Beyond the Cusp

March 9, 2014

The Coming Inflation and Its Hidden Damage

Inflation has effects beyond the obvious of making the item we buy, especially the necessities which we cannot live without, more expensive eating away at what little money we have after the various levels of government take their overtly large share. What has not been discussed much are some of the many hidden side effects caused by inflation and what are some of the driving causes of inflation. One of the surest causes of inflation comes when the money supply is increased no matter the reason. When the government prints or electronically invents money in order to finance government spending, especially deficit spending, then eventually this gets represented by rising prices. The United States since sometime during the second term of President George W. Bush began printing money electronically. This was used in order to fund the original “bailout” of two-thirds of the American auto industry, kudos to Ford who actually turned down any bailout monies as they had taken a precaution and downsized two years earlier in anticipation to trends they predicted that the other two major companies, General Motors and Chrysler, had ignored. Of course, once the Federal Government found that it could boost a lagging economy by injecting more and more monies an addiction set in and every problem became just an opportunity to throw good money after bad. When it also turned out that throwing more money into the economy also had the effect of pushing the stock market higher and higher, well, what’s not to love?

 

The problem is these increases in the value of the stock market were nothing more than inflationary effects caused by the increased money supply. What basically resulted in the increases was that each stock is actually a value of a percentage of the total money supply which is presumably driven by GDP and production. When the government simply pushes more money into the supply and there has been no increase in actual goods, services and other tangible assets, then it is reflected in higher prices, inflation, as the price of commodities and even stocks are what their worth is in the total of production times the total money supply. If produced goods have not increased and there are additional monies in circulation, then everything rises in price to restore its value in percent of the available money proportional to its actual percentage of the total value of goods. The goods and services have not changed in their actual value, but instead are now revalued to equal a larger money supply. Much, if not all, of the higher prices in stocks is not representative of increased worth but reflects cheaper money as the total money has been increased through Quantitative Easing, a fancy pair of words that actually mean printing money except they can now make money simply by pressing the appropriate keys on a computer keyboard and presto, increased money supply leading to higher stock market gains and eventually inflation which will eat up an equivalent percentage of everybody’s wealth as inflation will eventually even everything back to represent the ratio of total goods and services against the total amount of monies in circulation whether it is in higher stock prices or bundles of dollars at the Federal Reserve or individual banks and corporations who received bailouts.

 

So, what could be the most damaging effect of inflation? There is the obvious effect of increasing prices at the grocery store, the service station and everywhere else but that would theoretically work itself out as salaries would also rise to reflect the inflation, though somehow the salaries never quite keep pace with inflation, or at least that has been my experience. But the effects of inflation within any nation’s borders according to economic theory pretty much equal a zero sum game where everything rises proportionally. The real difficulties come when we look at trade between nations. As inflation forces prices up on goods and on the processes that manufacture the goods, the price on the international market rises and remains higher until the balance of currencies eventually works itself out in the exchange rates. The rebalancing of the currencies is always a lagging indicator and thus inflation has an initial effect of damaging trade of the nation under its effects. Inflation also will eventually cause all imported goods to increase in price, though this is a lagging indicator that represents the changing balance of currencies. So, when inflation first strikes it takes its toll on exports but eventually takes a permanent hit on imports.

 

As noted earlier, inflation is directly proportional to increased money supply that exceeds the increase in total goods and services within the national economy, it is a ratio. Thus, there is only one solution to prevent inflation from heating up, which is to remove the excess monies from the total supply. The reason the United States has not experienced excessive inflation from the large amounts of monies pushed into the total money supply starting with President George W. Bush and continued by President Obama is because the vast amount of the monies is being sat on and kept from circulating as the banks have been woe to put it in circulation through making loans. Another reason has been that a fair share of the cash has been invested in European banks and institutions in order to prop up numerous European economies which were in varied amounts of distress. The effect this has had is to allow banks to keep the interest rates low and inflation in check, but such a game cannot last forever. Eventually the economies will begin to recover and the banks will begin to make more loans as the interest rates increase. As the interest rates increase, so will the required payments on national debt increase even if all that is being paid is the interest payment and no principle is paid off, exactly what the United States has practiced for a very long time. As the interest rates increase thus pushing debt payments higher then taxes will also be increased in order to pay off the debt and still finance the government including any inflation. As rough and difficult as such may be, this distressed situation actually will have an eventual benefit, it will remove a portion of the excess monies in circulation. Eventually an equilibrium point will be attained and inflation will slow or even virtually stop and the interest rates will stabilize and possibly lower for a while. Unfortunately, do not expect the government to lower anybody’s taxes when this occurs as the government is very adept at finding ways to waste inordinate amounts of money thus never cutting its ability to take more from the people and the engines of production. Actually, the one eternal hidden cause of inflation is government spending and government largess simply makes for higher inflation as government spending seldom adds to the total amount of goods and services provided in the national total production. An interesting ride is in the makings as the economies of the world adjust to the policies of the past decade and there may not be very many winners.

 

Beyond the Cusp

 

January 3, 2013

They Surrendered to President Obama and Passed on Promises

Well, as everybody who has functioning senses probably knows by now, the Congress has given President Obama a good measure of everything he desired without extracting even a single sacrifice from the White House. Alright, so they pared the salary up from $200,000.00 for singles and $250,000.00 for couples and families all the way to $400,000.00 for singles and $450,000.00 for couples and families to be punished for their success with higher taxes. The good news about this is now it will be only those making closing in on half a billion dollars who will now move the vast percentage of their investments overseas where they will be safe from the increased penalties from increasing taxes instead of those making around a quarter of a billion dollars. Even so, with estate taxes being raised significantly and capital gains taxes also being raised measurably, these will force the investor class to place their monies in safe havens and pass them on to their descendants in measured ways which work around the estate taxes. By increasing the capital gains and estate taxes the government will likely cause the opposite of what they have been peddling to the public and the government will actually receive less in revenues from these taxes than had they left them at the lower rate where it was not cost effective to play the avoidance games. They extended unemployment insurance for an additional year without bothering to figure out how to pay for it leaving it to be simply added to the deficit. It will not be that much money so it will hardly be noticed. But all of this is the least of the disappointments.

The depression many fiscal conservatives are feeling today has to do with the lack of spending cuts, not exactly lack as complete dearth of spending cuts or even reductions of increases. The vote to pass this legislation, which has laughably been referred to as a compromise, had one defining item, the kicking of budget cuts down the road, even the presumed ones that were to take effect as part of the fiscal cliff, making for another crisis now scheduled for around March 1, 2013. This is more serious than it will be reported as it will lead to another round of panic, screaming and insanity which will allow President Obama and his Democrat allies in Congress along with a compliant media to again assail the Republicans with charges of obstructionism. In the end there will be yet another compromise which will give mere lip service to spending cuts while gaining concessions from the Republicans which will bring them that much closer to their goals of tax increases back to the Clinton administration levels for those earning $200,000.00 to $250,000.00 annual incomes. The likelihood that even come March the compromise will once again kick the spending cuts can down the road is far too high. One has to realize that we are expecting a Congress in which the Senate is still under the direction of Harry Reid who has refused to even allow a budget to reach committee, let alone come to the floor for a vote, in over three years. Does anyone honestly believe that anything will change during the second term of President Obama? The President and his facilitators in the Congress have realized that by not passing a budget and instead voting for continuing resolutions to keep the government running they are able to increase spending in whatever department they feel favorably towards simply by giving it an increase every few months when it comes up for its turn for a continuing resolution. By this method they can actually increase spending beyond inflation and have done so already with the largest increases coming in the first eighteen months of President Obama’s first term when the Democrats had unopposable majorities in both Houses of Congress. This fiscal cliff so-called compromise is simply another of those continuing resolutions under a different name and the next few will all be called fiscal cliff compromises but a continuing resolution by any other name is just as damning to those Republicans who allow such to pass in the House of Representatives. This little fact leads me to what I find the most distressing of the maneuverings and sleight of hand going on in the Halls of Power.

There exists one thing which those who are still voting for responsible governance and honestly wish to gain control over spending and actually address deficit spending and the national debt can still do that will make those willing to go along rather than take a principled stand have to pay a price. Every time when the House of Representatives reach the critical vote on one of these boondoggles, we need to insist that the news sources publish lists in order to tie every Representative to their vote so when they stand for reelection in the next elections they have to explain their vote. This may not have much of an effect on the final vote taken now, but it has the potential to give the voters in the home district know if their Representative was voting as they had hoped they would. This opens up the possibility for candidates to be proffered to their constituents who is willing to take the hard principled stand and better represent the desires of the people. Making each member of the House of Representatives answer to their name with a Yes or Nay vote which can be recorded and played during the next campaign may be the best medicine to wake up some of the wayward Representatives and bring them back to walking the line. And if such does not convince some to vote to uphold their election promises, then so be it and may we find a brave and solid candidate to replace them. That is the way to make progress, make every member vote on the record and note where each stands when the chips are down and their backs are against the wall.

Beyond the Cusp

December 5, 2012

The Real Truth of the Fiscal Cliff

Polls have shown the influence of the media on public opinion as their results of polling on the fiscal cliff have become public. These polls universally trend showing that should no compromise be reached and the sequestration be imposed along with the Bush Tax Cuts, as they are called, being withdrawn, all consequences of hitting the deadline without making other arrangements, the Republicans are blamed by twice as many people as blame the Democrats. Much of this is due to the fact that the media has presented the Republican position as being simply demanding to retain the lower tax rates for the rich while the Democrat position has been reported as preserving government benefits programs. But what are the realities and which side is refusing to make any compromise? You just might be surprised how different the truth is to the reporting you have been fed consistently since the election ended.

The Republicans are standing to keep the current tax rates in place for every income while either placing monetary upper limits or elimination of some of the tax deductions and credits, many of which favor the upper income individuals but would not affect small business owners. The Republicans are calling for cuts to be made in numerous government programs in order to reduce spending to meet the requirements in place defining the fiscal cliff. The Democrats are proposing to simply raise taxes on people making over $250,000.00 a year who they define as millionaires or the rich as well as allowing Capital Gains Taxes to return to the previous higher level which will have a serious effect on anybody who sells their house or cashes in on investments. Neither the Republican nor the Democrat plans will come anywhere near solving the current fiscal problems faced by the United States. The main reason that no plan put forth thus far comes anywhere near solving the economic woes of the United States is simply because everybody is in denial and refuses to mention the real and honest reason for the economic problems facing the United States. Sure, they give some reference to spending and the recession and other economic weaknesses, but what is the root, the original sin, so to speak, that nobody is brave enough to speak that made the current economic difficulties an unavoidable inevitability?

The spawning of the United States economic ills is also the reason that under the Obama Presidency there has yet to be a budget passed by Congress. Initially, neither house of the Congress attempted to pass anything resembling a budget beyond continuing resolutions and department by department or individual program financing for those particular programs and social policy departments preferred by the Obama Administration and the liberals in Congress. After the Republicans took control of the House of Representatives in the 2010 elections they were able to pass budgets which addressed the obvious and growing deficit problem, the more well-known ones being the Ryan Budgets, but all these hit a brick wall of refusal in the Democrat controlled Senate. The truth be told, Democrat Majority Leader, President Pro Tempore Harry Reid simply refused to even place any of the Ryan budgets onto the Senate Schedule and thus they died without even reaching a committee or being discussed or acknowledged in any form. All of these peculiar actions which totally ignored the Constitutional responsibility of the Congress to pass a budget every year by a specific date had a reason, and that was in order to camouflage a devious plan instituted by President Obama that had it been done through the normal budget procedure would have raised outrage and condemnation of such actions from the people. So, what was this plan, this conspiracy of sorts?

In the first year of President Obama’s Administration he had complete freedom to pass any legislation he so desired with a majority in the House of Representatives and a super majority that precluded the possibility of a Republican filibuster in the Senate. President Obama, being one who would never allow such an advantage to go to waste, met with Senate Majority Leader Harry Reid and Speaker of the House Nancy Pelosi and carved out a plan to increase certain social programs and allotting them all the monies which would be necessary to greatly increase their scope and numbers of people qualified for payments. Some of these programs and their bloated beneficiaries have been reported, the most often criticized being Food Stamps which has had the numbers of people receiving them explode since President Obama was first sworn into office. Food Stamps are not the only program to have a dramatic increase in people receiving payments or increases in their budgets. Welfare, Social Security Disability, Medicaid, among other programs have led the list of programs to be given new floods of monies from the Federal Government. Similar increases were awarded to selected favorites among the Federal Departments including Education, the Environmental Protection Agency, Health and Human Services, and other social service, social welfare, and social support agencies. What was done in the first year under President Obama was as much as a doubling or even more of many of these budgets as well as the huge increases made with the stimulus bills. These budgetary increases were not intended as one time increases but were used to reset these budgetary levels permanently so that in every following budgetary vote any increases were made using the new and substantively increased levels as the new baseline. This is why the budget has mushroomed so completely out of control. This was a planned crisis designed to push the United States off a fiscal precipice and into a deep chasm from which it would be near impossible to climb out from. That is why even if we gave President Obama his demand of increasing taxes on the rich and restoring the higher rate on Capital Gains and also gave the Republicans even their most draconian spending cuts that they have ever proposed during discussions on this fiscal crisis, it would still not be sufficient to climb out of the hole the United States finds itself in. This is the dirty little secret that neither party wishes to acknowledge.

Beyond the Cusp

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