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

 

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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