Beyond the Cusp

December 15, 2017

Will America Explode First?

 

There has been any number of editorials commenting about the presumed unrest in the United States. They all, more often than not, have referred to the extreme anger and protest existing on social media. They assume that as social media was largely quiet during the Presidency of Barack Obama and has been very noisy since the election of Donald Trump as President that the United States public was more unified during the former and very distressed now. There have been those who point out that there is this old expression of the “silent majority” which was described as what awoke to elect President Reagan. This was presumed to explain that the “silent majority” actually is silent. There is some support to this as these are presumed to be the older people plus ones who are not as computer active as the ones now protesting so vehemently. After all, they are presumably silent, right? Still, how completely upside down and fouled does the world, and the United States in particular, have to be for Donald Trump to be elected to the Presidency? That has been one of the overriding questions which are somewhat more difficult to answer. Had the election gone the other direction, there would be people asking how far things must have gone awry and has become to elect Hillary Clinton. The other question is how crazy have things become that an avowed socialist and former Communist to almost win the Democrat primary elections. Well, how far gone have things become in the United States?

 

The first point that we believe shows that the political class has completely lost all connection with reality has been the debt. Things were viewed as having reached the verge to going off the rails when George W. Bush was elected President and the debt stood near five-trillion dollars. Eight short years later the debt had all but doubled pushing towards ten-trillion dollars. Then enter President Barack Obama and another short eight years later and the debt had almost doubled again approaching twenty-trillion dollars. Things actually went off the rails far earlier when the politicians decided that they could only afford to pay the interest on the debt and never pay down the debt. When under President Willian Jefferson Clinton with a Republican Congress managed to make a budget that on paper did not add to the deficit, the nation celebrated as if President Andrew Jackson completely paid off the debt which was celebrated on January 8, 1835. By the end of 1935, the debt had returned to between thirty to thirty-five billion dollars. Apparently, the debt had been eradicated for just a few weeks and then Congress returned to business as usual. Debt appears to be the norm and not the exception. Eventually, one of two things are going to happen, either there will be a Constitutional Convention called by the States to amend the Constitution placing a balanced budget amendment onto the Constitution with a stipulation that some percentage, ten sounds like a good number, of each budget must be applied to the principle of any existing debt until all debt is vanquished and to be reapplied instantly should new debt accrue. Anything short will lead to the worst possible option, default.

 

Eventually the interest on the debt will exceed the ability to allow paying the full amount and still running the government and meeting promised payments and allotments. Now it is possible to continue to pay the interest and all government expenses as long as there is somewhere for the United States to borrow the necessary amounts of money. This became a problem when China closed its loan office to the United States. This led to some creative financing. The Federal Reserve sold the United States the needed moneys while creating this money through bonds which it gave to the main lending banks. This method works just fine providing that these funds remain dormant in the lending banks. The problem comes when the economy becomes more active and there comes a demand for more loans and these funds begin to be utilized by the loaning banks. This is called giving the money velocity in economics. This leads to inflation as the money supply begins to increase, and in this case possibly rapidly. With inflation comes the problem of removing this excess currency from the monetary supply. There are two means for completing this task, taxes and interest rates. There are, needless to point out, ramifications to each of these means. Increasing interest rates makes the interest on the debt, which is refreshed through short-term loans on the debt, rise and eventually this leads to default or spiraling inflation. So raising interest rates is out of the question and explains why interest rates have been artificially kept so low. The other means is taxes and increasing taxes ends the economic activity and leads to less tax moneys being collected. This would also eventually lead to default or spiraling inflation. Any means used will, eventually, lead to default on the debt which will cause a loss in faith of the dollar. What would that cause?

 

A crisis in the dollar would have any number of consequences. First, and likely the most devastating, the world would all but immediately demand that some different or group of different monetary notes be used as the new reserve currency. If a group of currencies were chosen, there would be some form of complicated and intricate formula to determine what the rest of the world’s currencies would be worth. The other choice would be some mythical means for establishing exchange rates and the various values of currencies. The reason for these confusions and problems is easy to explain, gold is no longer the basis of any currency. As the dollar was the reserve currency when President Nixon took the dollar off the gold standard, he took the world off the gold standard and now currencies floated against the arbitrary value of the dollar. This is also why gold prices fluctuate against the dollar, though they actually do not gain or lose value. If you were to figure what a Ferrari would have cost in gold in 1971 and then figured the price of a Ferrari cost in gold today, the difference would be relatively negligible. That is why these claims that investing in precious metals, especially gold, will make you more wealthy in the future. It will not, you may receive more dollars, Federal Reserve Notes, but they will have very much the same purchasing power as the money you utilized to purchase the gold in the first place.

 

Tulipmania

Tulipmania

 

Would defaulting on the debt ruin the United States? Interestingly enough, such a default would allow the United States to get out of debt faster. The dollar would immediately lose much of its value and imported goods would become prohibitively more expensive. On the other hand, it would make American made goods extremely affordable to the rest of the world, except China who falsely set their currency tied to the dollar, so China would also become a pauper nation. This would allow the United States to become a prime location for manufacturing, as American labor prices would be lower than almost everywhere else where the ability of the work force is comparable. Made in America would become desirable once again not only for quality but also for affordability. Still, a default would be ruinous for American business initially and numerous companies, especially those manufacturing overseas, would find they were no longer able to be profitable and they would be replaced by new companies which would spring up almost overnight. The largest problem would be foreign corporations and billionaires could buy large shares of American companies which would provide the United States with the funding to climb out of the hole they would find themselves to have fallen. The real losers would be those people holding stocks and other investments which were in dollars as overnight they would become almost worthless compared to their value just a few days, possibly hours earlier. Such a default might lead to another stock market crash but the following dark days could be avoided providing that Congress was locked in political gridlock and unable to act. Financial bubbles burst and that makes room for new smaller bubbles to begin. That is the normal cycle for investing, especially if you are investing in tulips in the Netherlands from 1619 to 1622 when the bottom fell out when one person decided that tulips were not worth their price and everyone realized that mania had led them astray. Those left holding tulips had lousy investments but very pretty flowers to show for the insanity. On that flowery lesson, we will let the American mania continue and see when their crash comes or if they might be saved by some sagely leadership, whenever that is proven to be found. In the meantime, stay tuned for more fun and watch the crazed social media; it can be amusing as long as nobody gets hurt.

 

Beyond the Cusp

 

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March 13, 2014

Putin Threat Harbinger of Greatest Danger to America

Putin made an unveiled, direct threat focused to cause President Obama to stop and consider if he really desires to enter a financial war with Russia when he threatened to end his nation’s practice of utilizing the Dollar as their reserve currency. In many ways such a threat is an empty one holding little credence as very few nations would accept the Russian Ruble in payment for resources or other transactions between nations and would still demand that Putin pay them in Dollars or at least Euros. But that is this very moment and the future does not promise that the dollar will continue to be the reserve currency of the world. That begs the question of what will become the world’s reserve currency and what will such a change do to the power and credibility of the United States?

There have been many in the recent few years who have sought to find an alternative to the American Dollar as the reserve currency of the world. Most of those proposing such oppose the United States though they are not adversaries on the brink of actual war. These nations all have a couple of items in common. They are all developing nations recently joining the advanced industrial world and are entering the information economic world and are struggling to be on a par with the United States. For the reason of gaining an advantage of equal footing with the United States, many of these nations have proposed a multi-currency reserve usage if not their currency replacing the Dollar. Now there are those who believe that virtual is better who talk of a world currency driven by demand to set its value such as the bitcoin. Where the bitcoin is a quaint idea and the whole concept of a virtual universal currency, such an idea has one very glaring drawback, no nation is going to go willingly to such a system that is outside the political control of governments, though such would provide a useful reality in the monetary markets of the world. Bitcoin is an unlikely choice as the originators are not quite as well connected as would be required for nations to trust such a system thus bitcoin would need to compromise with international political powers before they could be accepted as the new universal currency. Expect some more prominent and well know entities to enter the market of virtual money with Pay-Pal, which is mostly Dollar centric, having already taken steps in that direction.

Some of the major competitors to the Dollar are the European Euro; the main reason behind the European Union was to establish a trade center equal to the United States market and the establishing of a currency to rival the Dollar, the Chinese Yen and a few others. Which nations and currencies are vying for the title of the replacement currency for the Dollar is unimportant as long as the Dollar retains sufficient stability and recognized value making it the continued universally accepted currency. Even those places which have decided to accept currencies other than the Dollar still rely on the Dollar for the setting of the value of the other currencies thus even when using the Iranian, the Chinese Yen or the Euro; these currencies are accepted in trade depending on their value as measured against the Dollar. So, even if you are paying with some other currency, your bill is still being charged in Dollars and your payment is in an equivalent amount of another currency.

So, what will it take to change the reserve currency of the world? One large step would be to have OPEC begin to use a different currency for purchases of crude oil. There is a reason the Dollar is often referred to as the Petro-Dollar, because the true value of the dollar is the amount of oil that can be purchased with a set amount of Dollars. Thus far, the only places accepting alternate payment for crude largely have been Iran. The reasons are obvious; Iran is attempting to weaken the Dollar as part of their offensive against the United States and the Western nations. The real test would be if the GCC (Gulf Cooperation Council) and especially Saudi Arabia were to stop accepting Dollars and choose another currency or group of currencies in payment for their crude oil. Even should these nations simply start accepting alternate currencies it would weaken the value of the Dollar and would be the initial step to the devaluing of the Dollar to the point that it would be dropped as the reserve currency of the world. If you question what affect such an event would have on the United States if the Dollar of today ceased to be the reserve currency of trade tomorrow, you only need look to the nation that once before minted the dollar that was the reserve currency of the world, Spain. The Spanish dollar which was the originator of the phrase “pieces of eight” as it was a bar of gold that was able of being separated into eight equal pieces that was the currency of trade. Part of the reason behind this was the Spanish exacted a serious penalty for anybody caught shaving their dollar, death. We need to remember the death of the Roman currency system and possibly a large contributor to the death of their empire was the shaving of Roman monies by, at first, the most unscrupulous and eventually it becoming almost commonplace such that it became necessary to weigh each Roman coin before accepting its value.

The Dollar is currently being shaved by a new destructive force, inflation. Because the United States has adopted the practice of simply printing monies in order to finance the government stimulation of the economy, a practice with a dodgy history and limited effect currently, there is going to come a time of rampant inflation in the United States which will result in a drastic devaluation of the Dollar. This devaluing of the Dollar will hurt far more peoples than simply the American public; it will hurt any nation holding large reserves of Dollars. This looming threat is also behind many nations’ nervousness with holding any excessively large amount of Dollars or American certificates or bonds which are Dollar based. This is what urged China to finally stop purchasing more American debt by buying bonds backed by Dollars. This, in turn, led to the Federal Reserve purchasing the Treasury Notes necessary to print additional Dollars, a practice which has artificially sustained the stock market prices and is leading them to new heights. This is an empty valuation as with time the Dollar will have to fall compared to the other currencies of the world which will make the higher priced stock market return to a value that truly represents its actual worth. The real fallout of this eventuality are the other nations whose currencies are directly tied to the Dollar and any nation with excessive holdings in Dollars as well as all those heavily invested in American companies’ stocks which are valued in Dollars. The first signs of the near universality of the effect of a devalued Dollar have been displayed each time the Federal Reserve had threatened to stop its constant Quantitative Easing which is a euphemism for making money, Dollars, out of thin air, and never a good idea. The nations whose currencies took direct hits resulting from such Federal Reserve threats are the nations most vulnerable due to their heavy investment in Dollars. This is what was behind the Chinese fire sale selling off a large portion of their Dollar reserves a few years back. That sell off came within six months of China refusing to purchase additional Treasury Notes, i.e. Dollars. Yes, the Dollar has become extremely vulnerable and yes, the Dollar may very well be on the verge of a collapse and no, we have no idea what the far ranging effects on the economies and currencies of the world when the American Dollar falls beyond the cusp into a great chasm of debt riddled valuelessness. We may not have to wait decades for an answer, but it would be best to never be in the position of realizing that everything we thought had value had become worth the cloth/paper it was printed on and not the value the pretty designs and numbers inferred. That will be a day of reckoning, a great and painful reckoning.

Beyond the Cusp

March 27, 2013

Is Our Money Safe?

The answer all depends on how much money you have, where you have it invested, and how aware you are of the various and diverse challenges which can devalue your money other than straight confiscation. The Cyprus bank debacle introduced the world to the unthinkable, the bald-faced theft of people’s and business’s monies from their bank accounts. The current story on the great Cypriot bank robbery is that the European Union (EU) and the International Monetary Fund (IMF) have agreed to take as much as half of the money in any account above the guaranteed insured deposit amount of one-hundred-thousand Euros. This larceny has redefined the presumed safety of our bank accounts if we have over the government guaranteed deposit insurance amount which is dependent upon the country that has jurisdiction over your bank. The next obvious question is what would happen if the government reached a deal with the IMF in order to receive a bailout and changed the amount they guarantee after they had frozen all accounts, as was done in Cyprus, and instead of guaranteeing $250,000.00, as the FDIC does in the United States, and lowered it to a mere $50,000.00 allowing the world banking powers of the IMF to take even a larger amount of money? The answer is there is nothing which would prevent such a move. So, this makes every penny you have in even a presumably guaranteed deposit of a bank or other financial institution could be adjusted overnight while also denying you access to your account in order to take your money out and keep it safe.

But there are far more devious ways that governments and world organizations can steal your money. What we have to remember is our money is all relative and only worth what the world market allows it to be worth. The usual worth of any particular monetary unit be it Dollars, Euros, Shekels, Rubles or Yen is how it measures with all of the other currencies. This can often be figured by comparing the worth of an ounce of gold in two currencies and figuring out the ratio will give you their relative worth. The current system recognized in much of the world is every currency is weighed against the Dollar as the United States currency is taking its turn as the standard reserve currency. In previous periods the standard reserve currency has been the English Pound Sterling, the Spanish Dollar, and in ancient times it was the coinage of the preeminent empire be it Rome, Greek, Persia, Babylonia, or Egypt. At some times in history salt was used as currency and in the earliest of times there was straight barter which made trade difficult which is what led to making forms of currencies. Gold has been a standard which has withstood the test of time and will likely be recognized along with silver and other precious and semi-precious metals for the foreseeable future. For much of history most countries held their currency value against a set amount of Gold which was presumed to be the amount of Gold and other precious metals in their vaults, in the United States the vault was presumed to be at Ft. Knox. Currently currencies are all relative in value and are no longer pegged to Gold or other forms of set and measurable value. This is what is implied by guaranteeing a currency like the Dollar is backed by the full faith and credit of the United States, whatever that actually means.

One manner in which our monies become devalued is inflation. We all have probably seen the effects of inflation most evident when doing the weekly food shopping. Over time the price of the grocery bill rises despite the fact that we are eating the same amount of food. The prices have gone up because the money we are paying with has less buying power. When inflation gets out of control it can become something called hyper-inflation where the amount of food or other items you can buy with a set amount of money changes weekly if not daily and in the most egregious cases, hourly. When the hyper-inflation was at its worst in Zimbabwe employers would pay their employees daily at lunch time for the whole day and allow them to shop for food and then return to work as if they waited until the end of the day to shop the prices would have gone even higher than they had been at lunch time. The rise of the Nazis before World War II was facilitated by hyper-inflation which befell the German economy after World War I during the Weimar Republic.

But there are policies which governments can willingly pursue which will cause inflationary practices and devalue the people’s monies eventually making saving money counter-productive which only serves to exacerbate the problems as a certain amount of savings are necessary for investment to be possible. The most obvious of these policies is when government introduces additional monies into distribution. This can be accomplished in numerous ways. Government can print more money which will devalue the currency in a direct amount equal to the percentage of the newly printed monies to the previous total amount in circulation. Government can run deficit spending actually borrowing through selling bonds to a foreign or private interest that purchases these bonds as an investment. This is another way that the government has invented more money into the money supply though it has less of an effect as the bonds accrue value over time which spreads the effect out over time. The final path to devaluing a currency is to have the government monetize their deficit spending which means that they simply spend money without taking any money from accounts and without actually selling assets or bonds to outside entities. This can be accomplished by the government or semi-governmental institution buying bonds in order to literally invent new money. This acts exactly the same way as printing more money and placing it in circulation. This is a dangerous risk to run as the effects can easily run out of control which can lead to a period of hyper-inflation and cause the currency to crash in value compared to the rest of the world currencies. This makes import of goods prohibitively expensive and weakens the country’s place in the world directly proportional to the devalued worth of their currency.

With the economic crisis befalling countries in Europe spreading slowly across most of the Euro Zone nations and the repeated crises addressed by the United States Congress recently are signs that both the Dollar and the Euro are in trouble and difficult decisions are going to have to be made going forward. There have been rumors and mention that similar actions to those utilized to bailout Cyprus may be taken in the future in order to stabilize other countries within the Euro Zone such as Spain, Italy, Greece and possibly France. Should this theft become accepted practice, the world can expect banks to become more frail and subject to failure as the people take their monies out of banking institutions and put them elsewhere to keep them safe possibly including their mattresses. Though it has not been mentioned as an alternative approach that may be used in the United States, it does not mean that there are not people in positions of power considering a similar theft of American’s bank accounts. This theft in Cyprus may have a ripple effect far wider and more severe than anybody may have calculated. One can only hope that the potential reaction to this bold sacrifice of trust in the financial system was not something the powers who executed this potential disaster were counting on in order to facilitate some even more draconian and sinister act in the near future. This has the stench of a strong poke at the people with the intent to threaten the sensitive trust upon which our banks and financial institutions use as their foundation. That begs the question of what is the goal that these actions are aiming to attain and what is the desired result. Danger abounds and Europe is under financial attack while the Middle East and North Africa are being politically targeted and governances completely transformed. Perhaps this is simply coincidence but what if it is intentional and there exists some devious change being formulated and thrush upon the peoples of the world?

Beyond the Cusp

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