being done somewhat differently. This time the Federal Reserve has announced that it will be buying mortgages and has stated their willingness to buy whatever amount of these debts as it will take to reach the desired effects. Nobody has even ventured a guess on how much debt will be involved. There is no upper limit which makes this not only unprecedented, it makes this truly frightening. Just imagine what it might mean if over a short period of time an unprecedented amount of dollars are suddenly pumped into the money supply and near unlimited amounts of credit are made available at rates next to no interests. The potential for massive inflation once this newly created money gets into the economy and starts to join and pump up circulation and inflation will become our main concern. Since this new money will likely sit initially and not enter circulation quickly, the negative effects will not be felt in the immediate future. What these Quantitative Easings are setting up is massive inflation kicking in as soon as the economy returns to a fair degree of health. This inflation will in turn wipe out much of the early gains made by the economy for much of the middle class as prices will begin to jump while salaries will lag behind.

But why at this time have the Federal Reserve Board decided to implement another round of Quantitative Easing without placing a ceiling on the amount? The answer is relatively obvious, it will give a momentary surge to the economy which will likely last two or three months which puts the consequences to this bald faced move to improve the image of the President concerning the economy as the easy credit will spark purchases. This is a sacrifice of the future of the American economy for a short turn sprint to just past the election for the benefit of President Obama’s reelection bid. This along with the continued ridiculously low interest rates will give the economy a burst like adding nitrous to the family car’s intake and just like the nitrous will burn out the family car’s engine, this will also burn out the economy down the road. This is not a surprise as both parties have done many of the same maneuvers in order to better their chances for reelection. We can expect another favorite to be used even more in the stretch to November, the release of supplies of gasoline from the National Petroleum Reserve in order to keep fuel prices as low as possible, placing another claim evidencing the good stewardship by the President. Despite all of these maneuvers to give the appearance of a bright future with lower fuel prices, easy credit with low interest rates and a quick spurt in the economy right before the election, the payment will come due by the end of the next year. The only way to counter the injected money from having deleterious effects on the future economy is to implement programs or interest rates which result in removing the excess funds from the money supply. This can be done most efficiently by either raising interest rates or raising taxes in order to bleed off the revenues injected into the system by the Federal Reserve. Ben Bernanke most certainly is aware of this reality but is playing politics with our futures. His actions are as contemptible as they are disingenuous. The one item that must be restated is that this Quantitative Easing has been made open ended with no upper limit and is being used to purchase the most toxic debt possible, Freddie and Fannie mortgages which were bought from banks and lending institutions who were allowed to unload bad debt they were forced to loan by Government regulations and threats of legal actions if they had refused to make bad risk mortgage loans. This ends up placing this most toxic of debt squarely on the shoulders of the American taxpayer who will be left to cover these defaults in the end.

Beyond the Cusp

June 22, 2012

Consequences for United States Bailing Out European Union Countries

The United States has already quietly taken the initial steps to assist in easing the financial problems being experienced by some countries within the European Union. This was done by, believe it or not, exchanging dollars for equal value of Euros thus tying the two currencies to the other to some extent. Who knew that the dollar was considered to be more stable a currency than any other in this crazy world. So, in order to repair this strength in the dollar, or for whatever reason the politicians and experts are claiming, we have exchanged straight up, charging no exchange fees, of dollars for Euros in order to share the pain. As for which side is sharing whose pain might still be up for debate but it is being sold as assisting the European Union through some rough periods with members’ economies ranging from imminent default to relatively healthy considering the current world economic situations. This will in effect ally the United States with Germany, possibly France and any other country with sufficient economic strength to support and pull the countries suffering from poor economic times, some claim caused by their overly socialist policies, without having any fall into default on their debts. The amount of funding this project will require is currently uncertain, we simply know that it is going to take more and more going into the future. The outlook seems bleak to us but some have said they see the light at the end of the tunnel. Some claim that light is on the onrushing runaway train coming at us in the tunnel.

So, exactly what are the risks being taken by the United States through stepping up to join in the efforts to save the Euro and the European Union from economic disaster? The most obvious risk is that it is possible that pulling the likes of Greece, Spain, Ireland, and possibly Italy and even France through to better times may be a futile endeavor that will simply pull everybody else down with the others. This may end up being the straw that breaks the camel’s back, or the investment that tips the economy into a ruinous spiral. What makes this even more risky is that neither Germany nor the United States nor any of the others who might be called upon to finance those countries in jeopardy will simply not have sufficient treasure to succeed and thus will simply collapse along with those they were supposedly saving. This is made evident due to the facts that in order to make the necessary loans to those desperate countries, the healthy countries are taking out loans as they do not have the money on hand. The United States already has budgetary deficits such that there is insufficient cash to pay for their own bills, let alone make loans to cover other countries’ shortfalls. This leads to the big question, where can the United States turn in order to get loans in order to loan the needy European countries. Who, in their right mind, would make a loan to the United States so the United States can loan the same monies to a country to which the loaning country would not make that same loan? Simply, why would China loan Greece money via the United States when they refuse to loan money directly to Greece; or for that matter even to the United States as things stand.

The simple answer is that nobody is going to loan more to the United States simply so the United States is enabled to make the same loan to a European country in danger of default. Now we have the United States already obligating themselves to assist the European Union’s weaker nations over their current problems by extending them new loans. The United States does not have the money for the loan and nobody is offering to loan the United States the necessary funds. So, what do you think those financial wizards in Washington DC have hit upon as the solution? Believe it or not, they are suggesting that we have another round of printing money under the guise of Quantitative Easing. So, here comes QE3, and no, that is not a new Queen Elizabeth Cruise Ship. Actually, a new Queen Elizabeth Cruise Ship would be both cheaper and very likely a better investment.

So, to give a quick overview of what it means when they say Quantitative Easing as the method to ease our budgetary needs or, as in the current so-called emergency, producing funding to loan as a bailout for the European Union Euro using nations experiencing fiscal difficulties and in danger of default, the mechanisms are that the Federal Reserve instructs the Treasury Department to print money which the Federal Reserve buys and then loans out. The reality is that the money is created electronically and simply added into the currency in circulation totals. This is painless as long as the new money does not gain velocity, another way of saying actually being spent in the economy. The problem comes when all this newly created money begins to be used by the banks to make loans and such which then places the money into actual circulation. Currently, the banks are sitting on most of the invented money resulting from QE1 and QE2. The money in QE3 will not be sitting idle in any banks; it will be used to pay loan interest from one country to another country. These transactions will involve banks but also will be made available to the crediting country to use to pay their debts and fund programs or pay salaries. This will place the QE3 into circulation rather rapidly and beyond the control of our Federal Reserve bankers or the Treasury Department. The result of this will be the beginning of sharper inflation and rising prices as the dollar will be devalued by the percentage of the QE3 totals against the current currency in the economy. This will very likely spark the banks to resume loaning in a more invigorated manner thus placing the rest of the QE1 and QE2 monies into circulation which will result in even faster rising inflation. So, the result of bailing out Europe will be higher prices here at home. Sometimes it pains to be so helpful.

Beyond the Cusp

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