Beyond the Cusp

December 24, 2015

United States Potentially About to Fall

 

The United States is precariously balancing between solvency and being revealed as bankrupt. The United States has mortgaged thousands of acres of virgin lands which hold resources above and below the ground. The resources include but are not limited to coal, uranium, lumber, wheat, grazing lands and potential oil deposits or precious metals etc. There are other questions which are relegated to conspiracy theorists and fear mongers but the fact that China has been purchasing gold and could be said to be hoarding gold for quite some time as the gold buying by China in a graph from 2012 displaying the situation in raw numbers as shown below.

 

 

China Gold Purchases of 2012

China Gold Purchases of 2012

 

 

The graph in and of itself is a solid display of a potentially damaging effect on the balance of gold holdings but in all honesty we need to make a confession; the number in metric tons is used as an alarmist shock figure which is a form of deception as taken as a percentage of the total holdings of all nations and one immediately realizes the minor difference eight-hundred-thirty-five metric tons is but three and a third percent of the over well over twenty-five-thousand metric tons owned by all the nations of the world. Perhaps a listing of the top ten nations in gold holdings according to the International Monetary Fund’s records will make a difference and put everything into perspective. Below is a list of the top ten national gold holdings listed below.

 

1) United States   with gold holdings of   8,133.5 metric tons
2) Germany          with gold holdings of   3,391.3 metric tons
3) Italy               with gold holdings of   2,451.8 metric tons
4) France            with gold holdings of   2,435.4metric tons
5) China              with gold holdings of   1,054.1 metric tons
6) Switzerland      with gold holdings of   1,040.1 metric tons
7) Russia             with gold holdings of     937.8 metric tons
8) Japan              with gold holdings of     765.2 metric tons
9) Netherlands      with gold holdings of     937.8 metric tons
10) India             with gold holdings of     557.7 metric tons

 

As can be note, 835 metric tons are a mere drop in the bucket providing these are the sole gold acquisitions made by China. There are claims that China has, as well as bringing in the amounts of gold in the graph through Hong Kong, has also established a surreptitious route through the gold markets in Shanghai and that they have acquired an additional 7,000 metric tons through this untraceable route over the past half a decade making China the largest gold reserve on the planet, providing these claims are valid and not just the ravings of conspiracy mongers living in some basement, likely their own basement, but basement all the same (we are located in a basement free apartment, so we can be trusted, well, that along with our track record of opinions over the past half a decade plus). The main problem with the seven thousand metric tons theory would be that such purchases would exceed the amount of gold available for purchase each year. The only way that China could have amassed that seven thousand metric tons would be if a state holding, or a number of state holdings, were to be being liquidated or transferred to China as payment of debts but being done under the radar through gold merchants in Shanghai, but even then one would expect the trade of such amounts would raise some suspicions and keeping them under wraps would be the best kept secret since the hiding of the Ark of the Covenant, itself constitutes a good amount of gold and things far more valuable than mere gold. That would beg the question as to who might be selling gold in such quantities.

 

This aside, China is on a definite path to acquire as much gold as they are able to buy and mine in efforts to improve its position and possibly having delusions that they could one day exceed the gold holdings of the United States, providing that China has not already cashed in their bank notes and other United States debt holdings, demanding payment in gold and routed this through trusted merchants in Shanghai who are actually Chinese government employees, high level Chinese government employees holding really cushy positions living the life in Shanghai. There was an increase in the interest rates charged by the lenders to top line banks by one-fourth-of-one-percent which some are claiming is a sign that the all but free money supplies are about to be tightened over the next year or so. While this very well may be in the plans, it is not what this tightening was about.

 

 

Gold Gold Gold Piled in Stacks Gold Gold

 

 

We can expect the Federal Reserve to hike the rates again this coming spring by as much as one-half-of-one-percent which will send panic waves through a fair number of investors and exactly the opposite through the other bulk of investors as there are going to be arguments that this is the end of expansion of the stock market and a slowing of business as lending will have become tighter and more expensive. Wrong again. These maneuvers are all being manipulated for political reasons and have absolutely nothing to do with the economy as that picture has not changed. After raising the interest rates the Federal Reserve will drop them announcing a reversal of policy claiming there was a misreading of economic indicators and it has become obvious that tightening the money supply is unwarranted and thus the return to the lower rate or an even lower rate. This announcement will be made about mid-September and will unleash a flurry of activity as stocks will soar, jobs will magically appear, most to deal with the holiday seasonal employment jump plus the coming available jobs held by students over their summer breaks. These replacement workers will demand a slightly higher rate of pay than did the summer employees working for near or at minimum wages. This will show a marked improvement in the jobs rate, lowering unemployment and even bringing some who had been dropped from the employment picture may return making the numbers all around look far better going into the fall campaign season. The improved picture will be claimed by President Obama as validation of his handling of the economy and his approach to growing jobs through government investment in the economy, also known as corporate welfare and crony capitalism. This will also make the Democratic candidates claims that theirs is the correct path to a bright future appear less Pollyannish and the claims that the tightening of the belt on government spending is actually necessary. This has been the path the Federal Reserve has taken ever since President Clinton needed a jobs, finances, and general boost in order to gain reelection and is now being extended when there is no President seeking reelections, more specifically a Democrat President seeking reelection, and the hope is to provide the best possible scenario for the election of another Democrat and keeping the republican Party out of the White House.

 

I can hear the skeptics already writing their comments screaming for us to quit with all of the conspiracy craziness and return to planet Earth. The problem is this has gone from crazed theory to actual reality as the economic health of the Western world depends on there never coming to fruition the exploding of the debt bubble. What the Western world, especially Europe and almost as deeply indebted United States, are facing is a huge and unpayable debt which has gotten to the point that there are no longer any credible sources of funding. This has caused these governments to do something which is euphemistically called Quantitative Easing which is where a loop is invented where one party loans funds they do not presently have to the government and then buy that money from the government in order to repay their debt but instead the monies are instead invested by distributing it to banks to lean and thus stimulate the economy. This might have functioned far more efficiently if the Federal Reserve had not already lowered the interest rates to where any corporate venture could be financed almost fee free thus there was no demand for these funds and the banks saw no upside to lending the funds anyways. Thus these funds which have come from a series of Quantitative Easings have basically sat in the larger banks vaults collecting electronic dust as these funds exist solely in the computers which run the economic system. This is known as stagnation of funds and means that the cash has no velocity, simply put the cash is not flowing through the system and thus has had absolutely no effect on the system which is good for keeping inflation low as had these funds been forced into the system then prices would have risen commensurate to the amount of increase is available monies for purchasing of goods and services.

 

So, when will these funds enter the system and what will be their effects? Well, they will come into play when the interest rates rise sufficiently that it becomes advantageous to the banks holding these funds to let them flow into the lending market. The situation will come about most likely when the prime interest rate set by the Federal Reserve reaches around four-and-a-half to five-percent which will mean rates of anywhere from six percent on up depending on one’s credit rating, the amount borrowed and whether the loan is backed by hard goods as in a mortgage or many business loans or if it is unbacked as are investment loans and purchases. There is a side problem which does not often figure into your or my daily life, and that is the Federal Debt which has about exceeded five-trillion dollars for the United States and a similar level in Europe which will only grow worse as more countries end up like Greece where the money flows in but nothing ever comes back including payments on these debts, they have become economic black holes where they take in but even small change cannot escape their borders. Once the IMF along with the Federal Reserve increase the interest rate it will effect an enormous upward jump in the short term interest rates which nations and the European Union all use to finance their debts and this will mean a jump in the interest payments, the minimum payment required for solvency.

 

The current rate is around one-half-of-one-percent for the best rates nations to probably two-percent for the riskiest of nations say Greece. Should the rate on these loans increase as expected for each level of increase in the prime rate, then the best rated nations could be looking at four or even five-percent and the worst risk nations clearing ten percent. Imagine if the United States, as a prime example, faced a change in their interest rates. Currently they receive a generously low rate, let us say one percent to make the numbers easy. Should the rate increase to one-and-one-fourth the United States would see their interest payment on their debt increase accordingly by one-quarter-of-one-percent, something easily handled. But what if the rate increased to around five-percent? Currently the United States uses approximately fifteen percent of their budget to pay their interest on the debt. Should that increase five-fold they would be spending seventy-five-percent of their budget on paying interest on their debt and thus they would reach the point of no return as this could not be sustained and still pay the salaries of the Federal Employees nor could they pay for the vast majority of programs and the military would be necessarily decimated to such an extent as to being unable to even be capable of protecting the mainland from attack. This would be the end of the United State and along with them the world economy as Europe would crash and the only way out for the world would be a total reset. The other definition for a total reset is a world war at whatever level of destruction required allowing for a complete restarting of all economies and the cancellations of all debts. The individual nations would then be dependent on their gold reserves to demand their seating as viable powers in this new world and this may be behind China, Russia, India and Brazil all buying gold and other precious metal and gems at a dizzying rate. Perhaps they know something the rest of us would be wise to note and understand.

 

Beyond the Cusp

 

July 10, 2015

Our Economic World is Shakier Than We’ve Been Told

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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

 

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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