With every Increase of the Debt Ceiling we get Closer to Third-World Status

Posted by PITHOCRATES - February 8th, 2014

Week in Review

George W. Bush’s last deficit was $498.37 billion.  President Obama’s deficits were $1,539.22 billion, $1,386.92 billion, $1,350.31 billion, $1,120.16 billion and $680 billion, respectively.  President Obama has taken the national debt from $12,973,669,938,453 to $16,738,183,526,697.  And increase of $3,764,513,588,244 (29%).  Or the amount added to the national debt from 1791 through 1985.

So President Obama did in 5 years what his predecessors did in 194 years.  Putting the U.S. dollar in great peril.  For the only reason why the United States hasn’t become a third-world economic basket case is because the U.S. dollar is the world’s reserve currency.  But once the world loses confidence in the American dollar they may choose another reserve currency.  And if they do all of that printing and borrowing will hit the U.S. economy hard.  Making the inflation of the stagflation Seventies seem like child’s play.

We can’t keep printing and borrowing money.  For we are approaching a tipping point.  Yes, having the power to print money can forestall the inevitable.  As long as people still have confidence in your currency.  But if they don’t there is nothing to prevent the U.S. from spiraling down into third-world status just as every other nation that destroyed their economy with out of control printing and spending.  Making these debates over increasing the debt ceiling more than Kabuki Theater (see All’s Fair in Love, War and Government? by Robert Schlesinger posted 2/3/2014 on US News and World Report).

The way that the approach to the debt ceiling has changed – going from a rhetorical opportunity and classic round of Kabuki Theater where lawmakers feign outrage and denounce the debt ceiling increase they know they’re going to vote for anyway to a genuine threat to the economy – illustrates a larger trend in Washington: the movement away from certain accepted norms in our governance. As I’ve written before, there used to be unwritten rules which helped keep the governance train on its rails – they limited the use of the filibuster to rare issues, they made the notion of deliberately shutting down the government in order to extract policy concessions out of bounds and the same with the idea of intentionally harming the economy by not raising the debt ceiling.

Those norms have increasingly been replaced with an ends-justifies-the-means view that the pursuit of power makes anything OK. That’s a real problem for our democracy.

The ends-justifies-the-means in the pursuit of power?  Yes, that is a problem for our democracy.  Such as passing the Affordable Care Act on partisan lines with back room deals.  Causing people to lose the health insurance and doctors they liked and wanted to keep.  Higher insurance premiums and higher deductibles.  A cost that went from just under $1 trillion over ten years to over $1 trillion each year (if our health care is anything like Canada’s health care).  And prolonging the worst economic recovery since that following the Great Depression.  Even telling the Lie of the Year.  Horrible things for our Democracy.  All in the pursuit of power.  In the left’s quest for the holy grail of power.  National health care.

With our huge debt weighing down our democracy we are fast approaching the tipping point.  And raising the debt ceiling may not be the best thing to do.  So someone should be trying to get some spending cuts before agreeing to raise the debt ceiling.  To save our democracy.  Before it’s too late.  Thanks to the Democrats’ pursuit of power.  Where ‘the ends-justifies-the-means’.  Even if it turns the country into a third-world nation.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , ,

Bretton Woods System, Quasi Gold Standard, Inflation, Savings, Nixon Shock and Monetizing the Debt

Posted by PITHOCRATES - February 4th, 2014

History 101

(Originally published 2/5/2013)

The Bretton Woods System was a quasi Gold Standard where the U.S. Dollar replaced Gold

Government grew in the Sixties.  LBJ’s Great Society increased government spending.  Adding it on top of spending for the Vietnam War.  The Apollo Moon Program.  As well as the Cold War.  The government was spending a lot of money.  More money than it had.  So they started increasing the money supply (i.e., printing money).  But when they did they unleashed inflation.  Which devalued the dollar.  And eroded savings.  Also, because the U.S. was still on a quasi gold standard this also created a problem with their trade partners.

At the time the United States was still in the Bretton Woods System.  Along with her trade partners.  These nations adopted the U.S. dollar as the world’s reserve currency to facilitate international trade.  Which kept trade fair.  By preventing anyone from devaluing their currency to give them an unfair trade advantage.  They would adjust their monetary policy to maintain a fixed exchange rate with the U.S. dollar.  While the U.S. coupled the U.S. dollar to gold at $35/ounce.  Which created a quasi gold standard.  Where the U.S. dollar replaced gold.

So the U.S. had a problem when they started printing money.  They were devaluing the dollar.  So those nations holding it as a reserve currency decided to hold gold instead.  And exchanged their dollars for gold at $35/ounce.  Causing a great outflow of gold from the U.S.  Giving the U.S. a choice.  Either become responsible and stop printing money.  Or decouple the dollar from gold.  And no longer exchange gold for dollars.  President Nixon chose the latter.  And on August 15, 1971, he surprised the world.  Without any warning he decoupled the dollar from gold.  It was a shock.  So much so they call it the Nixon Shock.

To earn a Real 2% Return the Interest Rate would have to be 2% plus the Loss due to Inflation

Once they removed gold from the equation there was nothing stopping them from printing money.  The already growing money supply (M2) grew at a greater rate after the Nixon Shock (see M2 Money Stock).  The rate of increase (i.e., the inflation rate) declined for a brief period around 1973.  Then resumed its sharp rate of growth around 1975.  Which you can see in the following chart.  Where the increasing graph represents the rising level of M2.

M2 versus Retirement Savings

Also plotted on this graph is the effect of this growth in the money supply on retirement savings.  In 1966 the U.S. was still on a quasi gold standard.  So assume the money supply equaled the gold on deposit in 1966.  And as they increased the money supply over the years the amount of gold on deposit remained the same.  So if we divide M2 in 1966 by M2 in each year following 1966 we get a declining percentage.  M2 in 1966 was only 96% of M2 in 1967.  M2 in 1966 was only 88% of M2 in 1968.  And so on.  Now if we start off with a retirement savings of $750,000 in 1966 we can see the effect of inflation has by multiplying that declining percentage by $750,000.  When we do we get the declining graph in the above chart.  To offset this decline in the value of retirement savings due to inflation requires those savings to earn a very high interest rate.

Interest Rate - Real plus Inflation

This chart starts in 1967 as we’re looking at year-to-year growth in M2.  Inflation eroded 4.07% of savings between 1966 and 1967.   So to earn a real 2% return the interest rate would have to be 2% plus the loss due to inflation (4.07%).  Or a nominal interest rate of 6.07%.  The year-to-year loss in 1968 was 8.68%.  So the nominal interest rate for a 2% real return would be 10.68% (2% + 8.68%).  And so on as summarized in the above chart.  Because we’re discussing year-to-year changes on retirement savings we can consider these long-term nominal interest rates.

Just as Inflation can erode someone’s Retirement Savings it can erode the National Debt

To see how this drives interest rates we can overlay some average monthly interest rates for 6 Month CDs (see Historical CD Interest Rate).  Which are often a part of someone’s retirement nest egg.  The advantage of a CD is that they are short-term.  So as interest rates rise they can roll over these short-term instruments and enjoy the rising rates.  Of course that advantage is also a disadvantage.  For if rates fall they will roll over into a lower rate.  Short-term interest rates tend to be volatile.  Rising and falling in response to anything that affects the supply and demand of money.  Such as the rate of growth of the money supply.  As we can see in the following chart.

Interest Rate - Real plus Inflation and 6 Month CD

The average monthly interest rates for 6 Month CDs tracked the long-term nominal interest rates.  As the inflationary component of the nominal interest rate soared in 1968 and 1969 the short-term rate trended up.  When the long-term rate fell in 1970 the short-term rate peaked and fell in the following year.  After the Nixon Shock long-term rates increased in 1971.  And soared in 1972 and 1973.  The short-term rate trended up during these years.  And peaked when the long-term rate fell.  The short term rate trended down in 1974 and 1975 as the long-term rate fell.  It bottomed out in 1977 in the second year of soaring long-term rates.  Where it then trended up at a steeper rate all the way through 1980.  Sending short-term rates even higher than long-term rates.  As the risk on short-term savings can exceed that on long-term savings.  Due to the volatility of short-term interest rates and wild swings in the inflation rate.  Things that smooth out over longer periods of time.

Governments like inflationary monetary policies.  For it lets them spend more money.  But it also erodes savings.  Which they like, too.  Especially when those savings are invested in the sovereign debt of the government.  For just as inflation can erode someone’s retirement savings it can erode the national debt.  What we call monetizing the debt.  For as you expand the money supply you depreciate the dollar.  Making dollars worth less.  And when the national debt is made up of depreciated dollars it’s easier to pay it off.  But it’s a dangerous game to play.  For if they do monetize the debt it will be very difficult to sell new government debt.  For investors will demand interest rates with an even larger inflationary component to protect them from further irresponsible monetary policies.  Greatly increasing the interest payment on the debt.  Forcing spending cuts elsewhere in the budget as those interest payments consume an ever larger chunk of the total budget.  Which governments are incapable of doing.  Because they love spending too much.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , ,

The Petulant President scolds Republicans, Conservatives and Anyone Else who dares to Oppose Obamaism

Posted by PITHOCRATES - October 17th, 2013

Politics 101

The government shutdown is over. And we avoided defaulting on the national debt  Or so they say.  So who won and who lost?  Well, at this point in time it looks like the Democrats lost less than the Republicans.  But it is the American people who lost.  For they are stuck with Obamacare for the time being.  And President Obama can raise the national debt to a new record high.  But it gets worse.  This morning the president gave a petulant, God-awful speech scolding the Republicans, the Tea Party, talk radio, the blogosphere and pretty much anyone else who dares to oppose Obamaism (see Transcript of Obama Remarks on End of Standoff posted 10/17/2013 on The Wall Street Journal).

Good morning, everybody.  Please have a seat.

Well, last night, I signed legislation to reopen our government and pay America’s bills.  Because Democrats and responsible Republicans came together, the first government shutdown in 17 years is now over.  The first default in more than 200 years will not happen.  These twin threats to our economy have now been lifted.  And I want to thank those Democrats and Republicans for getting together and ultimately getting this job done.

There was never a risk of default.  With $2.45 trillion in annual revenue coming into the treasury from the taxpayers there was never a risk of the $415.7 billion annual interest payment on the debt going unpaid.  Lying about it just helped a petulant child get his way.  Waaa.

Now, there’s been a lot of discussion lately of the politics of this shutdown.  But let’s be clear:  There are no winners here.  These last few weeks have inflicted completely unnecessary damage on our economy.  We don’t know yet the full scope of the damage, but every analyst out there believes it slowed our growth.

What growth?  Since coming to office the president’s policies have lost approximately 9,966,000 jobs through the September jobs report.  That’s just shy of 10 million jobs he’s lost.  So what recovery?  Or is he just setting the stage to blame the worst economic recovery since that following the Great Depression on this 16 day shutdown?  And not the lost economic activity from those 10 million or so lost jobs?  Of course he is.  Because what are 10 million jobs when he can stick it to the Republicans?

We know that families have gone without paychecks or services they depend on.  We know that potential homebuyers have gotten fewer mortgages, and small business loans have been put on hold.  We know that consumers have cut back on spending, and that half of all CEOs say that the shutdown and the threat of shutdown set back their plans to hire over the next six months.  We know that just the threat of default — of America not paying all the bills that we owe on time — increased our borrowing costs, which adds to our deficit.

Yes, pity the government bureaucrats who had to go 16 days without reporting to work.  Even though they will be paid for those 16 days they missed.  Yes, pity the government bureaucrats.  And not the 10 million who have disappeared from the labor force since President Obama assumed office.  I mean, what are 5 years without a paycheck compared to missing 16 days of work?  Which the taxpayers will still pay them for?

Businesses cut back on spending and hiring because of the great uncertainty of a 16-day shutdown?  Are you sure it wasn’t the regulatory requirements of Obamacare that is forcing employers with close to 30 ‘full time’ employees (30 hours or more per week) to not hire any more workers?  Even pushing full-time workers to part time?  Are you sure this isn’t the reason why they’re not hiring?  Especially with the cost of health insurance going through the roof now that it must cover everything under the sun (such as pediatric care for a couple whose children are now grown adults) as well as pre-existing conditions?  Where someone can walk in off the street who was just diagnosed with cancer and buy an insurance policy for the first time in their life?  Are you absolutely sure it’s the 16-day shutdown and not Obamacare?   If so someone needs to attend a high school economics class to learn the first thing about economics.

And, of course, we know that the American people’s frustration with what goes on in this town has never been higher. That’s not a surprise that the American people are completely fed up with Washington.  At a moment when our economic recovery demands more jobs, more momentum, we’ve got yet another self-inflicted crisis that set our economy back.  And for what?

Again, are you sure it was the 16-day shutdown and not the 4 years or so of Obamacare?

There was no economic rationale for all of this.  Over the past four years, our economy has been growing, our businesses have been creating jobs, and our deficits have been cut in half. We hear some members who pushed for the shutdown say they were doing it to save the American economy — but nothing has done more to undermine our economy these past three years than the kind of tactics that create these manufactured crises.

The last fiscal year ending deficit while George W. Bush was president was $498.37 billion (adjusted for inflation).  At the end of the first fiscal year with President Obama in office the deficit soared to $1.539.22 trillion.  An increase of 208.9%.  It is this deficit number that he cut in half.  The one he exploded with his near trillion dollar stimulus that did not stimulate anything but unions and the president’s cronies on Wall Street and in Big Business.  Especially Big Green Business.

And the president had something else preventing him from spending as much as he did during his first term.  Sequestration.  Which the Democrats hate with a passion and want to get rid of.  So they can turn on the spending spigot once again.  Like they did during his first term.

And you don’t have to take my word for it.  The agency that put America’s credit rating on watch the other day explicitly cited all of this, saying that our economy “remains more dynamic and resilient” than other advanced economies, and that the only thing putting us at risk is — and I’m quoting here — “repeated brinksmanship.”  That’s what the credit rating agency said.  That wasn’t a political statement; that was an analysis of what’s hurting our economy by people whose job it is to analyze these things.

Really?  Brinkmanship?  You don’t think adding $6.2 trillion to the national debt during your presidency had anything to do with the credit rating agency’s concern about our debt paying ability?  A high school economics student can understand that the greater your debt is the greater your debt-paying problem.  Funny how you don’t, Mr. President.

That also happens to be the view of our diplomats who’ve been hearing from their counterparts internationally.  Some of the same folks who pushed for the shutdown and threatened default claim their actions were needed to get America back on the right track, to make sure we’re strong.  But probably nothing has done more damage to America’s credibility in the world, our standing with other countries, than the spectacle that we’ve seen these past several weeks.  It’s encouraged our enemies.  It’s emboldened our competitors.  And it’s depressed our friends who look to us for steady leadership.

I thought it would have been your bad foreign policy that did all those things.  Starting with the Green Revolution in Iran.  An uprising of the people against the Islamist and oppressive government of Iran.  The precursor to the Arab Spring.  Where you did nothing.  Leaving the good Iranian people with that oppressive Islamist government.  Which is currently working to produce a nuclear bomb.  Then there was the Arab Spring and you telling our friend and ally and anchor to peace and stability in the Middle East, Hosni Mubarak, that he had to go.  Turning Egypt over to the anti-Western Muslim Brotherhood.  And then there was Libya.  Another ally in the War on Terror, Muammar Gaddafi (who joined the fight against terrorism after our invasion of Iraq), that he had to go.  Turning Libya over to radical Islamists.  Who killed four Americans in Benghazi.  Then there was the red line fiasco with Syria.  If you cross that red line I will hem and haw and stammer.  Then I might say something else.  Then Vladimir Putin steps in and saves the day for their Syrian ally.  Russia.  Who suspended all adoptions to Americans to spite America.  Who are also helping the Iranians with their nuclear program.  All the while laughing at President Obama who they see as weak.  Who couldn’t get one nation to join him for military strikes against Syria.  If you want to talk about our prestige on the world stage you gave that up long ago.  For today no one fears the wrath of the United States these days.  With some nations seeing the United States becoming irrelevant in the world.  Especially Russia and China.  As well as radical Islam.

Now, the good news is we’ll bounce back from this.  We always do.  America is the bedrock of the global economy for a reason.  We are the indispensable nation that the rest of the world looks to as the safest and most reliable place to invest — something that’s made it easier for generations of Americans to invest in their own futures.  We have earned that responsibility over more than two centuries because of the dynamism of our economy and our entrepreneurs, the productivity of our workers, but also because we keep our word and we meet our obligations.  That’s what full faith and credit means — you can count on us.

And today, I want our people and our businesses and the rest of the world to know that the full faith and credit of the United States remains unquestioned.

There is a difference between economic investment and buying our bonds.  Any money that buys government bonds is money pulled out of the economy.  Investing in government bonds doesn’t create economic activity.  It actually destroys economic activity.  And the only worry the rest of the world had was what you were going to do, Mr. President.  Would you not pay the interest on the national debt out of spite to attack the Republicans?  That’s what they were worried about.  For even they knew we had the money to pay our debt without new borrowing.  They just don’t trust you.

But to all my friends in Congress, understand that how business is done in this town has to change.  Because we’ve all got a lot of work to do on behalf of the American people — and that includes the hard work of regaining their trust.  Our system of self-government doesn’t function without it.  And now that the government is reopened, and this threat to our economy is removed, all of us need to stop focusing on the lobbyists and the bloggers and the talking heads on radio and the professional activists who profit from conflict, and focus on what the majority of Americans sent us here to do, and that’s grow this economy; create good jobs; strengthen the middle class; educate our kids; lay the foundation for broad-based prosperity and get our fiscal house in order for the long haul.  That’s why we’re here.  That should be our focus.

Strong words coming from a professional activist.  For he was a community organizer.  And taught activism.  Funny how there are two types of activism.  The good kind in his world.  When it advances a liberal agenda.  And the bad kind in his world.  The kind based in conservatism.  The president hates conservative activism, otherwise known as a government of the people, by the people and for the people, and believes it should be silenced and replaced with one-party rule.

Now, that won’t be easy.  We all know that we have divided government right now.  There’s a lot of noise out there, and the pressure from the extremes affect how a lot of members of Congress see the day-to-day work that’s supposed to be done here. And let’s face it, the American people don’t see every issue the same way.  But that doesn’t mean we can’t make progress.  And when we disagree, we don’t have to suggest that the other side doesn’t love this country or believe in free enterprise, or all the other rhetoric that seems to get worse every single year.  If we disagree on something, we can move on and focus on the things we agree on, and get some stuff done.

And the Democrats calling the political opposition terrorists, arsonists, hostage takers, the Taliban, etc., how is that coming together to focus on the things we agree on?  To get some stuff done?  Well, Mr. President, it is obvious you believe compromise is the Republicans caving and becoming your bitch.  This is not a government of the people, by the people and for the people.  This is a government of, by and for you.

Let me be specific about three places where I believe we can make progress right now.  First, in the coming days and weeks, we should sit down and pursue a balanced approach to a responsible budget, a budget that grows our economy faster and shrinks our long-term deficits further.

At the beginning of this year, that’s what both Democrats and Republicans committed to doing.  The Senate passed a budget; House passed a budget; they were supposed to come together and negotiate.  And had one side not decided to pursue a strategy of brinksmanship, each side could have gotten together and figured out, how do we shape a budget that provides certainty to businesses and people who rely on government, provides certainty to investors in our economy, and we’d be growing faster right now.

The last time we did this little dance it was the same.  You want to raise taxes and cut no spending.  That’s your idea of a balanced approach.  Oh, you’ll promise spending cuts after we raise some taxes.  But those spending cuts will never come.  Democrats just don’t cut spending.  Unless they get themselves stuck in a sequester.  And that’s not even real spending cuts.  It’s only smaller increases in future spending.

Now, the good news is the legislation I signed yesterday now requires Congress to do exactly that — what it could have been doing all along.

And we shouldn’t approach this process of creating a budget as an ideological exercise — just cutting for the sake of cutting.  The issue is not growth versus fiscal responsibility — we need both.  We need a budget that deals with the issues that most Americans are focused on:  creating more good jobs that pay better wages.

Can the nation afford anymore of your job creation?  After losing some 10 million jobs we should just cut our losses.  And refuse anymore of your ‘help’ with the economy.

Cutting for the sake of cutting?  What, we don’t have a debt crisis that requires our debt ceiling to be raised again and again?  We’re spending too much.  Hence the need to keep raising our debt ceiling.  And Obamacare only makes this worse.  A lot worse.  Hence that 16-day government shutdown.  Or did he miss that?

And remember, the deficit is getting smaller, not bigger.  It’s going down faster than it has in the last 50 years. The challenges we have right now are not short-term deficits; it’s the long-term obligations that we have around things like Medicare and Social Security.  We want to make sure those are there for future generations.

Oh, you are devious, Mr. President.  The deficit is going down faster than in the last 50 years only because you raised it to record highs in your first year in office.  Your smallest deficit is still larger than George W. Bush’s last deficit.

Medicare?  You cut Medicare spending so you can spend that money on Obamacare.  And Social Security?  The Social Security Trust Fund has no cash in it.  It’s stuffed with government IOUs.  Because the government is spending so much money that they have to raid the Social Security Trust Fund to pay for it.  And even that’s not enough to prevent deficit spending.  So they’re robbing Peter to pay Paul.  This out of control spending is why Medicare and Social Security may not be there for future generations.

So the key now is a budget that cuts out the things that we don’t need, closes corporate tax loopholes that don’t help create jobs, and frees up resources for the things that do help us grow — like education and infrastructure and research.  And these things historically have not been partisan.  And this shouldn’t be as difficult as it’s been in past years because we already spend less than we did a few years ago.  Our deficits are half of what they were a few years ago.  The debt problems we have now are long term, and we can address them without shortchanging our kids, or shortchanging our grandkids, or weakening the security that current generations have earned from their hard work.

More on education?  That’s to shore up the teachers’ underfunded pensions.  Infrastructure?  That’s just pork-barrel spending.  Building airports where no one wants to fly.  Or high-speed rail that requires constant government subsidies.  Money that buys votes in Congress to pass huge spending bills.  Like Obamacare.  Which passed only by buying off Democrats with the Cornhusker Kickback, the Louisiana Purchase, the Florida Flim Flam, etc.

So that’s number one.  Number two, we should finish fixing the job of — let me say that again.  Number two, we should finish the job of fixing our broken immigration system.

There’s already a broad coalition across America that’s behind this effort of comprehensive immigration reform — from business leaders to faith leaders to law enforcement.  In fact, the Senate has already passed a bill with strong bipartisan support that would make the biggest commitment to border security in our history; would modernize our legal immigration system; make sure everyone plays by the same rules, makes sure that folks who came here illegally have to pay a fine, pay back taxes, meet their responsibilities.  That bill has already passed the Senate. And economists estimate that if that bill becomes law, our economy would be 5 percent larger two decades from now.  That’s $1.4 trillion in new economic growth.

There’s a reason why people hire illegal aliens.  So they can pay them less than legal citizens.  So once these illegals become legal they’re not going to work for illegal wages anymore.  So it will raise labor costs.  Forcing businesses to lay off some workers.  Creating no net economic benefit.  But the Democrats don’t care.  Because it’s not about the economy.  It’s about all those new Democrat voters.  To turn the nation, like they turned California, Democrat.

The majority of Americans think this is the right thing to do.  And it’s sitting there waiting for the House to pass it.  Now, if the House has ideas on how to improve the Senate bill, let’s hear them.  Let’s start the negotiations.  But let’s not leave this problem to keep festering for another year, or two years, or three years.  This can and should get done by the end of this year.

Really?  A majority of people want immigration reform?  And because of that we should pass it?  Well, the majority of people want to repeal Obamacare.  So perhaps this is a negotiation the Republicans and Democrats can agree on.  To please the majority of people.  Exchange immigration reform for the repealing of Obamacare.

Number three, we should pass a farm bill, one that American farmers and ranchers can depend on; one that protects vulnerable children and adults in times of need; one that gives rural communities opportunities to grow and the long-term certainty that they deserve.

You know, it was a farm bill that helped precipitate the Great Depression.  Price parity.  Increasing the price of farm goods so they were closer to the price of nonfarm goods.  In response to their increased productivity due to the mechanization of the farm that produced bumper crops.  Increasing supply beyond demand.  Causing the price of farm goods to fall.  So Hoover passed legislation raising the price of food.  Making it harder to put food on the table for the average American.  An example of the unintended consequences of government intervention.  Such as requiring gasoline to include a portion of the corn crop.  Thus raising the price of corn.  And everything in the food chain downstream from corn.  Like beef, chicken, milk, eggs, etc.  No, the last thing consumers need who are trying to put food on the table is another farm bill.

Again, the Senate has already passed a solid bipartisan bill.  It’s got support from Democrats and Republicans.  It’s sitting in the House waiting for passage.  If House Republicans have ideas that they think would improve the farm bill, let’s see them.  Let’s negotiate.  What are we waiting for?  Let’s get this done.

So, passing a budget; immigration reform; farm bill.  Those are three specific things that would make a huge difference in our economy right now.  And we could get them done by the end of the year if our focus is on what’s good for the American people. And that’s just the big stuff.  There are all kinds of other things that we could be doing that don’t get as much attention.

I understand we will not suddenly agree on everything now that the cloud of crisis has passed.  Democrats and Republicans are far apart on a lot of issues.  And I recognize there are folks on the other side who think that my policies are misguided — that’s putting it mildly.  That’s okay.  That’s democracy.  That’s how it works.  We can debate those differences vigorously, passionately, in good faith, through the normal democratic process.

And sometimes, we’ll be just too far apart to forge an agreement.  But that should not hold back our efforts in areas where we do agree.  We shouldn’t fail to act on areas that we do agree or could agree just because we don’t think it’s good politics; just because the extremes in our party don’t like the word “compromise.”

When the Republicans wanted to add tax breaks for small business in the stimulus bill President Obama refused to listen.  Because he won the election.  And elections have consequences, he said.  And to the winner goes the spoils.  When the Democrats had the House, Senate and the White House they had no interest in compromise.  And didn’t.  But when they don’t have all the power they expect the other side to compromise.  And give them what they want.  That’s their idea of compromise.  Unconditional surrender.

I will look for willing partners wherever I can to get important work done.  And there’s no good reason why we can’t govern responsibly, despite our differences, without lurching from manufactured crisis to manufactured crisis.  In fact, one of the things that I hope all of us have learned these past few weeks is that it turns out smart, effective government is important.  It matters.  I think the American people during this shutdown had a chance to get some idea of all the things, large and small, that government does that make a difference in people’s lives.

We hear all the time about how government is the problem.  Well, it turns out we rely on it in a whole lot of ways.  Not only does it keep us strong through our military and our law enforcement, it plays a vital role in caring for our seniors and our veterans, educating our kids, making sure our workers are trained for the jobs that are being created, arming our businesses with the best science and technology so they can compete with companies from other countries.  It plays a key role in keeping our food and our toys and our workplaces safe.  It helps folks rebuild after a storm.  It conserves our natural resources.  It finances startups.  It helps to sell our products overseas.  It provides security to our diplomats abroad.

Really?  You want to go there?  Security of our diplomats?  The administration that let 4 Americans die in Benghazi on its watch?  Despite ample warnings?  Warnings so serious that the British pulled out of Benghazi?  Before our four diplomats were killed?  But there was an election, wasn’t there?  And we just couldn’t have trouble with terrorists during an election, could we?  Not for the president that won the War on Terror with the killing of Osama bin Laden.

So let’s work together to make government work better, instead of treating it like an enemy or purposely making it work worse.  That’s not what the founders of this nation envisioned when they gave us the gift of self-government.  You don’t like a particular policy or a particular president, then argue for your position.  Go out there and win an election.  Push to change it. But don’t break it.  Don’t break what our predecessors spent over two centuries building.  That’s not being faithful to what this country is about.

The Founding Fathers created LIMITED government.  What we have today is far from limited.  The progressives/liberals have destroyed what the Founding Fathers gave us.  Today we have a big, fat, bloated bureaucracy.  And the Republicans would like to change it by winning elections.  Which isn’t that easy when the Obama administration suppresses the vote by turning the IRS loose on the Tea Party.  Limiting their fundraising ability.  Causing their turnout to be less than it was in the 2010 midterm election.  When the Tea Party stirred the people to vote the House of Representatives back to the Republicans.  Which they weren’t going to let happen in 2012.  Hence using the IRS to suppress the Republican vote.

And that brings me to one last point.  I’ve got a simple message for all the dedicated and patriotic federal workers who’ve either worked without pay or been forced off the job without pay these past few weeks, including most of my own staff: Thank you.  Thanks for your service.  Welcome back.  What you do is important.  It matters.

You defend our country overseas.  You deliver benefits to our troops who’ve earned them when they come home.  You guard our borders.  You protect our civil rights.  You help businesses grow and gain footholds in overseas markets.  You protect the air we breathe and the water our children drink.  And you push the boundaries of science and space, and you guide hundreds of thousands of people each day through the glories of this country. Thank you.  What you do is important.  And don’t let anybody else tell you different.  Especially the young people who come to this city to serve — believe that it matters.  Well, you know what, you’re right.  It does.

And those of us who have the privilege to serve this country have an obligation to do our job as best we can.  We come from different parties, but we are Americans first.  And that’s why disagreement cannot mean dysfunction.  It can’t degenerate into hatred.  The American people’s hopes and dreams are what matters, not ours.  Our obligations are to them.  Our regard for them compels us all, Democrats and Republicans, to cooperate, and compromise, and act in the best interests of our nation –- one nation, under God, indivisible with liberty and justice for all.

Thanks very much.

The majority of people want to repeal Obamacare.  But the president doesn’t care about these American people.  Because they don’t share his vision of expanding government power in our lives.  People who would prefer to keep the health insurance they have.  And the doctors they have.  As well as not paying more for their health insurance.  But what they want isn’t as important to President Obama as what he wants.  So there is no compromise.  No cooperation.  Or acting in the best interest of the United States.  For this may be one nation, under God, indivisible with liberty and justice for all.  Where all Americans are equal.  Only some are more equal than others.  Like those who share President Obama’s vision.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

China’s Continuing Credit Expansion is Starting to Worry the IMF

Posted by PITHOCRATES - September 15th, 2013

Week in Review

As the U.S. fiscal year draws to a close the Republicans and Democrats are digging in their heels over the upcoming debt ceiling debate.  The Republicans want to cut spending and taxes to rein in out-of-control spending.  So they don’t have to keep borrowing money.  Running up the national debt.  The Democrats, on the other hand, say, “Who cares about the debt?  We’ll be dead and buried when the nation collapses under the weight of this mammoth debt load.  As long as we get what we want why should we care about future generations?”  At least, that’s what their actions say.

A lot of leading economists on the left, Keynesians economists, see no problem in running up the debt.  Print that money, they say.  Keep that expansion growing.  What could possibly go wrong?  Especially when the federal government has the power to print money?  Just look at what the Japanese did in the Eighties.  And what the Chinese are doing now (see As the West Faltered, China’s Growth Was Fueled by Debt by Christina Larson posted 9/12/2013 on Bloomberg Businessweek).

As demand for Chinese exports diminished in the wake of the financial meltdown, the Chinese economy kept humming at more than 9 percent annual gross domestic product growth each year from 2008 to 2011. The trick? “A huge monetary expansion and lending boom,” says Patrick Chovanec, chief strategist at Silvercrest Asset Management and a former professor at Tsinghua University’s School of Economics and Management in Beijing. With bank lending restrictions loosened in late 2008, “Total debt accelerated from 148 percent to 205 percent of GDP over 2008-12,” according to a May 2013 report from research firm CLSA Asia-Pacific Markets. When Beijing tried to rein in the banks beginning in late 2010, shadow banking—lending outside the formal sector—exploded. Today “China is addicted to debt to fuel growth,” according to the CLSA report, with the economy hampered by “high debt and huge excess capacity with only 60 percent utilization.”

The Beijing-based firm J. Capital Research dubbed 2012 the “Year of the (White) Elephant” in a report detailing some of China’s questionable infrastructure build-out. To take one example, 70 percent of the country’s airports lose money, yet more are being built in small and remote cities. At the shiny new Karamay Airport in far western Xinjiang province, there are four check-in counters serving two flights daily. Local governments have splurged on “new towns” and “special zones,” many of which have already fallen into disrepair. The $5 million Changchun Zhenzhuxi Park, intended as a scenic area, is now a large public garbage dump, as the local landscaping bureau never agreed to provide maintenance. Near the southern city of Hangzhou, a forlorn replica of the Eiffel Tower overlooks a faux Paris—the ersatz arrondissement attracted hardly any residents, and local media have dubbed it a ghost town.

“In China, you often hear people say they’re building for the future,” explains Chovanec. “But if you build something and it’s empty for 20 years, does that make any sense? By that point, it may already be falling apart.”

The classic Keynesian argument for economic stimulus is the one about paying people to dig a ditch.  Then paying them to fill in the ditch they just dug.  The ditch itself having no economic value.  But the people digging it and filling it in do.  For they will take their earnings and spend it in the economy.  But the fallacy of this argument is that money given to the ditch-diggers and the fillers-in could have been spent on something else that does have economic value.  Money that was pulled out of the private sector economy via taxation.  Or money that was borrowed adding to the national debt.  And increasing the interest expense of the nation.  Which negates any stimulus.

If that money was invested to expand a business that was struggling to keep up with demand that money would have created a return on investment.  That would last long after the people who built the expansion spent their wages.  This is why Keynesian stimulus doesn’t work.  It is at best temporary.  While the long-term costs are not.  It’s like getting a 30-year loan to by a new car.  If you finance $35,000 over 5 years at a 4.5% annual interest rate your car payment will be $652.51 and the total interest you’ll pay will be $4,018.95.  That’s $39,018.95 ($35,000 + 4,018.95) of other stuff you won’t be able to buy because of buying this car.  If you extend that loan to 30 years your car payment will fall to $177.34.  But you will be paying that for 30 years.  Perhaps 20-25 years longer than you will actually use that car.  Worse, the total interest expense will be $23,620.24 over those 30 years.  That’s $58,620.24 ($35,000 + 23,620.24) of stuff you won’t be able to buy because of buying this car.  Increasing the total cost of that car by 50.2%.

This is why Keynesian stimulus does not work.  Building stuff just to build stuff even when that stuff isn’t needed will have long-term costs beyond any stimulus it provides.  And when you have a “high debt and huge excess capacity with only 60 percent utilization” bad things will be coming (see IMF WARNS: China Is Taking Ever Greater Risks And Putting The Financial System In Danger by Ambrose Evans-Pritchard, The Telegraph, posted 9/13/2013 on Business Insider).

The International Monetary Fund has warned that China is taking ever greater risks as surging credit endangers the financial system, and called for far-reaching reforms to wean the economy off excess investment…

The country has relied on loan growth to keep the economy firing on all cylinders but the law of diminishing returns has set in, with the each yuan of extra debt yielding just 0.20 yuan of economic growth, compared with 0.85 five years ago. Credit of all types has risen from $9 trillion to $23 trillion in five years, pushing the total to 200pc of GDP, much higher than in emerging market peers…

China’s investment rate is the world’s highest at almost 50pc of GDP, an effect largely caused by the structure of the state behemoths that gobble up credit. This has led to massive over-capacity and wastage.

“Existing distortions direct the flow of credit toward local governments and state-owned enterprises rather to households, perpetuating high investment, misallocation of resources, and low private consumption. A broad package of reforms is needed,” said the IMF.

Just like the miracle of Japan Inc. couldn’t last neither will China Inc. last.  Japan Inc. put Japan into a deflationary spiral in the Nineties that hasn’t quite yet ended.  Chances are that China’s deflationary spiral will be worse.  Which is what happens after every Keynesian credit expansion.  And the greater the credit expansion the more painful the contraction.  And with half of all Chinese spending being government spending financed by printing money the Chinese contraction promises to be a spectacular one.  And with them being a primary holder of US treasury debt their problems will ricochet through the world economy.  Hence the IMF warning.

Bad things are coming thanks to Keynesian economics.  Governments should have learned by now.  As Keynesian economics turned a recession into the Great Depression.  It gave us stagflation and misery in the Seventies.  It gave the Japanese their Lost Decade (though that decade actually was closer 2-3 decades).  It caused Greece’s economic collapse.  The Eurozone crisis.  And gave the U.S. record deficits and debt under President Obama.

The history is replete with examples of Keynesian failures.  But governments refuse to learn these lessons of history.  Why?  Because Keynesian economics empowers the growth of Big Government.  Something free market capitalism just won’t do.  Which is why communists (China), socialists (the European social democracies) and liberal Democrats (in the United States) all embrace Keynesian economics and relentlessly attack free market capitalism as corrupt and unfair.  Despite people enjoying the greatest liberty and economic prosperity under free market capitalism (Great Britain, the United States, Canada, Australia, Hong Kong, Taiwan, South Korea, etc.).  While suffering the most oppression and poverty under communism and socialism (Nazi Germany, the Soviet Union, the communist countries behind the Iron Curtain in Eastern Europe, the People’s Republic of China under Mao, North Korea, Cuba, etc.).

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

FT187: “It’s odd how we can never afford a tax cut but we can always afford new spending.” —Old Pithy

Posted by PITHOCRATES - September 13th, 2013

Fundamental Truth

The Democrats’ idea of Bipartisanship is Republican Capitulation

It’s that time of the year again.  Summer is winding down.  The weather is starting to cool.  The harvest is coming in.  The stores are already stocking their shelves with Halloween decorations.  Yes, it’s the end of the government’s fiscal year.  The time the government will run out of money unless Congress passes a new budget.  Or what passes for budgets these days.  Continuing resolutions.

This that magical time of year when Republicans and Democrats come together to negotiate the government’s budget for the upcoming fiscal year.  The give and take process where they sit down and work with each other.  Civilly.  Saying things like, “Yes, that is too costly.  We need to spend less there.”  And, “You’re right, that is important to the people and we should spend more there.”  And the occasional, “I agree.  That program is no longer needed and we can remove it from the budget entirely.”

I am, of course, lying.  These are things that are rarely, if ever, said to each other.  For when it comes to these budget battles it is always the same.  The Republicans try to be responsible and cut spending.  The Democrats then call them greedy corporate toady Nazis.  The Republicans will then suffer a general emasculation and give the Democrats their spending hikes.  And perhaps a tax hike or two.  While asking them to please like them and invite them to the cool parties.  And the Democrats will then commend the Republicans’ bipartisanship.  What others would call capitulation.  Happy that things are once again right in the world.  With the Republicans once again the Democrats’ bitch.

Entitlement Spending creates a Permanent Underclass that keeps the Privileged Class in Power

John Emerich Edward Dalberg-Acton, known more simply as Lord Acton, said, “Power tends to corrupt, and absolute power corrupts absolutely.  Great men are almost always bad men.”  And boy was he on to something there.  For something happens when some good conservatives go to Washington.  They enter a world like no other.  Nothing they could ever have dreamed of.  A world that once belonged only to the nobility and the aristocracy.  Those things Americans fought for their independence from.  And here they are.  After winning an election to rein in the kind of government spending that makes this living possible.  And they say, “What, end all of this?  Are you mad?”

So many cross over to the dark side.  Sell their souls.  Forsake their constituents.   Do great dishonor to our Founding Fathers.  All because they like the money and the power.  Especially the power.  Some resist.  Those from the Tea Party seem more immune than most when it comes to the corrupting influences of Washington.  But these people who stand on principle?  Those who serve their constituents honorably?  The left will fling every invective upon them.  A figuratively flinging of excrement.  To try to beat them down and break them.  To get them, too, to forsake their constituents.  And to join them as they drop trou and defecate on the Constitution.  Figuratively, too, of course.  At least I hope so.

So this is what makes the budget process so adversarial.  You have those who are trying to do the right thing for the people.  And those on the other side who want to corrupt these people.  To get them to quit fighting against them and to join them.  So they can maintain their privileged class.  This is what all that entitlement spending is all about.  It’s nothing but alms.  To keep the people content enough so they don’t rise up.  But not too content that they don’t fear that those greedy corporate toady Nazis may take away their meager alms.  And once they get someone to think like that they have a voter for life.

There comes a Point when Raises in Tax Rates actually Reduce Tax Revenue

The key, then, is keeping people poor.  For the whole privileged class thing those in Washington have doesn’t work unless they have poor people who need them.  Which is why they spend so much time reminding the poor how much they need them.  The Democrats in Congress.  Who are always there fighting for them.  Keeping their alms flowing.  But also keeping them poor.  Which a welfare state does well.  Because if you have enough to subsist lethargy will do the rest and destroy the spirit.  Getting the poor to accept their place as a permanent underclass.  That needs a permanent privileged class taking care of them.

There is only one problem.  This destroys lives.  People in this permanent underclass may have gone on and done great things.  They may have been doctors.  They may have been engineers.  They may have been entrepreneurs.  But they will never be those things because the left sacrificed them to maintain their privileged class.  Forever consigning them to the underclass.  So the privileged class has someone to take care of.  No matter how costly it gets to maintain this entitlement culture.  No matter how great the deficits get.  Or how great the national debt grows.

So there is another problem. As you convert taxpayers into tax-consumers you have to keep raising taxes on those remaining in the tax base.  But as you raise tax rates you put the brakes on economic expansion.  And with reduced economic activity there is reduced tax revenue.  There comes a point when raises in tax rates actually reduce tax revenue.  And we’ve passed that point.  Which is why we have record deficits.  A record national debt.  And the worst economic recovery since that following the Great Depression.  Because we are spending, taxing and regulating too much.  Which is why uncorrupted conservatives want to cut taxes, defund Obamacare, roll back other costly regulations and reduce spending.  Things the left bitterly opposes.  For doing so means we don’t need them as much as they need us to need them.

So as the budget battle commences you will hear the usual refrain from the left.  We can’t afford tax cuts.  As they equate tax cuts with government spending.  But we can always afford new government spending.  So the left will call for bipartisanship.  That is, capitulation.  And eventually make the Republicans their bitch.  Again.  And increase the national debt.  Again.  Putting the nation on the path to bankruptcy.  What the left considers a small price to pay to maintain their privileged class.  As long as that bankruptcy comes after they’re dead and buried.  After they enjoyed their time in the privileged class.  Which is why the left is also less likely to believe in God and life after death.  For it is easier to be bad when there is nothing to fear after a bad life.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Why the Deficit and the Debt Matter

Posted by PITHOCRATES - March 25th, 2013

Economics 101

Keynesian Economists say there is Nothing Wrong with Running a Deficit or a Growing National Debt

We had the sequester.  Before that it was the fiscal cliff.  Before that it was the debt ceiling debate.  We hear these things.  But it’s like water off a duck’s back.  It doesn’t sink in.  We hear but we don’t understand it.  In one ear and out the other.  In fact people are tired of hearing of how we go from one financial crisis to another.  Enough already the people say.  Enough.  Pity, really.  As there are some serious consequences to the decisions our politicians are poorly making.

Part of the problem is that these economic issues are difficult to relate to for average Americans just trying to take care of their families.  A trillion dollar deficit?  A debt reaching $16 trillion?  A lot of people don’t know the difference between the deficit and the debt.  Including many of our television news talking heads.  And then the sheer magnitude of the word ‘trillion’ is just difficult to fathom.  We know it’s big.  But no one uses it in their personal lives.  We know a $200 utility bill is expensive.  An $8,000 property tax bill is expensive.  A $40,000 car is expensive.  But a trillion dollar deficit?  It is hard to make a connection to the size of a trillion dollars.

Compounding the problem are all these Keynesian economists who say there is nothing wrong with running a deficit.  Or the growing national debt.  Despite the financial debt crisis in the Eurozone.  Where running a deficit and growing national debt have caused great problems.  But the Keynesians say that can never happen here.  Because our economy is so much larger.  And the U.S. can still print money.  So people don’t know what to believe.  The government and their economists sound like they understand this stuff.  While a lot of people don’t.  So the people who don’t are more inclined to believe those who sound like they understand this stuff.  Which makes it easier for the politicians who are making all of these horrible decisions to make even more of them.

Over time Interest Charges run up the Outstanding Balance on our Credit Cards

So to understand deficits and debt it would be better to bring it down to our level.  And once we understand it at our level then we can understand better what’s happening at the national level.  So let’s do that.  Let’s imagine a person earning $30,000 a year.  Or $2,500 monthly.  Let’s further assume this person’s earnings are not enough to support their lifestyle.  So they turn to their credit card each month for an additional $100 in spending.  Which is this person’s deficit.  The amount they spend over what they earn.  Or money they spend that they don’t have.  So they charge it.  For this example we’ll assume a credit card with a 24% annual percentage rate.  In the following table we crunch these numbers for 120 months.  Or ten years.

Personal Deficit Spending and Cummulative Debt R2

The columns in the table are fairly self explanatory.  Each month we start with $2,500.  We start borrowing money in month 1 so there is no interest in the first month.  We subtract the interest from the monthly income to arrive at income less the interest charge on the credit card.  Our spending budget each month is $2,600.  Requiring $100 in credit card purchases in the first month.  Each month this increases by the amount of interest charged each month.  The last column is a running total of the credit card balance.

Over time the interest charges run up the outstanding balance on the credit card.  Because we are paying interest on both our purchases and our interest.  So as time goes by this increases our credit card balance at an increasing rate. Soon the interest charges take a larger percentage of our monthly income.  So much so that we need to borrow more and more to maintain our current level of spending.  The interest charge on the 120th month equals 38% of our monthly income.  Chances are that it would never get this bad as we would be unable to make our monthly payment long before the 120th month.  And with an outstanding debt approaching our annual income we probably would have filed for bankruptcy protection long ago.  For at these interest rates it wouldn’t take long before that debt grew beyond our ability ever to pay it back.

Deficit and the Debt Matter because Income is Limited

We can see this better if we graph these numbers.  We can see the cumulative debt growing at a greater rate over time.  Just as does the percentage of our personal income going solely to paying the interest on our debt.  Truly wasted money.  Spending money for things we purchased long ago.  And if we spent it on restaurants and vacations we have nothing tangible to show for this.  Nothing we can sell to get our money back.  Just interest payments that seem to go on forever and ever.  For something that gave us a few hours or days of pleasure.  Which is the worst kind of debt to have.  As there is no way to pay it down other than with current earnings.  Meaning we have to make sacrifices today and tomorrow for spending we did long, long ago.

Personal Income Debt and Interest as Percent of Income R1

On the chart we have a horizontal line for monthly income.  And one for annual income.  We can see that it only takes 21 months for our credit card balance to exceed our monthly income.  Not even two years.  But only 1.9% of our monthly income is going to pay for interest on the debt.  Which doesn’t sound that bad.  So we keep charging.  Just after three years of doing this we break $100 in interest expense.  Requiring 4.2% of our earnings to go to pay the interest on the debt.  It only takes another 2 years to break $200 in interest expense (8.4% of earnings).  It only takes another year to bring the interest charge to $300 (12.3% of earnings).  In 99 months the interest charge breaks $600 (24% of earnings).  And the total outstanding credit card debt is now greater than our annual earnings. Making it very unlikely that we’ll ever be able to pay this balance down.

Anyone who charged a little too much on their credit cards knows what this feels like.  And what those phone calls from collection agencies are like.  Not good.  Anyone who charged anywhere near this example no doubt brought great stress into their lives.  They might have lost their house.  Their retirement savings.  Their kids’ college funds.  Or had no choice but to file a personal bankruptcy.  But when we run our debt up this high there comes a point where we cut up the credit cards.  Making a serious cut in our spending.  Because that’s all we can do.  We can’t just earn a lot more money.  And we can’t print money.  If we could do either we would not have a debt problem in the first place.

This is where average Americans and the federal government differ.  Average people have no choice but to be responsible.  While the federal government can allow the problem to grow and grow.  For they can arbitrarily raise their income.  By raising taxes.  And they can print money.  Unfortunately for average Americans both of these options make life worse for them.  Raising taxes makes us cut our personal spending as if we ran up our credit cards.  Forcing us to get by on less.  And printing money causes inflation.  Raising prices.  Which, of course, forces us to get by on less.  This is why the deficit and the debt matter.  For income is limited.  Whether it’s ours.  Or the federal government’s.  And when you spend more than you have more money goes to paying interest on the debt.  Which is money pulled out of the economy and thrown away.  The ultimate cost of spending money you don’t have.  Money thrown away.  And, of course, potential bankruptcy.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , ,

Bretton Woods System, Quasi Gold Standard, Inflation, Savings, Nixon Shock and Monetizing the Debt

Posted by PITHOCRATES - February 5th, 2013

History 101

The Bretton Woods System was a quasi Gold Standard where the U.S. Dollar replaced Gold

Government grew in the Sixties.  LBJ’s Great Society increased government spending.  Adding it on top of spending for the Vietnam War.  The Apollo Moon Program.  As well as the Cold War.  The government was spending a lot of money.  More money than it had.  So they started increasing the money supply (i.e., printing money).  But when they did they unleashed inflation.  Which devalued the dollar.  And eroded savings.  Also, because the U.S. was still on a quasi gold standard this also created a problem with their trade partners.

At the time the United States was still in the Bretton Woods System.  Along with her trade partners.  These nations adopted the U.S. dollar as the world’s reserve currency to facilitate international trade.  Which kept trade fair.  By preventing anyone from devaluing their currency to give them an unfair trade advantage.  They would adjust their monetary policy to maintain a fixed exchange rate with the U.S. dollar.  While the U.S. coupled the U.S. dollar to gold at $35/ounce.  Which created a quasi gold standard.  Where the U.S. dollar replaced gold.

So the U.S. had a problem when they started printing money.  They were devaluing the dollar.  So those nations holding it as a reserve currency decided to hold gold instead.  And exchanged their dollars for gold at $35/ounce.  Causing a great outflow of gold from the U.S.  Giving the U.S. a choice.  Either become responsible and stop printing money.  Or decouple the dollar from gold.  And no longer exchange gold for dollars.  President Nixon chose the latter.  And on August 15, 1971, he surprised the world.  Without any warning he decoupled the dollar from gold.  It was a shock.  So much so they call it the Nixon Shock.

To earn a Real 2% Return the Interest Rate would have to be 2% plus the Loss due to Inflation

Once they removed gold from the equation there was nothing stopping them from printing money.  The already growing money supply (M2) grew at a greater rate after the Nixon Shock (see M2 Money Stock).  The rate of increase (i.e., the inflation rate) declined for a brief period around 1973.  Then resumed its sharp rate of growth around 1975.  Which you can see in the following chart.  Where the increasing graph represents the rising level of M2.

M2 versus Retirement Savings

Also plotted on this graph is the effect of this growth in the money supply on retirement savings.  In 1966 the U.S. was still on a quasi gold standard.  So assume the money supply equaled the gold on deposit in 1966.  And as they increased the money supply over the years the amount of gold on deposit remained the same.  So if we divide M2 in 1966 by M2 in each year following 1966 we get a declining percentage.  M2 in 1966 was only 96% of M2 in 1967.  M2 in 1966 was only 88% of M2 in 1968.  And so on.  Now if we start off with a retirement savings of $750,000 in 1966 we can see the effect of inflation has by multiplying that declining percentage by $750,000.  When we do we get the declining graph in the above chart.  To offset this decline in the value of retirement savings due to inflation requires those savings to earn a very high interest rate.

Interest Rate - Real plus Inflation

This chart starts in 1967 as we’re looking at year-to-year growth in M2.  Inflation eroded 4.07% of savings between 1966 and 1967.   So to earn a real 2% return the interest rate would have to be 2% plus the loss due to inflation (4.07%).  Or a nominal interest rate of 6.07%.  The year-to-year loss in 1968 was 8.68%.  So the nominal interest rate for a 2% real return would be 10.68% (2% + 8.68%).  And so on as summarized in the above chart.  Because we’re discussing year-to-year changes on retirement savings we can consider these long-term nominal interest rates.

Just as Inflation can erode someone’s Retirement Savings it can erode the National Debt

To see how this drives interest rates we can overlay some average monthly interest rates for 6 Month CDs (see Historical CD Interest Rate).  Which are often a part of someone’s retirement nest egg.  The advantage of a CD is that they are short-term.  So as interest rates rise they can roll over these short-term instruments and enjoy the rising rates.  Of course that advantage is also a disadvantage.  For if rates fall they will roll over into a lower rate.  Short-term interest rates tend to be volatile.  Rising and falling in response to anything that affects the supply and demand of money.  Such as the rate of growth of the money supply.  As we can see in the following chart.

Interest Rate - Real plus Inflation and 6 Month CD

The average monthly interest rates for 6 Month CDs tracked the long-term nominal interest rates.  As the inflationary component of the nominal interest rate soared in 1968 and 1969 the short-term rate trended up.  When the long-term rate fell in 1970 the short-term rate peaked and fell in the following year.  After the Nixon Shock long-term rates increased in 1971.  And soared in 1972 and 1973.  The short-term rate trended up during these years.  And peaked when the long-term rate fell.  The short term rate trended down in 1974 and 1975 as the long-term rate fell.  It bottomed out in 1977 in the second year of soaring long-term rates.  Where it then trended up at a steeper rate all the way through 1980.  Sending short-term rates even higher than long-term rates.  As the risk on short-term savings can exceed that on long-term savings.  Due to the volatility of short-term interest rates and wild swings in the inflation rate.  Things that smooth out over longer periods of time.

Governments like inflationary monetary policies.  For it lets them spend more money.  But it also erodes savings.  Which they like, too.  Especially when those savings are invested in the sovereign debt of the government.  For just as inflation can erode someone’s retirement savings it can erode the national debt.  What we call monetizing the debt.  For as you expand the money supply you depreciate the dollar.  Making dollars worth less.  And when the national debt is made up of depreciated dollars it’s easier to pay it off.  But it’s a dangerous game to play.  For if they do monetize the debt it will be very difficult to sell new government debt.  For investors will demand interest rates with an even larger inflationary component to protect them from further irresponsible monetary policies.  Greatly increasing the interest payment on the debt.  Forcing spending cuts elsewhere in the budget as those interest payments consume an ever larger chunk of the total budget.  Which governments are incapable of doing.  Because they love spending too much.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , ,

2012 Endorsements: Alexander Hamilton

Posted by PITHOCRATES - October 18th, 2012

2012 Election

When Hamilton looked out Across the Vast North American Continent he saw Great Economic Opportunity

Alexander Hamilton was born in the British West Indies.  At the age of eleven he had to get a job.  As his father abandoned his family after losing all the family money.  Young Alexander worked at Cruger and Beckman’s.  a New York trading house.  A window onto the world.  And international trade.  Where young Alexander learned about the world.  And business.  He had a gift for numbers.  He was bright.  And driven.  Born in the British West Indies he was also something else.  A Founding Father without any state lineage.  With no provincial views.  During the prelude to American independence when other patriots talked about the states going their own way he was already thinking of an American union.  And only of an American union.

The British response to the Boston Tea Party was the Intolerable Acts.  Or the Coercive Acts in Britain.  Where the British put the hurt on Boston.  And Massachusetts.  To separate it and isolate it from the rest of the colonies.  Reverend Samuel Seabury took to the papers and argued against uniting the other colonies to support Massachusetts.  That the people should support their king.  And Parliament.  And not the spoiled, trouble-making people of Boston.  Hamilton took to the papers and argued in support of union.  And Boston.  Warning the people that this was just the beginning for Britain.  More taxes would certainly follow.  Hamilton warned the people to put away their sectional differences.  As this attack on one was an attack on all.  And that if they gave up on Boston it would only be a matter of time before other colonies met the same fate.

That was all well and fine during the warm months of summer.  But the American colonies were part of the British Empire.  Which was a mercantilist empire.  Whose colonies shipped raw materials to the mother country.  And the proceeds from those sales were used to buy manufactured goods made from those raw materials in the mother country.  Making the colonists dependent on Britain for their clothing.  The lack of which would make a very cold and miserable winter.  Which led a lot of people to agree with Reverend Samuel Seabury.  But not Hamilton.  For he looked out across the American colonies and saw something else.  Economic independence.  The South had cotton.  The North could raise sheep for wool.  And they could build factories in the cities to make cloth and clothing.  Staffed by skilled immigrants from European factories.  This is what Hamilton saw when he looked out across the vast North American continent.  Great economic opportunity.  Made possible by an American union.

Hamilton spent the Winter Seasons at Valley Forge and Morristown Reading and Studying Economics and Public Finance

When the Revolutionary War came Hamilton joined the Continental Army.  Fought bravely.  Then ended up as General Washington’s aide-de-camp.  Serving in Washington’s inner circle he knew what the commanding general knew.  And he knew the sorry state of the army.  Half-naked, hungry and unpaid.  While some civilians were living the life of Riley.  Making a fortune off of hording commodities and selling them at high prices.  Which they could do with impunity as the Continental Congress was powerless to stop them.  As it was at the mercy of the states.  The national congress was broke and had little legal authority.  Which let the speculators run roughshod over it.  Leaving the people sacrificing the most for independence half-naked, hungry and unpaid.  Diminishing the fighting ability of the army.  Which greatly increased the risk of defeat.

Hamilton learned an important lesson.  The stronger the national government was, and the richer it was, the easier it was to wage war.  And the easier it was NOT to be defeated in war.  The problem here was that the national government was too weak.  While the state governments were too strong.  Which was fine for the people living normal lives in their states.  But not the soldiers in the field fighting for the nation.  Making things worse was inflation.  The Continental Congress was printing money.  As were the states.  And the more they printed the more they depreciated it.  Which led to even higher prices.  More profits for the speculators.  And even more hardship for the army.  Which had to at times take things from the local people in exchange for IOUs.  Making these people hate the army.  And the army hate the people.  As they were the ones risking life and limb for what was to them an ungrateful people.

Hamilton spent the winter seasons at Valley Forge and Morristown reading and studying economics and public finance.  And set out to solve the inflation problem.  What he learned was that a lot of people were benefiting by the rampant inflation.  Debtors loved it.  For the greater the inflation was the easier it was to repay loans in those depreciated dollars.  Especially the farmers.  They sold their produce at ever higher prices.  Borrowed money to buy land (and repaid those loans in depreciated dollars).  While escaping much of the ravages of inflation themselves.  Because they were farmers.  And were self-sufficient.  Eating what they grew.  Even making their own clothes.  For some inflation was a way to get rich quick at the detriment of others.  To help dissuade such activity Hamilton suggested high taxes in kind (if a farm grew wheat that they turned into flour they would pay a portion of their flour to the government as a tax) on those benefitting from inflation who where destroying the confidence in the dollar.

If Hamilton were Alive Today he would likely Endorse the Republican Candidates Mitt Romney and Paul Ryan

Hamilton also suggested a plan for a national bank.  To help restore the credit of the United States.  And to provide a source of credit for the national government.  The bank would be owned half by the government and half by rich investors.  By letting the rich investors make money on the bank it would, of course, encourage them to invest in the bank.  And provide capital the government could borrow.  Hamilton believed in bringing the rich people closer to the government.  So the government had access to their money.  Both would win in such a partnership.  And both would have a vested interest in seeing the government succeed.  The Continental Congress used some of Hamilton’s ideas.  But not enough to bring his vision to life.  He would get another chance, though.  When he became America’s first Secretary of the Treasury.

At the end of the Revolutionary War the United State’s finances were in a mess.  State governments and the national government owed money.  As they used that money to prosecute the war Hamilton believed the national government should assume the states’ debts and roll in into the national debt.  And, more importantly, the new national debt would help strengthen the union.  By binding the states to the national government.  These actions also helped to restore the nation’s credit.  Allowing it to borrow money to repay old debts.  As well as finance new spending.  Hamilton also got his bank.  And he produced a report on manufacturers.  A plan to use government funds to help launch American industry.  So they could catch up to Great Britain.  And even surpass the former mother country.

Hamilton pushed for these things because he wanted to use the power of government to make America strong and fiercely independent in the world of nations.  With an economic plan that would make the nation wealthy.  And allowing it to afford a military that equaled or surpassed Great Britain.  He did not want to make America wealthy to implement a massive welfare state.  His idea of partnering government with business was to make an American Empire modeled on the British Empire.  Making it a rich military superpower.  Able to project force.  Maintaining peace through strength.  Much like the British did with their Pax Britannica that he didn’t live to see.  And to protect what it had from anyone trying to take it away from them.  So based on this who would he endorse in the 2012 election?  The party that had business-friendly policies to encourage economic growth.  The party that was more anti-inflation.  The party that would best exploit the nation’s resources.  And the party that favored a strong military.  Which is NOT the Democrat Party.  No, if Alexander Hamilton were alive today he would likely endorse the Republican candidates Mitt Romney and Paul Ryan.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Revolutionary War, Sovereign Debt, Report on Public Credit, Hamilton, Jefferson, Madison, Assumption and Residency Act

Posted by PITHOCRATES - August 16th, 2012

Politics 101

In 1792 the Outstanding Debt at all Levels of Government was 45% of GDP

Wars aren’t cheap.  Especially if they last awhile.  The American Revolutionary War lasted some 8 years until the British and Americans signed the Treaty of Paris (1782) officially ending all hostilities.  So the Revolutionary War was a very costly war.  The ‘national’ government (the Continental Congress) owed about $70 million.  The states owed another $25 million or so.  And the Continental Army had issued about $7 million in IOUs during the war.  Added up that comes to $102 million the new nation owed.  About 45% of GDP.  (Or about 35% without the state debt added in.)

To put that in perspective consider that the Civil War raised the debt to about 32% of GDP.  World War I raised it to about 35%.  World War II raised it to about 122%.  Following the war the debt fell to about 32% at its lowest point until it started rising again.  And quickly.  In large part due to the cost of the Vietnam War and LBJ’s Great Society.  Government spending being so great Nixon turned to printing money.  Depreciating the dollar’s purchasing power in every commodity but one.  Gold.  Which was pegged at $35/ounce.  Losing faith in our currency foreign governments traded their U.S. dollars for gold.  Until Nixon decoupled the dollar from gold in 1971.  Ushering in the era of Keynesian economics, deficit spending and growing national debts.  Because of increased spending for social programs governments everywhere now have debts approaching 100% of GDP.  And higher.  But I digress.

So 45% of GDP was huge in 1792.  And it continued to be huge.  Taking a devastating civil war and a devastating world war to even approach it.  It took an even more devastating world war to exceed it.  And now we’ve blown by that debt level in the era of Keynesian economics.  Without the devastation of another World War II.  This debt level has grown so great that for the first time ever in U.S. history Standard and Poor’s recently lowered the United States’ impeccable sovereign debt rating.  And restoring that debt rating at today’s spending levels will be a daunting task.  But imagine trying to establish a sovereign debt rating after just becoming a nation.  Already with a massive debt of 45% of GDP.

In Hamilton’s Report on Public Credit the New Government would Assume Outstanding Debt at all Levels of Government

There was only one choice for America’s first president.  The indispensible one.  George Washington.  Some delegates at the Philadelphia Convention in 1787 who were skeptical of the new Constitution only supported it because they had someone they could trust to be America’s first president.  George Washington.  Benjamin Franklin, John Adams, Thomas Jefferson and James Madison were indispensible at times.  But not as indispensible as Washington.  For without him the Continental Army would have ceased to exist after that winter at Valley Forge.  That same army would have mutinied (for back pay and promised pensions) after the war if he didn’t step in.  Our experiment in self-government would have ended if he did not relinquish his power after the war.  We wouldn’t have ratified the Constitution without having Washington to be America’s first president.  And our experiment in self-government would have ended if he did not relinquish his power.  Again.  After his second term as president.

With the state of the government’s finances after the war there was another Founding Father that was indispensible.  Not as indispensible as Washington.  But close.  For without him the Washington presidency may have failed.  As well as the new nation.  Because of that convoluted financial mess.  The Continental Congress borrowed money.  The states borrowed money.  Some of which went to the Continental Congress.  The army took stuff they needed to survive in exchange for IOUs.  There were bonds, loans and IOUs at every level of government in every state.  Complicating the matter is that most of the instruments they sold ended up in the hands of speculators who bought them for pennies on the dollar.  As the original holders of these instruments needed money.  And did not believe the Continental Congress would honor any of these obligations.  For before the Constitution the government was weak and had no taxing authority.  And no way to raise the funds to redeem these debt obligations.

A few tried to get their arms around this financial mess.  But couldn’t.  It was too great a task.  Until America’s first secretary of the treasury came along.  Alexander Hamilton.  Who could bring order to the chaos.  As well as fund the new federal government.  He submitted his plan in his Report on Public Credit (January 1790).  And the big thing in it was assumption.  The federal government would assume outstanding debt at all levels of government.  Including those IOUs.  At face value.  One hundred pennies on the dollar.  To whoever held these instruments.  Regardless of who bought them first.  “Unfair!” some said.  But what else could they do?  This was the 1700s.  There weren’t detailed computer records of bondholders.  Besides, this was a nation that, like the British, protected property rights.  These speculators took a risk buying these instruments.  Even if at pennies on the dollar.  They bought them for a price the seller thought was fair or else they wouldn’t have sold them.  So these bonds were now the property of the speculators.

Jefferson and Madison traded Hamilton’s Assumption for the Nation’s Capital

Of course to do this you needed money.  Which Hamilton wanted to raise by issuing new bonds.  To retire the old.  And to service the new.  Thus establishing good credit.  In fact, he wanted a permanent national debt.  For he said, “A national debt, if not excessive, is a national blessing.”  Because good credit would allow a nation to borrow money for economic expansion.  And it would tie the people with the money to the government.  Where the risk of a government default would harm both the nation and their creditors.  Making their interests one and the same.

That’s not how Thomas Jefferson saw it, though.  He had just returned from France where he witnessed the beginning of the French Revolution.  Brought upon by a crushing national debt.  And he didn’t want to tie the people with the money to the government.  For when they do they tend to exert influence over the government.  But Hamilton said debt was a blessing if not excessive.  He did not believe in excessive government debt.  And he wanted to pay that debt off.  As his plan called for a sinking fund to retire that debt.  Still, the Jefferson and Hamilton feud began here.  For Hamilton’s vision of the new federal government was just too big.  And too British.  Madison would join Jefferson to lead an opposition party.  Primarily in opposition to anything Hamilton.  Who used the Constitution to support his other plan.  A national bank.  Just like the British had.  Based on the “necessary and proper” clause in Article I, Section 8.  Setting a precedent that government would use again and again to expand its powers.

At the time the nation’s capital was temporarily in New York.  A final home for it, though, was a contentious issue.  Everyone wanted it in their state so they could greatly influence the national government.  Hamilton’s struggle for assumption was getting nowhere.  Until the horse-trading at the Jefferson dinner party with Hamilton and Madison.  To get the nation’s capital close to Virginia (where it is now) Jefferson offered a deal to Hamilton.  Jefferson and Madison were Virginians.  Give them the capital and they would help pass assumption.  They all agreed to the deal (though Jefferson would later regret it).  Congress passed the Residency Act putting the capital on the Potomac.  And all the good that Hamilton promised happened.  America established good credit.  Allowing it to borrow money at home and abroad.  And a decade of prosperity followed.  Hamilton even paid down the federal debt to about 17.5% of GDP near the end of America’s second president’s (John Adams) term in office (1800).  Making Hamilton indispensible in sustaining this experiment in self-government.  Keeping government small even though it was more powerful than it was ever before.  Of course his using that “necessary and proper” argument really came back to bite him in the ass.  Figuratively, of course.  As government used it time and again to expand its role into areas even Hamilton would have fought to prevent.  While Jefferson no doubt would have said with haughty contempt, “I told you so.  This is what happens when you bring money and government together.  But would you listen to me?  No.  How I hate you, Mr. Hamilton.”

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

It’s Entitlement Reform or Bust. Literally.

Posted by PITHOCRATES - April 27th, 2011

Boehner not Wedded to Ryan’s plan to Reform Medicare

Just when you thought someone was getting serious about addressing the 800 pound gorilla in the room.  That thing that is driving this car into the ditch.  Entitlement spending.  Unsustainable entitlement spending.  The young guns laid down a bold plan.  But the old guard is now backing away from it (see Boehner: ‘Not Wedded’ to Ryan Plan for Medicare by Danny Yadron posted 4/26/2011 on The Wall Street Journal).

House Speaker John Boehner (R., Ohio) said he is “not wedded” to Mr. Ryan’s plan to redo Medicare. “Paul Ryan has an idea that’s certainly worth consideration,” Mr. Boehner said in an interview with ABC News. “I’m for it. It’s our idea. It’s Paul [Ryan]’s idea. Now other people have other ideas. I’m not wedded to one single idea.”

For crying out loud, who do you gotta sleep with to get some entitlement reform around here?

This is why the Founding Fathers did not include Entitlements in the Constitution

Somebody needs to do something with Medicare and fast.  Because the current entitlement spending (the biggest chunk of which is Medicare) is going to bankrupt the United States.  The Heritage Foundation has published a new book chock full of charts (some of which they crunched from 2008 tax data).  If you’re looking for a good book to curl up with on a rainy night, this isn’t it.  But if you want to make some sense out of all these numbers being thrown around out there, this is a must read. 

Based on current projections, by 2049 spending on Social Security, Medicaid, Obama Subsidy Program and Medicare will consume all tax receipts, leaving nothing else to pay for military spending or interest on the debt (see Entitlements Will Consume All Tax Revenues by 2049 from The Heritage Foundation 2011 Budget Chart Book).

If the average historical level of tax revenue is extended, spending on Medicare, Medicaid and the Obamacare subsidy program, and Social Security will consume all revenues by 2049. Because entitlement spending is funded on autopilot, no revenue will be left to pay for other government spending, including constitutional functions such as defense.

Sure, some may not care that the military will be completely defunded.  But at the rate of growth of this entitlement spending on ‘autopilot’, we won’t be able to pay that other great expense.  Interest on the federal debt.  And that’s a big deal.  For it’s what everyone is talking about right now.  Now that we’re fast approaching the legal debt ceiling.  If we don’t raise it, the Obama administration claims, we’ll destroy the credit worthiness of the nation (see Treasury quietly plans for failure to raise debt ceiling by Lori Montgomery and Brady Dennis posted 4/26/2011 on The Washington Post).

The White House is warning that catastrophe will strike if Congress fails to raise the limit on the national debt: With too little cash to pay creditors, the U.S. government would default. Interest rates would skyrocket. And the economic recovery would collapse.

So, yeah, this entitlement spending is pretty serious.  If unchecked, its growth will make it impossible to pay for defense and interest on our debt.  And continuous deficit spending adds more and more to the debt.  Other than a spike during World War II, the national debt as a percentage of GDP was at or below 50%.  Obama has taken that above 50% for the first time since FDR.  And then it just soars after that.  By 2050 they project it to be 344% of GDP (see National Debt Set to Skyrocket from The Heritage Foundation 2011 Budget Chart Book).

In the past, wars and the Great Depression contributed to rapid but temporary increases in the national debt. Over the next few decades, runaway spending on Medicare, Medicaid, and Social Security will drive the debt to unsustainable levels.

Of course, a trillion dollar stimulus or two and a national health care program only compounds the problem.  Even Obama is now saying we can’t spend more than we have, implying that we’re just not taxing the people enough for the current level of spending.  But it’s not a lack of taxing that caused the problem.  It’s the orgy of spending that is (see Runaway Spending, Not Inadequate Tax Revenue, Is Responsible for Future Deficits from The Heritage Foundation 2011 Budget Chart Book).

The main driver behind long-term deficits is government spending[,] not low revenues. While revenue will surpass its historical average of 18.0 percent of GDP by 2021, spending will shoot past its historical average of 20.3 percent, reaching 26.4 percent in the same year.

But didn’t we cause the deficit by letting the rich not pay their fair share of taxes?  George W. Bush gave the rich unfair tax breaks.  And President Obama renewed the tax breaks for the rich.  It seems to me that if we would only stop the free ride of the rich we could solve a lot of our fiscal problems.  I mean, just how much are these cheap bastards paying anyway? 

Well, funny you should ask.  Because they’re paying a lot.  The top 1%, the richest of the rich (those earning $380,354+ annually)?  These cheap bastards are paying 38.02% of all federal income taxes.  The top 10% (those earning $113,799+ annually)?  These cheap bastards pay 69.94% of all federal income taxes.  It appears that these cheap bastards aren’t all that cheap after all.  The rich are paying the lion’s share of all federal income taxes.  While the bottom 50% (those earning $33,048 or less annually) are only paying 2.7% of all federal income taxes (see The Top 10 Percent of Earners Paid 70 Percent of Federal Income Taxes from The Heritage Foundation 2011 Budget Chart Book).

Top earners are the target for new tax increases, but the U.S. tax system is already highly progressive. The top 1 percent of income earners paid 38 percent of all federal income taxes in 2008, while the bottom 50 percent paid only 3 percent. Forty-nine percent of U.S. households paid no federal income tax at all.

It’s the entitlements, stupid.  They’re breaking the bank.  When the Founding Fathers wrote the Constitution there wasn’t any entitlement spending in it.  Why?  Because they didn’t want them in the Constitution.  It wasn’t in their plan for the federal government.  Why?  Because they all feared what would happen when people started voting themselves money from the federal treasury.  Franklin warned that it would be the end of the republic.  You see, he said if we started doing that we would eventually end up exactly where we are.  Wise man, that Franklin.  As were all the Founding Fathers.  They knew better than to give us a democracy.  They wanted people who knew better (or should know better) between the people and the treasury.  So that some demagogue couldn’t come along and promise federal benefits in exchange for votes.  Like they do today.  And plan to do until the country spends itself into the ground.  Obama’s 2012 budget calls for entitlement spending that consume 58% of the entire budget (see More Than Half of the President’s Budget Would Be Spent on Entitlement Programs from The Heritage Foundation 2011 Budget Chart Book).

In combination with other entitlements, Medicare, Medicaid, and Social Security constitute the lion’s share of President Obama’s 2012 budget. In contrast, spending on foreign aid represents 2 percent.

That’s an infinity percent increase ((58%-0%)/0%) since 1787.   For something the Founding Fathers didn’t want the federal government to do.  And trying to pay for this is forcing the nation into a “catastrophe.”  If they were alive today they’d probably say, “See, I told you so, you stupid sons of bitches.  And, by the way, thanks for taking our gift to you and destroying it in a little over 200 years.  Makes those 8 years of the Revolution all the more worth it.  You should have listened to us.  But no!  What do we know?  The English Civil War, the Enlightenment, the Magna Carta…what are these?  Sure, they influenced us.  But what do they mean to you?  Probably about as much as our constitution.  Whatever the hell you want it to mean.  Because it’s a ‘living document’.  “Sure, the Founding Fathers wrote this but they meant something completely different.”  Oh, did we?  How interesting.  We were so stupid we didn’t even know how stupid we were.  Gee, thanks for pointing that out to us.  You ungrateful sons of bitches.”

Or something like that.

American Civil War II

Everyone knows we have a problem with entitlement spending.  It will eventually bankrupt the United States.  We all know it has to be reformed.  But no one wants to because it may cost votes.  You see, you don’t buy votes by taking money back.  You buy votes by giving money away.  So everyone just kicks the can down the road.  All the while the cost of reform grows ever higher.  Much like it did in the first half of the 19th century.  When we kept kicking another can down the road.  Always trying to find a compromise to fix things for today.  And letting someone else worry about tomorrow.  I’m sure you know what I’m talking about.  If you don’t, here’s a hint.  That problem ended about 150 years ago.  At the conclusion of the American Civil War.

We have a growing underclass that pays no income taxes that is now half of the population.  We have a small middle class/rich that is paying most of the taxes.  And a ruling elite.  Kind of reminds me of another civil war.  The French Revolution.  So it is not inconceivable that our class warfare could turn into actual warfare.  There was civil strife in Greece when they went bankrupt.  But the European Union bailed them out.  The question here is who will bail out the United States?  Or, rather, who can bail out the United States?  For, at the moment, it doesn’t look like anyone can.

Speaking in worst case scenarios, it may become necessary to rewrite our history books.  We will have to revise the American Civil War to the American Civil War I (1861-1865).  To differentiate it from the American Civil War II.  Whose start and end dates have yet to be determined.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , ,

« Previous Entries