Tag Archives: inflation

2 Cents Worth On Life Its Ownself

We will scan the headlines and the back pages today for your edification….

Per the Democrat Elijah Cummings the IRS scandal is all over because a conservative Republican was responsible for all the targeting and the case is solved and over.   He did back off that a bit, but only a bit.  But his original assertion and that of fellow Democrats that everything was contained to those low- level folks in Cincinnati runs into one pretty big contrary fact.  If it is really true that everything was done by those peons in Ohio and actually just the one guy–then riddle me this Batman–why did Lois Lerner feel the need to plead the Fifth during her Congressional testimony?   If that Democratic narrative is true then all the higher level people should have absolutely nothing to fear or hide.

The Nazis in Germany are rightfully vilified for their actions during the War.  One can reasonably wonder though why some of the same moral outrage isn’t directed at their allies during the War.   For example when Germany invaded Russia in June 1941, the Finns quickly joined into the fray as allies with the Germans and attacked toward Leningrad.  They understandably wanted payback for the unpr0voked attack of the Russians in the fall of 1939 into their country.  Indeed the Finnish forces helped complete the encirclement of that city which lasted for over two years and cause the death there of more civilians through starvation than all the losses of both Britain and the US during the entire War.  Likewise many aren’t even aware of the armies supplied to support the German crusade against the Soviets from Hungary, Bulgaria, Romania and the hundreds of thousands of Russians who all gladly joined the Germans to fight against the Commies.  It is always best to know some true history or you will be intellectually trapped into knowing only “headline” history or the headings in the Chapters of your World History book.   That will give you a distorted picture of your world today.

Noticed the report just this last week that in spite of that pathetic photo in Al Gore’s book and movie that there are more Polar  Bears today than in the last 40 years.

The peach crop was pretty meager this year. Don’t know why but the crop does vary from year to year even when the weather and other conditions remain pretty constant.  But the ones we did pick were juicy and delicious as ever.  Let my 10-year old grandsons help me pick them this year.

Always interesting to note that your Federal government can do things that people in the private world would go to jail for doing.  I mean the Fed is literally cornering the market on the US Treasuries buying up 75% of all the new issues for the last couple of years.  At the same time is it manipulating the interest rates for all banks and mortgage companies.  Can you imagine the outcry if JP Morgan was buying up 75% of all US Treasuries?   The Fed is also in clear violation of the Sherman Anti-Trust Act because it is definitely restricting trade in financial markets.

Recall last year when several Democrats floated the idea of simply printing a trillion dollar platinum coin and using it to pay down the national debt.  As predicted here earlier you will see at some point as the debt ceiling debate heats up again that the Fed should simply legally  forgive a trillion or two of the US Treasuries held by the Fed.  Again that would magically reduce the national debt.   We would all have the free lunch and Democrats love those free lunches.  I can’t find any statutory injunction that would prevent such an action.  Forgiveness of debt and a release by a lender is well-established law and could be done.   The Lender doesn’t have to offer any reason for the forgiveness.   Of course that could mean the Fed would have less money to pay over to the Treasury Department and Lord only knows what the domestic and international markets would think of such an action.  It wouldn’t be favorable.  It would be like pulling back the curtain on the Wizard of Oz.

The IRS scandal has caused so many pundits and commentators to make comparisons to the Nixon era and his alleged abuse of government.  He was a tough politician in the same mold as Roosevelt and LBJ, no different.   Some of the comments are so far from the truth it makes me cringe.  I didn’t care for Nixon on many issues such as he embrace of pretty big government but darn these people can’t get any of their facts correct.  Most of them weren’t even around during Watergate and darn sure haven’t done any real research of the facts.  They are simply spewing out the headline story from the era.  I have personally read the Watergate tapes.  Please don’t form any opinions of Watergate until you have read them yourself.  Also I watched every minute of those hearings into Watergate.  The tapes do NOT reveal Nixon ever proposing or demanding anything remotely criminal.  Read them for yourself.  The secret Oval Office taping  went all the way back to Roosevelt and LBJ.  Indeed the system used by Nixon was merely a continuation of that utilized by LBJ.  Yes, Nixon and his cohorts discussed lots of things mostly of a purely political nature to minimize the p0litical damage from the break in.   But unsavory conversation is not criminal.   Nixon was understandably ticked off that the break in had occurred; he was doing well and on his way to re-election and the whole thing was a terrible distraction from what he wanted to concentrate on doing.  This is not an apologia for Nixon but I abhor historical distortion.  You need to know facts to reach your own determination of culpability or moral turpitude.

Which modern American party adheres most closely to the following tenets of K. Marx? 1 Abolition of property in land….2. a heavy progressive or graduated income tax.  3. Abolition of all right of inheritance.   5. centralization of credit in the hands of the state.  6.  centralization of the means of communication and transport in the hands of the state.  http://www.olcranky.wordpress.com

 

 

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King Dollar, Gold and Globalization

Our economy faces vexing problems today regarding the value of the dollar compared to the other world currencies and its effect on our own economy.  We’ve been off the gold standard now for decades and the lack of a linchpin for the dollar has allowed the Federal Reserve to print money based on its “feel” for what is best for the US economy.  Gold is high today and you can find a variety of opinions about where it will go from here.  Some predict a crash in the price of gold and that only fools would own it now others take a contrary position.  Whatever the future for gold it is interesting to note that all the major central banks still own substantial gold reserves as does the US government and even many other major institutions.  The University of Texas Endowment Fund for example is reported to own almost a billion dollars worth of gold at present.

During the War Between the States the Yankees went  off the gold standard to finance the war.  That was the first use of the “greenbacks” to pay government debts and for private use.  Shortly after the war under pressure from European creditors the US returned to the gold standard to bolster the dollar value and its credit standing in the world.  In fact the period after the war until WWI saw tremendous growth in the US economy (with the South lagging far behind due to the effects of the war).  There were panics and downturns to be sure but the overall trend was moving up substantially.   By the 1890’s there was a great deal of anguish over the value of the dollar and the peg to gold.  This was the cause celebre for William Jennings Bryan and his cohort of mainly farmer followers. 

They wanted cheaper dollars so they could pay off their debts with those cheaper dollars to the bankers and industrialists back East.   We were still a mainly agrarian society in raw numbers of population but changing with each decade.  It was a battle between those groups.  Of course that over simplifies everything.  Those bankers and industrialists also produced all those jobs back East that the working men loved.  As grim as their existence was often in the factories and mines and on the railroads it was a vast improvement over the grinding poverty most had known only a generation before on the farm. 

Even then we had globalization.   Those farmers were concerned with the costs of their loans and the transportation costs to move their crops to market back East or even exported.  Europe was still mostly self-sufficient agriculturally but that was changing and our wheat and corn were much cheaper and more abundant than theirs.   It was more of  city versus rural dispute rather than the classic class warfare so often described.   The price of crops had been dropping and thus the revenues of the farmers and they were pushing hard for a move off the gold standard so more money would flow into the economy and they could use those de-valued dollars to pay their loans.  This was when Bryan made his famous “Cross of Gold” speech.  The European creditors were becoming increasingly alarmed over the threat to the value of the dollar.  They started moving gold out of the US.  Literally taking it and putting onboard ships and moving it to London.   As the gold stocks sunk the confidence in the dollar began to sink also.  The House of Morgan with support from its London office and few others stepped in and bought gold and issued gold backed bonds.  They had to move quickly to prevent a collapse of the dollar.  It worked temporarily and some gold was actually taken off ships and returned to the Federal Reserve in New York. 

But capital and confidence in the business atmosphere on any government are not cast in stone and must be maintained.  The threat kept returning and the gold was drained more.  But then we found gold in Alaska and the Europeans had a couple of really bad crops.  The price of US agriculture zoomed for a while and the price of both gold and the dollar stabilized.  It really wasn’t any brilliant government policy that stabilized things but frankly sheer luck.  But that state of affairs managed until WWI when we underwent a real boom in industry to build everything needed for the War and that lasted through the ’20’s before the Great Depression came along. 

With the Depression Roosevelt removed the gold standard for debt payments and required everyone to turn in their gold for dollars.   The Depression lasted until WWII.  Making those cheap dollars again and killing off what the Feds considered “excess” hogs and cattle and plowing under crops the bolster prices for everything didn’t seem to help much.  Some think it did.  I don’t think you would find many ordinary folks and farmers of that era who believed those  government policies improved their lot.

Maybe we’ll get lucky again before the Feds come up with programs that aim for the stars but hit us in the backside.

“When we hear news we should always wait for the sacrament of confirmation.”  Voltaire www.olcranky.wordpress.coml

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Money, Money, Everywhere

You have certainly heard the references to Bernacke over the last couple of years as “helicopter Ben” because of the allusion that he would simply fly over America and dump money out of a helicopter to stimulate the economy.  Of course we are too well aware that the trillions of dollars dumped into the economy was not that evenly spread.  Perhaps all that stimulus money would have done more good if it had been dumped from the helicopter rather than the methods employed by the Fed in reality.   Of course the Fed was not directly involved in the TARP funding, that was a Treasury action, but they made if possible by printing more money for Treasury to buy those bank stocks rather than the “toxic assets” they said they were going to buy.  Again, we probably would have been better off it they had bought all those bad mortgages. After all the government, us, owns over 90% of all the mortgages out there through Fannie, Freddie and the FHA anyway. 

Then the Fed bought over a trillion dollars worth of bonds, mortgages and Treasuries in ’09 to facilitate the government’s “Stimulus” bill rammed through by the Democrats.  On top of that there was the Obama budget with its built-in 1.3 trillion dollar deficit which had to be funded somehow and yes, it was with more debt.  That was mostly through the sale of Treasury bills and notes which were primarily bought by the banks and foreign entities, can you say Chinese?   The banks got their money to buy these Treasuries, from you guessed it the Fed.  Now the Fed is actively talking about doing another round of quantitive easing, that is buying more Treasuries to the tune of a trillion dollars in the near future.

Most people don’t realize how that actually works.  What will happen usually is that the Fed will go to individual banks and buy Treasuries from them at a profit.  Remember that the banks bought these in the first place with TARP or discount window money and almost zero interest rates and were making a profit without having to administer anything.   These Treasuries will be sold at a profit to the banks.  That is how the Fed gets more money into the economy.  From a technical stand point that makes sense as the banks are the conduit for the flow of money into the economy.  But the rub is that where does the Fed get the money to buy all those additional treasuries?  They are the only entity that can create money from nothing.  They simply print up more money to give to the banks.  There is no inherent worth behind those new dollars they are merely pulled out of the Fed hat like the white pigeon from the magician’s bag of tricks.   That is inflationary.  One day you had x number of dollars in the economy and the next you have x plus y but without any increase in real economic output or activity.

All of which brings us to the interest rate on the Treasuries at the moment.  The 10 year note which is the more or less the bench mark pays a yield of about 2.40 at least as of last Friday.    So you invest say 10K and you get only $240 a year in interest.  I know it is not a true interest payment but for illustration purposes it is accurate.  Interest rates and returns on investment are always related to the amount of risk involved in the investment whatever type it may be–stocks, bonds, Money Market accounts, Treasury bills or whatever.   I completely understand the arguments about safety and that many investors and investment funds are seeking security and a high degree of safety with their money.  This is especially true since Obama was elected with all the uncertainty about taxes, regulations already on the way and the promise of even more to come if the powers that be in Washington remain in p0wer.  This is exacerbated by the hostile rhetoric spewing out of Washington like a steady drum beat for the last couple of  years.

Why would anyone accept such a low rate of return?  I think those who are only thinking of safety are myopic.  What good will the safety do them if inflation takes off again and the dollars they receive years from now on their investment won’t pay for cab fare?  The uncertain future of the value of the dollar is reflected many believe in the recent rise in the value of oil, gold and silver and other commodities.  That is probably true to some extent.   But why are billions of the Treasuries still be sold at such depressed interest rates?  The Chinese will continue to buy for a while because they need our consumers and our markets for their products.  But someday it will be a revelation when many investors realize all at one time that the  Emperor is not wearing any clothes.  After all several nations have defaulted on their debts in the past;  many European and a few Latin nations are near default again and have only avoided it with help from the IMF or the European Central Bank.  We have no guaranty that our debt is sacrosanct.  

When the day of revelation comes everyone will still be willing to buy the Treasuries, especially the big banks since they are regulated by the seller, but collectively the market will demand much higher rates of interest.  The risk is high of either default, partial default or inflation that devalues the investment and interest rates will zoom.  It can happen quickly.  Just like a street crowd when one person starts looking up, then another, then another, within seconds everyone is checking out the scene.  Watch the interest rates on those Treasuries for the early warning test for our future economic well-being.  The increase in interest rates will make our deficits and debt explode.  It will have an exponential effect.

At least with the gold standard governments could not manipulate the currencies or fiscal policies.  It has its drawbacks but also has its advantages. www.olcranky.wordpress.com

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U S Credit Rating or Does the U S Rate?

Well, we finally got the news that Moodys has given the US a triple A rating for its debt obligation. This is primarily the Treasury notes and bills.  Certainly since WWII the US has been the premier economy in the world and long considered the safe haven for money and the safest and most profitbable nation for investments in the world.  What is really the news is that this is news at all.  But times they are a-changing. 

We have written before that the rates on the bench mark 10 year Tresaury has been rising at an alarming rate recently.  When we first raised concerns it was still under 3% and had been as low as 2.5% a couple of months ago.  Now is over 3.5%.  That is an enormous rise in such a short period of time.  The rate has been higher on occasion but so were most other rates at the time and when inflation was causing concern in the markets.  Why is the rate shooting up so fast and so high?  What does reading the tea leaves of the rate portend for our economic future.

Let’s start with the basic proposition that interest rates are a function of several things but one major component is risk.  Perceived risk always makes the interest rate on any investment rise.  The risk factors now facing our nation are obvious to those willing to take an objective look at matters.  First there is the clear and demonstrable anti-business attitude from Washington.   The rhetoric and actions out of Washington for months has been vilifying all business interest.  Couple this with Government, Inc.’s intervention into the market place and you have genuine cause for concern.  Government, Inc. is throwing away any pretense to following the rule of law but is embarked on  a populist agenda to garner votes and approval from the great unwashed out in the hinterlands.  That may be a great political strategy for the short term but it is an awful way to encourage business activity and a growing economy.   The government is in the middle of our banking system, strong arming major industries to bow to the unions, see GM and Chrsyler, is moving rapidly into the insurance sector and has proposed numerous other steps into making our economy a centrally planned and controlled one.  

Second we have the Cap and Tax proposals that are coming down the pike and that guarantee higher costs for virtually everything we use, not to mention much higher costs for all energy sources.  That is coming on the heels of the health care overhaul which will be a tremendous drag on or economic growth.  I know that some argue that getting the health care cost “under control” will save our economy money in the long run but we have to remember that we are only talking about shifting the costs, not reducing them.  They will still be high and probably go higher with improved technology.  It is just shifting the cost from the user of medical services to others. 

Then we have to deal with the debt an printing money factor.  We are running up debt into the trillions right now and we are printing money into the trillions at the same time.   The world begins to wonder just how much debt we can handle.  It is a fair question.  Even governments can default on their loans and have many times in the past just as Argentina may do again in the near future.  Much of our Treasury debt is being “bought” by the Federal Reserve.  Where does the Federal Reserve get this money to buy those notes and bills?  It prints it up.  It has not received payments for any goods or services to generate this cash.  The Federal Reserve is also printing money to buy billions of dollars worth of the mortgage backed securities.  This is classic funny money.  The world watches this and sanely concludes that we are becoming a greater risk as a debtor.  Some are beginning to think they are better off buying bonds or notes from the emerging markets like China, India or even Brazil.  For decades the emerging countries when they made a trade deal with each other would require that payments be made in US dollars or their equivalent.  Now China and Brazil are starting to trade without that provision and likely will pay each other in their own currencies.  That is another profound display of lack of faith in the US dollar and our debt obligations.  

All of the above leads to the legitimate concern about inflation in the near future and the decline in value and respect for the US dollar.  That money printed up by the Fed will be there.  It had no economic basis behind it.  It was done to “save” the banking system and to stimulate the economy.  Once created that money can’t be simply withdrawn.  It does diminish the worth of existing greenbacks.  We are talking trillions in new debt and trillions in new printed money, not billions.    I am not that smart a guy and there are scads of bright people out there who are obviously worried a great deal about the value of the US dollar and our debt.   Some may say my ideas are all hogwash.  Well, I would like to hear why the interest rates are going up if not for at least the reason outlined here.  Yes, there can be some fluctuations in the rate but they are usually very small and over a much longer period of time; there can be technical reasons in the bond and mortgage markets or even the stock markets that will influence the rate but those factors at the moment should be pointing to a low rate of return on those 10 year notes not an increase.   Irealize that the US debt is still considered a safe haven by investors around the world at the moment.  But with the current world-wide recession that as the saying goes is faint praise. 

The Moody rating is a joke of course.  Moodys has been under intense criticism from the politicians since last year for their ratings on the sub prime loans.  There have been hints of regulations on them and other new restrictions to their business model to be imposed by Government, Inc. and threats of lawsuits.   We’ve seen how the government has bullied one business group after another for months now.  Does anyone really think that Moody’s would downgrade the US debt at the moment regardless of what the hard numbers and economic indicators reveal?   I don’t think they are that brave myself. 

The GM bondholders are showing some grit.   Good on ’em.  In the law they are on a parity with the unions and should receive equal treatment.  Anything less is a defeat for all who believe in the rule of law and oppose thuggery in government.

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Old Bad Remedies Are Still Bad Ones

We are faced with difficulty at the moment in our economic and financial affairs.  Many refer to it as a crisis.  I suppose that is in the eyes of the beholder.  But a faltering economy is a fact whatever its degree.   Some are  proposing certain remedies that they vervantly hawk as new and different to fix the exigencies of our times.  The proposal of Government, Inc. include among others the following: i) a  program of wage and price controls ii) printing of money that will debase the current value of money and iii) the issuance of extraordinary amounts of notes–borrowing. 
The phrase “exigent circumstances” has even been used by the Federal Reserve to justify several of its more extreme actions of late, such as the take over and funding of AIG and other banks.   Likewise the Treasury has called upon such language for its justification for recent actions.    We have tried wage price controls before and without exception they have all been dismal failures.  Check your history.  There is not a single example of that effort being efficacious.  

Government, Inc. has not set the sticker price of GM cars, at least not yet, but it has in reality.  By mandating the amount of wages the company will pay and the amount of debt it will be allowed to carry on its books and lastly demand that it produce “green cars” , the Government, Inc. bureaucrats and politicians are setting the price.   The market is not setting the price.  Likewise Government, Inc. through its regulatory controls will be setting the price of borrowing for everything from cars to houses.  In the face of growing international hesitancy to buy our debt the Treasury is issuing even more debt of unprecedented proportions–Trillions.  (See China for the hesitancy).  Lastly, the Fed has embarked upon a policy of printing up money and dumping it into the stream of commerce without any underlying economic justification that there is an equivalent  increase in  value in our economy.   Have these problems and attempted remedies been tried before?   Yes.   Go all the way back to the embryonic days of our Republic.

During the Revolutionary War we faced these problems.  Shortages and disrupti0ns caused by the war with Britain were causing a tremendous spike in prices.  We weren’t really a nation yet but a confederation of colonies with limited financial resources and were facing difficulty in provisioning our armies.  Indeed that was the constant thorn in the side of Washington throughout the war.  As early as 1776/77 the effort was made to impose wage price controls by some of the colonies.  A few did.  They prepared very specific lists of the prices that could be charged for services or products.  “horse-keeping, at sea port towns per night or 24 hours, 2s, 6d”, “best beaver hats at 42s. best felt hats at 8s”, and the lists go on.  This was from Rhode Island in 1777.  There were many others.  There were those who were opposed to the whole notion.  From Dr. Rush in 1777–“The wisdom and power of government have been employed in all ages to regulate the price of necessities to no purpose”.  ….”We estimate our viture by a false barometer when we measure it by the price of goods”….”The resolution before you is nothing but an opiate.  It may compose the continent for a night, but she soon will awaken again to a fresh sense of her pain and misery”.   Later John Adams commented “I much doubt the justice, policy and necessity of the resolution.  The high price of many articles arises from their scarcity.  If we regulate the price of imports we shall immediately put a stop to them forever”.

The colonies varied in their approach to the controls.  Many ignored them completely.  It was a hodge- podge of enforcement but they were failures.  We printed more money through the Continental congress.  The Continental currency had little value because we printed too much and our power was limited.  Thus the phrase “not worth a Continental”.    There were heated arguments about the effects of inflation.  Those arguing against the wild printing were right.  A few years later in 1781 we had to reconstitute our money and debts.  We traded in the old debt at 40 to 1.   Our currency was recognized as having little worth and thus our debt was without value.  The King of France loaned us millions out of his own purse.  So did other French interest and the Dutch.  This was all before our final victory at Yorktown.  Those were our biggest debts.  The money was used to pay for the war.  Naturally the French King and his subjects had their own selfish reasons for helping us defeat the British.

 A few years later when we adopted the Constitution and organized our affairs as a nation one of the first things we did was recognize the obligation to pay our national debts.  Mr. Morris of Pa. had also financed much of our war expenses.  Indeed he financed almost alone our campaign and victory at Yorktown.  The decision to honor our debts was not universally popular at the time.  Many thought is was merely favoring the rich here and abroad.  Those in power recognized how important it was for our new nation to start its voyage as an equal on the world stage by honoring its debts–by doing the right and honorable thing.  The memory of the inflation and debasement of our debt and currency was fresh on the minds of all in the late 1780’s.  Despite the populist demand and rants that we deny payment on the debts of the Confederation decency  and common sense prevailed.  Thus we have Article VI of the US Constitution. 

Having money that is worth something is vital.  Honoring your debts by paying with real value is economically important and letting the market work will keep our economy free.  Government, Inc. is not the solution, it is going to be the problem.   Our virtues and values are the solution.  Please, please read some history yourself on this topic from different eras in history.   Government intervention into market systems universally leads to bad results.  Otherwise the Soviet Union would still exist and be the world’s premier economic powerhouse and leader.ore  www.olcranky.wordpress.com

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Will Bull Market Endure?

It is so unusual to have financial and economic news dominate the headlines the way they have for the last several months.  Under normal conditions there might be a headline or two each month about such matters but usually they would be relegated to the business section of the paper.  Not any more.  There has been some improvement in the market in the last 3 weeks and there naturally is a great deal of speculation about whether or not the market has reached a bottom and if the economy is starting an upswing or if not then when will it occur.  Let’s consider some factors that will influence the markets and our economy. 

The first obvious factor is the incredible amount of money the Government is pouring into the economy and markets.  It is a real shotgun approach.  The Fed is involved to the tune of trillions of dollars in various ways.  There is the Government itself with the 800 billion Stimulus bill and of course the Treasury is buried up to its eyeballs with issuance of new debt instruments as the Government borrows beyond anything seen before.  We are running in the red and there is nothing in the budget by the new guy and his cronies to suggest that will stop.  They have promised that  they will cut the deficit in half but that  is faint hope for economic security.  That is like the lady being only half pregnant.   We will be spending more than we collect as far as the eye can see and our accumulating debt mounts at astonishing rates.  Sen. Gregg has even mentioned that we are going bankrupt.  He is right by the accepted definition of that phrase.

There has historically in the law been two types of “insolvency”.  The common law has recognized these for centuries now.  The first is called equitable insolvency which means that you or any entity is not and cannot pay its debts as they fall due in the ordinary course of business.   The second is the balance sheet test where you add up the total assets and liabilities and see whether or not there is a net worth if the liabilities are less than the assets.  Under any sensible accounting method the country is bankrupt now or will be in short order.  We damn sure are not paying our debts as they fall due in the ordinary course of business.  Yes, I know they are “paid” but that is only because the Government manipulates the numbers by having the Treasury issue new notes which are bought by the Fed which in turn has simply printed up more money.  Our tax revenues do not come close to equalling our expenses.  The balance sheet test is probably not relevant to a Government but even if it were we would fail that solvency test too.  On that basis we would have to add in all the long term debt for the entitlement programs which alone would run into the tens of trillions of dollars.  The Government doesn’t have assets to offset that even if you consider projected tax revenues on a discounted basis as an asset along with the other assets of the Government.

You should have noted this week that there was weakness in demand by investors for our debt instruments.  See the China position.  The interest rates have shot up on the Treasuries and will continue to do so.   If the budget passes anywhere near its proposed form those pressures on the interest rates will not abate.  That occurence will also require the continued printing of money by the Fed which will lead to inflation.  Remember the Fed is already printing new money for TARP, TALF and the Toxic asset purchase program in additon to the funding of regular Government operations. It simply can’t be denied that if you print money out of thin air it devalues the worth of the money in circulation because of that increase. 

The question that will hurt our economy the most is–how are we going to pay the debt?  What is our plan to reduce the debt?  That one is being ignored at the moment especially by the media.  Sooner or later it will be asked and it will be repeated over and over until some kind of answer is given.  The markets and investors here and around the world will want to know that and they will not be satisfied with campaign rhetoric.  They will want to see specific details.  Those details will not be forthcoming.  That lack of candor will only heighten concerns and fears about inflation and the economy.  Short term, say one to 4 years, the economy will improve some only because so much money has been poured into it by Government.  But just like a honeymoon it can’t last forever.   The concerns discussed here will not be dealt with in the current budget or any other budget for years to come.  The reality of inflation will not fade nor will the need to find lenders for the Government.  The “recovery” will be a weak and fragile one.  It will not boom.  It can’t with these debt and fiscal burdens on it.  The private market can’t function with any certainty other than projected bad news in the out years.  I wish it was otherwise and I wish I believed otherwise.  But ifs and buts don’t make candy and nuts for Christmas.

Lastly recall that the breathless announcements of the last week or so about the market having a 20% rally is true mathmetically but still very misleading.  You have to consider where the recent rally started from to see if the improvement is that significant.  If you had a $1000.00 investment and then lost 50% of it, how much of an increase would it take to get you back to where you were?  Your answer was probably wrong.  Most say “well, 50% increase will get you back”.  Nope, ‘it takes a 100% increase to get you back to where you were before.  So, in that example if you were down to $500 and had a nice 20% run up you will have only $600 and would still have a 40% loss.  So the 20% increase is nice and better than a continued drop but don’t think it is the boom times. 

How are we going to pay the national debt?   We deserve an honest, candid and understandable explanation.  Yes, with all the nuts and bolts–tax increases, the printing press, inflation, reducing entitlement payments, whatever the plan is let the American people know.   Tell us about the pain now and quit putting it off until after one more election cycle.

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The Printing Press and Debt

Of late we hear many politicians of both parties talking about running up debts that will be a insurmountable burden on our children and grandchildren.  This is certainly appropriate given the scope and size of the proposed budget of the new administration.  The numbers are truly staggering and almost incomprehensible due to their size.   That budget is in addition to all the extra money that has already been authorized for the current crisis which if my math is right runs to over two trillion.  I mean there is the 700 billion TARP money, the 787 billion stimulus money and then the over 800 billion of special funding from the Treasury and the Fed for asset purchases.  The largest item on the budget will be the interest on the national debt.  It will even exceed the defense budget; that is even with the extremely low interest rates prevailing at this moment in time.  Those rates will change in the near future.

Surely you have heard the rumblings from China who holds a very substantial portion of our debt.  First they argued about our stimulus Plan and the Buy American provisions, then they start talking about the value of our Treasuries and then they float out the idea of a new currency to replace the US dollar in international markets.  They are concerned with good reason about not just our existing debt but about the fact that there is nothing in place to demonstrate when or how it will ever be reduced.   The proposed budget is for a ten  year cycle.  That is a pretty long time and it makes no effort to reduce debt.  Indeed it only projects very large deficits for the entire ten year period.  That assumes that the budget is accurate as drafted which the CBO has questioned to the tune of over 2 trillion dollars–that is the deficits will increase by that much more than the administration’s budget projects. I suggest that the politicians quit worrying about our kids and start worrying about us in the here and now.  Those numbers are so huge they can’t be shoved off that long.  Those economic and fiscal chickens will come home to roost long before even the ten years have expired.  

The question that isn’t being asked is how are we going to pay for this debt?   That is the critical question and its answer or lack of one will affect our fiscal and economic well being now and over the next decade.  Everyone keeps talking about an emergency and how something must be done now.  I don’t accept that premise myself but that is of no moment since we are in the water now and we will be getting wet.   If you run up large debts and go to the bank for more they will ask you how you intend to pay it off and when.  They will want to see the numbers to justify your repayment plan.  Those international concerns and nations that lend us money are just like a banker to the US right now.  We in effect deal with a consortium of “banks” which includes China, Japan the Mid East nations and other large investors around the world.  The budget assumes we will continue to be able to borrow from those folks on a regular basis ad infinitum without ever having to explain our repayment program.  The question of dealing with the debt should be asked to the Presidend at every news conference and of all administration officials without let up until we have an answer.   I don’t think we will like the answer and that is why they don’t want to give one.

Our lenders aren’t idiots and they know there is only three ways we can  possibly begin a repayment program on this mother of all budgets–raise taxes substantially, which will deaden economic growth here and abroad; default on the debt in whole or in part, a la Argentina recently; or simply print up more money which will inflate the dollar and make them worth so much less that our creditors would not be excited about the thought of being paid in dollars worth less.  Maybe they would almost be worthless dollars.   They have a right to be concerned.  The next thing to watch for will be a slow down in the purchasing of the US Treasury bills and notes.  The sales of these items are held on a regular basis.  Those foreigners buy them on a regular basis. They are selling well now because on a comparative basis our economy is still stronger than some others.  But that is short term thinking.  As the debt builds so will the international concern.  One fine day some of those foreigners, probaby the Chinese, will not make a bid as expected for our debts.  That will immediately raise the interest rates on our Treasuries and correspondingly reduce the exposure on our debt to them.   Watch for it.  Unless we get a sensible answer to the question about our intentions on the increasing deficits and debt it will happen. The only issue is when.  That will put the kaboosh on government plans pretty quickly.  The Government will print more money but folks won’t value it as before and the spiral will have begun.  Higher interest rates which will  mean even more debt, much slower growth because credit will be unstable, and at the same damn time we will have increasing inflation.  That is your future world if this budget and others similar to it are passed in this term of the administration.   There will be some short term improvement in the economy until the investors and trading partners realize we aren’t addressing the long term debt problems.  The Chinese are clearly already sniffing around for alternatives to loaning us money.  They have tremendous room to grow their internal economy for years to come even if their exports diminish.   We don’t have the same room for internal growth because we are already developed.

A penny saved is a penny earned if you have the penny in the first place.   A pretend penny you think you might have in the future that you don’t spend now is not earned.  But the Feds don’t seem to get that.

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Debtor’s Prison for a Nation?

The amount of the debt we are accumulating and proposing to accumulate has become more than worrisome.   In the olden days we had debtors’ prisons for those who couldn’t satisfy their debt obligations.  Newgate prison in London was one of the most famous of these.  In the Colonies we had them too until after the Revolution and for a while beyond that.   They are now a thing of the past.   The ancient Romans were even more severe in their treatment of debtors who couldn’t pay off their debts.  The creditors after trial and the establishment of debts due provided that the unsatisfied creditors could kill the debtor and divide up his carcass.   Of course this was after they had stripped him of everything of any value.   Becoming bankrupt in those days was not a very viable option.  Most debtors who could would flee.

Our GDP is about 14 trillion a year right now.  Before all the extraordinary actions taken in the fall of ’08 the Federal government’s share of that was about 3 trillion and when you add the States and local governments that was an additional 3 trillion.   So almost half our GDP is government of one sort or another.   Now the politicians are proposing trillions more.  During this year more than half of our GDP will become Government spending.   Government gives us somethings that we need of course, like security and safe skies to fly.  But it doesn’t “produce” goods or services for the general economy.   At least so far the government doesn’t own and run your local super market.  That may change if we continue with the bailout nation approach to solving our economic difficulties.   We won’t even discuss today the trillions of dollars in debt that we already have on the books for our accumulated deficits and the projected shortfalls for Social Security and Medicare.   The fact is the government will be determing the winners and losers in our economy to a very large extent because of its power of the purse ; its purse which can only be filled with the taxes it extracts from us.   The government has clearly demonstrated that it is currently incapable of balancing a budget or even attempting to balance a budget.   The influence of government on our economy will have deleterious effects.  The Government is not innovative or creative.  I mean Apple and Microsoft have come out with many news gadgets and gizmos we all use and love.  You want the Government deciding what kind of computer you can buy and at what price?  or the kind of car you can drive?  AOL had a weird business model at the beginning of is life by literally giving away its software to anyone.   That turned out to be a smart decision.  I doubt a bureaucrat would have come up with that one and certainly would never had it approved up the chain of command.   We have entrepreneurs for a reason.  That is not the Government’s forte.

The government can’t be put into debtor’s prison but might deserve to be there.   The only two methods for dealing with the current debt  and the insatiable appetite of the government to spend more is to print more money or borrow even more.   The borrowing will continue for a while with success but at some point the foreigners and even our home grown investors will not want to loan any more money to the government.  If you had a relative who was notoriously profligate would you continue to loan him  money?   The government is spending money like a drunken sailor on leave.    I am aware of the arguments that we must have this additional stimulus to make our economy grow.  I find them unpersuasive and very dangerous for our future.   Those proposing these giant spending plans are the very same people who got us into trouble in the first place.  Why have they become so smart overnight.   Some could argue that we could raise taxes to reduce the debt.   But we are reaching a tipping point in that area and the returns will diminish by squezzing harder.  Less juice will flow from the fruit.   Only a little over half of us pay any income taxes as it is now.  Those that pay none are going to get a tax rebate which is a lie, it is a transfer welfare payment–a redistribution of the wealth.   Remember that anything, and I mean anything, you tax you will have less of.   Taxes don’t create wealth for anyone.  They merely empower politicians.    When we can’t borrow enough we will simply print more money.  That will devalue the dollar and cause inflation.   That is a fact that can’t be disputed.  Those dollars rolled off the mint presses under the direction of the Federal Reserve aren’t adding real wealth to the nation’s store of value.   They merely provide a method for the Government to pay off debts with inflated dollars.   It also means we have less ourselves.  We might have more dollars in our pocket but they won’t buy as much as they did earlier.  It is a net loss for all of us except those in p0wer.

Please read some history of the Federal Reserve.  You will learn lots.   We do not have to become a debtor nation with debts beyond our ability to pay.   We all need to blow hard on Washington to clear away the smoke from in front of the mirror.   

I wonder how the folks in Spokane feel about the danger of Global warming this winter?

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Overstimulating the Bailing

The headlines are filled everyday with another bailout or stimulus discussion or proposal.  It is really beginning to be hard to keep them straight even for someone like me who does try to stay abreast of these matters.   The array of actions taken or projected to be taken by the Fed, the Treasury and Congress has mushroomed and what is scary is that there seems no end in sight.  I have found when faced with severe time pressures and urgent needs it is all the more important to make sure you formulate a list of priorities and then work out the proposed plan of action for each one with careful thought to the consequences for each.    Hasty and hurried actions rarely result in the desired outcomes.  When they do it is often a matter of luck as much as anything else.  It is not a good idea to trust our economy to luck.   I realize all these people think they are smart and know better than we do; that assumption may even be true.  But very smart people can still make very bad decisions.   Mere motion is not the same thing as progress.  You are also reminded that many times when you are faced with a dilemma the best course of action is to do nothing.   I am obviously not talking about the wreck on the road or hearing the sound of a falling bomb but rather those business and personal decisions that affect your welfare at home or work.   How many times has a difficulty faded away when you did nothing but watch?   It happens all the time.  Things have a way of straightening out if we let “nature take its course”.

Yesterday the Fed announced it was going to invest up to 500 billion in buying mortgage backed securities.  I am confused.  Is this new or is this part of the 600 billion package that was announced by them a few weeks ago to buy mortgage backed securities and the 200 billion for consumer loans like auto and credit card debt?  Unfortunately I fear that it is something brand new and is to be added to the other plans already announced.   This will be even more money that is printed up and created out of whole clothe.   Last night I heard a spokesman for the transition team talking about the need for the new stimulus package being put together and defending the use of the money for what are clearly nothing but “pork” projects.   You know, those swimming pools, tennis courts, snow making machines for Minnesota, and the list goes on and on.   This person had at least the honesty to say it didn’t matter if the projects were needed or not but that it would put people to work temporarily.  The worth or merit of the projects was of no consequence.   What an open invitation to Congress to pour on even more of these useless projects.  Alternatively, if they are important to the local folks then let them pay for them with state or local tax revenues.   Why do I care if they have heated swimming pools in Hawaii?   Part of that stimulus is to give money directly to the states to cover their shortfall.  I have nothing against California, indeed I like it, but what is the justification for my tax dollars bailing them out of their deficit when they have a bloated state payroll that has exploded recently and they will do nothing to rein in their spending.   Will no one take responsibility for  their own actions anymore?   Also New Jersey and New York are beating at the door with their hands out as well as Michigan.    We have a Federal system of government, or at least that is the way it was designed, and those states must see to their own economic well being.    If the Federal government taxed all of us less then the states would have more money to meet their needs.  Why must we first filter the money through Washington then back out to the states.   When it comes back it is always with Federal strings attached–a political agenda that might not be what the folks in a particular state desire.

Now GMAC has become a bank overnight and it too is receiving some of our Federal dollars.   It will be more billions.   The first of the direct loans to GM have also gone out and there is no commitment from the unions that they will do anything to adjust costs.  Indeed they have made it clear they intend to do nothing until the new administration takes office.   The free market would have worked all along if the government had remained on the side line.   It could work again if permitted.   I ask you to think back  over all the laws and regulations that have been imposed on that industry over the years.   Yes, the big three made many mistakes but they also had to work in a very regulated envoirnment.   Was it smart for the government to regulate the mileage of cars?   By doing that the government ignored one of the basic tenets of the free market system.  That system as you know is based on supply and demand but also a vital third element–value.  By that I mean you are making something that people desire and thus it has a value.   You could manufacture a gazillion buggy whips now and have a tremendous supply of them and they might even be very cheap.   But no matter how cheap if no ones wants them you still won’t sell any and your business will fail.   For supply and demand to work properly there has to be that element of value.   It is just like our dollar.  It has to be “valued” to have value.   Simply printing money gives a bold letter announcement to the world that it isn’t really that valuable–look we’ll just print up more!  The government can mandate all it wants but if they make Detroit produce a specific car that is overpriced or has features that the consumers don’t want then the product will not sale and we will have a subsidized industry functioning at a loss.   Those Tata cars are only about $3000 but who would want to buy one of them here?   If there were a million of them here tomorrow how many would sell?

We need to get a grip.   Slow down and  give some grown up thought to what we are doing and not let ideologs take over the direction of our economy.  We have too much at risk.  I always try to be the optimist and am by nature and wish I thought the coming years would show improvement but with the indicated direction I have serious worries.   Not the least of which is the inevitable inflation that can ‘t be gainsayed because of the government’s creation of money without value behind it.

There are 25 time zones in the world, not 24 as we would all assume.  Don’t take my word for it, check it out yourself.   It has to do with not wanting the same time at the International dateline.   It can’t be noon on both Tuesday and Wednesday simultaneously.

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Piper paid for bailouts?

The bailout monies continue to grow and the list of beggars at the Feds’ door also is mushrooming with each passing day.   Even more states and local governments are now saying they deserve some bailout help.  The numbers have become so staggering that I fear to many ordinary folks that they are becoming meaningless and that is dangerous.  Only a few short months ago the mentioning of 100 billion for any government program would have seemed off the charts.  People would have gasped and they did gasp at the first major bailout proposal of 700 billion in September.   Now the numbers have run into the trillions and the Big Three bailout request is probably going to be approved if for no other reason than that it seems like chump change all of a sudden.  What’s 25 billion after all when we are talking now of over 3 trillion in bailout funds for the multitude of programs now in play.

I don’t like repetition but we all need to bear in mind that the Government has NO money.  Only we have money and it is our money and our credit the Government is using for these bailouts.  The piper must always be paid.  Who is going to pay for this enormous expense?  Not the Government, but you and me.   The Government can print money literally but that doesn’t work well over time.   Usually the Government borrows the money but our creditors may soon become unwilling to loan us any more or else start imposing  new conditions on the loans that affect our domestic and foreign policies and economy.   Germany tried to print up money as one way to pay its reparations debt under the Treaty of Versaille after WWI.   That ended up getting them into hyperinflation that damned near completely ruined what was left of their society in the ’20’s.   The war debt was not the only reason behind the inflation but it was certainly a significant contributing factor.   You should study the history of Germany in the ’20’s as a background for some of the economic matters facing our nation today.  There are many disparate factors and differences between then and now and our society and theirs at the time but the lessons  are none the less quite revealiing.  Recall too that it was against this economic turmoil that Hitler began his rise to power because the people were so desperate for hope and change.  I urge you to get a good history of that era.   There are many sources available.  

 Printing money would  make each dollar worth less.  It makes it easier to pay off all those treasury notes bought by the Chinese for sure but it also destroys our own wealth at home.  Inflation is a killer of any economy.   It will grind it to a halt quicker than anything and you end up with almost a barter system rather than a modern economy.     With inflation you get to pay off your mortgage with those cheap new dollars so that is a real bargain for you but then you have to buy gas, groceries and pay for insurance, a new car, etc. and the prices for all those items will skyrocket.   Believe me you won’t feel or be rich with inflation.

There is nothing written in the stars that says we must spend all this money on the bailouts.   Printing a little money will work but only if it is limited and we stop at the right time.  Unfortunately, inflation in its early stages is like an addition.   It is so easy to do and there is all this money to spend at first but quickly the prices for everything starts to accelerate and when you reach a tipping point it spirals out of control.   No economist can predict with  accuracy that tipping point.   If we allow the use of debt for all these bailouts we run the risk of facing tax rates of such proportions that they couldn’t be borne.   Remember also that only about half of us pay any income tax at all now.   The amounts to simply service the interest on these debts will be approaching 1 trillion dollars a year.   It is already a several hundred billion every year now for debt service on our national debt.  

We either print more money that loses value and causes inflation or we borrow and have to deal with repayment.   We pay the piper or we kill the piper.  I don’t really think we want to do the latter.   There is a third choice.  We cut back on these bailouts dramatically.   Stick with the original 700 billion number.   Otherwise let the market do its work  and over a period of a year or two things will be better.  Failing companies should use the Chapter 11 alternative.  There is no free lunch and there damn sure isn’t a 3 trillion dollar free lunch.   We simply can’t afford it.   Lastly,  that much money sloshing around in Government coffers inevitably leads to Government control of our lives, our economy and a draconian intrusion  into our freedoms.   At my age this is advice for my kids and grandkids.  I do hope someone will listen out there.   Civil unrest and  true taxpayer rebellion loom on the horizon if we follow the present announced course.   The new administration whatever you think of it can’t change human nature, the law of supply and demand, the rights of creditors holding our debt or creat wealth out of thin air.  It can balance the books and we should demand that it do that.

The Christmas season is upon us.  I confess I love most of the Christmas carols and music of  the season.   It reminds me of hot chocolate, family  and friends and a spirit of giving for others and hope.

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