Let’s do politics, money matters, memories and other random thoughts of vital importance…..after all isn’t everything of vital importance these days according to the talking heads. So here we go.
The debt ceiling increase is merely the teaser to pull us into the real debate. The problem is a growing Federal budget beyond the reasonable collections of the Feds. We have to reduce seriously the Federal budget of the real disaster will be coming anyway regardless of the debt ceiling increase. We have had the tsunami warning and it has been confirmed by other measurements and now we either get prepared and just allow it to engulf our country and bring us to ruin.
The suggestion that the President or any President could use the 14th amendment to unilaterally increase the debt ceiling is ridiculous. Some of the reasons: 1) that amendment was intended to assure the US creditors they would be paid after the War Between the States 2) Constitutionally only the Congress can initiate the expenditure of money, not the Executive 3) The provision is question says the debt that can’t be questioned must be “authorized by law”; well, Congress passed a Debt limit statute decades ago and any increase outside that law would not be “authorized by law” 4) Because there at a minimum would be serious questions about the actions of the President and litigation for sure, the global markets would not buy these bonds issued only under the authority of the President, the risk factor would be too high; if the bonds were found by a court to be invalid then how would those bond holders get paid? 5) the public relations aspect of using the 14th amendment would be horrendous, it would put the US truly on the level of a Banana Republic being ruled by a tin pot dictator by decree. It would never work.
The Chinese are finishing up work on their new aircraft carrier purchased from the Ukraine. Two more are getting ready. Those carriers will be able to roam the vast Pacific at will in only a matter of a few years. What you have you will use sooner or later. Where will they decide to use their carriers in ten years? Off the coast of South America to support some new Hugo Chavez? Maybe they will use them to “protect” the ethnic Chinese in Singapore? That tension has been there for decades. It is a real matter of concern for those who occasionally look up beyond what they can see right at their feet.
What is the positive side of the Arab Spring so far? In Egypt the Muslim Brotherhood is set to be the dominant party in power come the fall elections. How can that be good. In Yemen–well, we don’t even have a program to tell the teams and players. You tell me if you know who the good guys are there. In Libya the lead rebelmilitary leader was mysteriously killed. A tribal conflict? The prediction of our fearless leader that this would last days or weeks seems to have faded into a vague blur. And then we see the Lockerbie bomber in the crowd cheering on the Quaddafi supporters. In Syria the news is spotty at best and the Baath Party for all we can discern is still firmly in control. You remember the Baath Party–those wonderful people who brought us Saddam. Those are only some of the high points in the region and yet the State Department is throwing a fit saying we can’t cut back on aid to the tune of billions to the region. exactly what are we getting or going to get for our money.
Geography and Mother Nature always throw us a few surprises. The Equator is generally a very hot place. We all know that. Glaciers are in cold weather locations. Yet some of the largest mountain glaciers are within shouting distance of the Equator. Not exactly where you would expect any to be. But look at a detailed topographic map of New Guinea. You will notice a chain of very high mountains that run down the middle of the island. Most of the island and certainly most of those pictures from National geographic so the very hot jungle areas of the island. But on those mountain tops are a series of large glacier that have been there for millenia. You might not believe it but you can have a snow ball fight on New Guinea. Ok, now you owe me for winning your next bar bet.
Another soldier has been arrested for planning an attack on Ft. Hood. You’ve seen it in the news. But you have to really read lots of the articles and read through the lower paragraphs before they (the media) ever get around to telling you he is Muslim, surprise, surprise and that he had been on Jihadist websites and was bent on killing Infidels to avenge the Muslim psychiatrist who killed over a dozen folks there over a year ago.
In spite of all the hyperbole about the debt ceiling debate and the imminent crash of our economy and the immediate rise in all interest rates, it is interesting to note that the Treasury held two auctions for Treasury bills this week and there were buyers. The 10 year T-bill in fact is a bit lower now than a couple of weeks ago. People only yesterday were willing to buy them for only 2.95% return on their money. Amazing. Some one with real money at stake doesn’t seem to be too worried about any default.
The original lease for oil exploration in Saudi Arabia by Aramco was paid with gold coins. Roosevelt’s restriction on gold made in impossible to make the payment. But gold is what the Saudi King wanted and nothing else. So Morgan Guaranty used its London office to buy gold sovereigns and delivered them by ship to Saudi Arabia where they were counted out in front of the King. Restrictions on capital and money always are counter productive, people around the world will find a way to move the money were needed and where it provides the best return. www.olcranky.wordpress.com
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.
Only this week the Treasury auctioned off another 71 billion of Treasury notes and bills. That is a small part of the hundreds of billions they intend to issue during this calender year. They have already issued over 300 billion this year to date. In addition to that fact we have the Federal Reserve printing up about 2 trillion of new money that seemingly floated in from Mars. It was mentioned here a couple of months ago that the rate on the long term 10 year Treasuries was going up and that was a bad omen for the future economy. Then the rate was about 2.80% that return rate has now shot up to 3.16% in such a short time. That is a very big move for those notes in that time frame. Historically those notes move only a few basis points (hundreths of a per cent) in a month. You please ponder a moment what that jump in rates means. I think it means a couple of things.
First that the confidence level on the return is weakening. We are creating too much debt and the ability to repay it is beginning to be questioned. Some folks are asking that hard question–how WILL we repay all that debt. It is like the little boy mentioning that the King has no clothes. We can raise taxes, default or print up even more money. None of those choices bode well for our economy or the strength of the US dollar. Thus the concern by investors here and around the world. Secondly, there is too much supply. We are issuing so many of those notes that the demand can’t keep up. Supply and demand does work regardless of your economic philosophy. Even the Keyensians would agree with that. Thirdly, the only reason the rate is not even higher is due to the weakness in the global economy and thus the desire for investors to seek a “safe” investment for the short run. It is not that there is great faith in our Treasuries but we just happen to be the tallest midget at the moment, but that won’t last forever. People apparently a lot smarter than me were concerned this week about how strong the demand would be for this week’s issue. It held up. But that tsunami of debt is still looming on the horizon and as it approaches closer and closer the concern level will rise. It is not inconceivable at all that one fine day soon there will be a weekly auction where the demand is so low that the issue does not sell out in full. You watch, when that happens Government, Inc. will put pressure on the banks it owns and regulates to buy up some of the Treasuries to support that market. They can always demand that the Federal Reserve buy even more but at a point that will be self-defeating because the market will be nervous about the Fed buying even more. The Federal is already committed to buying hundreds of billions of those notes already. The Fed buying those T-notes is the classic Ponzi scheme. It is an artificial prop for that market and sooner or later the free market will not abide the sham. Of course that assumes we will be permitted to maintain a free market.
Another problem with the Treasury issuing so many of these notes is that it swallows up whole huge amounts of capital that could otherwise be invested into the private businesses here and around the world. The total amount of capital does change daily, but nevertheless at any point in time there is finite amount of it. That 71 billion in Treasury notes is 71 billion that will not be invested in the next Microsoft for now. At the same time Government, Inc. is wanting private money to be invested into the PIPP program to buy the toxic assets from the banks and also is seeking every way possible to raise taxes on business to fund the budget nirvana of the new guy. Despite all the talk about “investment” by Government, Inc. we are not investing in our economy. The government is desperately seeking ways to finance debt–pure and simple.
All of the above is not the recipe for a growing and vibrant economy. I welcome differing views. But if you do, please give a detailed explanation for retiring our debt we are running up now. I will even allow you to forget for the moment the debts associated with Social Security and Medicare. Just the 9.3 deficits of the new guy’s budget. Do some math on it. How high can taxes go? Where does the new money come from to create new jobs and businesses, large and small? Government, Inc. remember can’t create a darn thing unless it takes the resources out of our pockets first. We can try to make a bigger pie, but will taking revenues from citizens increase the size of that pie or merely force everyone to button down the hatches and play hide and seek with the tax collector like they do as sport in Italy.
Keep your eye on the rate for those 10 year notes. They are a harbinger of the future and a forecaster of confidence in the long run economy. Short term there will be a bounce and the stock market will even continue its rally for a while. But that debt is a fact of life and facts are always stubborn things. I wish I believed differently but I worry that we haven’t reached the bottom yet. As more and more people and investors realize the downside of our planned debt explosion the economy will contract and/or stumble along with very slow growth as far as the eye can see because the debt is as far as the eye can see. Either we reduce that debt or explain in plain language how we indeed to satisfy it or our economic future is so-so at best. It could be much worse. Some smart folks think we haven’t reached the “give up” stage yet in the current market turmoil where investors bail out because they see no hope.
Two new grandsons arrived last night. I have been throught this many times with children and now grandchildren and it is always such a thrill. It is for them these concerns are expressed. I want those little guys to have the freedoms and opportunities my dad fought to preserve.
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.
From the most ancient of times governments have dealt with the issue of having a medium of exchange–money. From earliest Babylonian times to the long ago Chinese empires to the Romans and the Hanseatic League, kings, emperors and rulers of one stripe or another have tried to manipulate the currency in use to their advantage. The common man and thieves have always been active also trying to figure a way to counterfeit the currency of choice or gain a profit on the fluctuations of the perceived value of any currency. Various tokens and coins have been used from the earliest of times. One of the problems was that the currency or money usually only had value within the jurisdiction of a particular state or empire unless it was made from a precious metal that had universal recognition as a store of worth.
That is why from the earliest times money was supported by some underlying comodity if the coins were not of gold or silver. Sometimes if an empire was large enough or strong enough then it could have coins from non precious metals. This was true with the Roman empire. The paper or metal money had to represent the ability to get something you wanted to have any exchangeable value. The coins themselves had insignificant value in and of themselves. It was what you could exchange it for that gave it value. You could buy an ox or pay the carpenter to build a cabinet with it and that is what gave it value. There had to be a consensus that the value was there. Doubt and hesitation would diminish the value of the money overnight. To protect the integrity of the coins they would have images and embosed features to make it more difficult to counterfeit. Plus it boosted the ego of the current ruler. More than one favorite of a king or emperor was felled by the temptation to alter the mix of the currency by blending in more copper with the gold. Sometimes that wasn’t really true but the accusation could result in a lost head. Read English or French history for examples of this.
This country remained on the gold standard longer than it has been off the gold standard. There have been a few calls recently for the return to that standard so that confidence in our money and thus our economy will be restored. Probably not a bad idea but it will not happen because then the Government could not create as much money as was convenient whenever it wanted. Power of the coin is the ultimate power once we became more than hunter-gatherers. This is true in any economic system. The politicians will never cede that power voluntarily.
We made an attempt to remove politics from the monetary system almost a century ago with the creation of the Federal Reserve Bank in 1913. The whole point of that bank was to make it independent of politics. It was designed specifically not to be a branch of the Treasury or subject to the whims of any particular Administration. It has the power to print the money. Congress can authorize the amount of debt that can be incurred by the US and has the power to authorize the use of the funds. It doesn’t have the power under current law to determine the amount of money in the system, the Fed does that. Article One of the Constitution has two provisions dealing with money and coins. You should read both of them for yourself. The history of our nation is replete with examples over the last 100 years of the Fed demonstrating its independence and there being conflict and disagreement betwee a particular Administration and the Fed. Often a sitting President who wants a second term will want the Fed to prime the pump as it were and put more money into circulation in an election year to boost economic activity or take other action they deem useful for the short term to enhance their political aims. Almost every President has had difficulties and disagreements with the Fed at one time or the other. That is a good thing, not a bad thing. That tension between a current Administration and the Fed represents the difference between a long term view and a short term feel good solution to real or perceived troubles.
I am very worried about the relationship of the current Fed and the new Administration. The Fed chief is never, never supposed to be a spokesman for any Administration. His job is strictly monetary policy to insure a sound banking system to prop up or increase our economic growth or well-being. Bernacke is being rolled out too often now. He may have disagreements with the current Administration but he is talking the party line. His recent TV interview was not a good idea regardless of what he said. Regrettably he is giving the appearance of doing the bidding of the Treasury department. That might not be true but the appearance can’t be denied. Appearances matter. Ask any bride or groom. The recent stimulus bill is a grave concern. It is not his job to support that or to implement it or make it work. His job is the overall economy. That stimulus bill is pure politics and for a short term goal. That is not the precept of the Fed. I have the impression that the Treasury at the instigation of the President can give a call to Bernacke and seek his support for just about anything they want. I don’t care for his approach as you can tell but I do hope he fulfills his full term and doesn’t resign early to allow the new administration to appoint another Fed chief “friendly’ to their views. Again that would give the wrong impression. We are drowning in politics now as it is. We don’t need politics to invade the realm of the Fed’s domain. Once that camel’s nose is in the tent the whole camel will follow and I don’t believe any of us will like the result. Let’s at least keep the dung outside the tent.
The Fed is printing up over 1.2 trillion more dollars in the next several months to purchase the Treasury bills and mortgage backed securities. This was announced yesterday. There is nothing to support that money in terms of comodity value. The Congress will authorize the Treasury issuance then the Fed will buy them. Gold soared over $50 on the news and Treasuries dropped over 1/2 a point. You may think these are arcane matters that don’t affect you. They do. You best make the effort to learn something about it.