What is it About Economics…The Debt Deal Examined

Given that it’s debt talk time in Washington, I thought I would repost my discussion from 2011. Given that Washington is still behaving the same, my discussion – with the exception of statistics cited – is still relevant. Indeed, after last year’s S&P credit rating downgrade of the U.S. and the Federal Reserve’s continued spending, the debt ceiling issue should be in the forefront of everyone’s mind. Below are a few other articles concerning Washington spending.


Government spending is out of control.  The national debt is almost equal to GDP (97%).  Unemployment is at 9.6% officially, almost 20% unofficially.  The debt ceiling game in Washington leaves little room for comfort among middle class Americans and investors.  A U.S. credit downgrade is imminent.  The future is not bright.  So what is it about economics that leaves so many people (on many occasions myself included) confused and bewildered into a state of apathy?  After all, are we not taught the fundamental aspects of economics, namely that competition preserves ingenuity, the law of demand determines fair (market) prices, and that a market free of government encourages investment for future growth because the market is the amalgamation of millions of choices – for America approximately 311 million.  So long as these phenomena are allowed to occur unimpeded, the path toward prosperity continues.  As more jobs are created and more products…

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Sad But Enlightening Debt Statistics

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To those still hoping to see a reconciliation in Washington over the debt ceiling, the following statistics show that the debt problem is not a Democratic or Republican issue, nor is it an issue that can be solved by raising the debt ceiling.  Indeed, repetitive increases in the U.S. debt threshold have lead to the very problem Washington claims can be fixed by taking on more debt.  The current debt-ceiling debate is nothing more than a political charade meant to mask the vicious death spiral painted below.

The following are 17 national debt statistics which prove that we have sold our children and our grandchildren into perpetual debt slavery….

#1 As of December 28th, the U.S. national debt was $13,877,230,355,933.00.  (Currently, our national debt is 14,342,830,116,551.28, an increase of roughly $500,000,000,000 in just 7 months).

#2 If the federal government began right at this moment to repay the U.S. national debt at a rate of one dollar per second, it would take over 440,000 years to pay off the national debt.

#3 If the federal government began repaying the national debt at a rate of $10 million dollars a day it would take approximately 3,800 years to pay off the national debt.

#4 Today, the U.S. national debt is increasing by roughly 4 billion dollars every single day.

#5 The U.S. government is borrowing approximately 2.63 million more dollars every single minute.

Click to read the rest.

Government spending is quite simply an issue created by government.  Both parties are guilty, and the first and most important obstacle of the American people is to overcome their political allegiances to any given party.  Once this is done, government may be returned to the people.  But the people must first be ready.  That is, we must take account of our own faults so as not to repeat them.  Consequently, we must overcome a second and perhaps more difficult obstacle.  We must come to terms with our own bad spending habits.  Jim Quinn explains the behavioral phenomenon known as the “peacock syndrome” quite exquisitely.

“The herd has been mad since 1970 and with the post economic collapse of 2008, some people are recovering their senses slowly, and one by one. The country was overrun by flocks of ostentatious peacocks displaying their plumage in an effort to impress their friends, families and work colleagues. What set the flaunting American peacocks apart was the fact they financed their splendid display of plumage with $0 down and 0% interest for seven years. The lifestyles of the rich and famous miraculously became available to the poor and middle class through the availability of easy abundant credit provided by the friendly kind hearted Wall Street banks and their heroin dealers at the Federal Reserve.”

This is an intriguing read for those interested in the behavioral implications of economics.

“Sad But Enlightening Debt Statistics” also available on Technorati


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The Debt Ceiling, A Political Red Herring

As bipartisan efforts at a debt-ceiling deal failed yet again over the weekend, the American public are left with yet another false, albeit ideologically reinforcing, rift between political allegiances.  And as usual, the media mask the real issue at hand (the solvency of the United States government) with yet another political red herring (raising the debt ceiling).  President Obama’s July 25 address to the nation presented the two issues as one.  However, due in part to increasingly opposed political ideologies and a growing worry among market analysts, the idea that the U.S. may lose its AAA rating is now a major source of anxiety for many investors, and rightly so.

Despite all this, what is critical at this stage in the fiscal game is not whether to increase the U.S. debt threshold.  This is, in part, a political sideshow to conceal the insolvency of the federal government.  President Obama stated the routine nature of increasing the debt threshold, yet he did not explicitly acknowledge the insolvency of the federal government.  Instead, he talked politics and ideology to the American people to once again appeal to the sentiments that have increasingly defined a critically partisan Washington.  Consequently, the debt-ceiling issue, from the perspective of politicians, has become a last-ditch-effort at saving face with the American people.

Whether we want to see the writing on the wall or not, it is written clearly.  The U.S. is bankrupt.  Our defense spending has increased for decades and out-paces all other industrialized countries combined.  Entitlement spending is now at unmanageable levels.  And since the 2008 crisis, stimulus spending has added over $5 trillion to the national debt, with little tangible results for the taxpayer except the logical expectation of increased taxation and much smaller revenue streams.  Here are some numbers to consider.

  • “Official” national debt: $14.3 trillion
  • U.S. GDP: $14.7 trillion
  • Ratio of Debt to GDP: 97%

This, however, does not include the unfunded obligations from Social Security and Medicare that add up to a staggering $62 trillion.  In reality, some place the US debt-to-GDP ratio well above that of Greece, which sits at 143%.  According to Joel Bowman of the Daily Reckoning, this puts the individual on the hook for about $46K, $130K per taxpayer.  If we continue down this road of unlimited spending, our national debt could jump another $9 trillion to $22.9 trillion by 2015.  This is $70K per citizen, or almost $190k per taxpayer.  And the government wants to raise the debt ceiling.

The bottom line is that America cannot afford to continue spending at anywhere near its current levels.  Of course, this begs the question as to where cuts should come from, ushering in American political chicanery.  But the fundamental issue to those who see through the ponzi scheme that is money creation is that at its core, America needs a much more fiscally sound government.  Sean Egan, Managing Director of Egan-Jones Rating Co., stated recently:

…the big issue is adjusting the debt to GDP [ratio].  There are three problems in the United States.  One is that the debt to GDP is at 100 or so percent, compared to Canada, which is a true AAA, that’s at about 35%.  The second thing is that you have a dysfunctional government….we have three undeclared wars that have costs of $3 trillion.  The U.S. government’s debt has gone from $8 trillion to $14 trillion over the past five to six years.  Three of this [$3 trillion] is from undeclared wars, two of these [$2 trillion] is from the debt crisis that hasn’t been addressed.  We haven’t solved, we haven’t addressed what has gotten us into this difficulty to start with.

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As bipartisan efforts continue to fail in Washington, the reality of a U.S. credit downgrade becomes more poignant.  The Wall Street Journal acknowledged that many are starting to view a rise in the debt threshold as falling short of addressing the real issue.  “Moody’s Investors Service, Standard & Poor’s and Fitch Ratings have all warned they might cut the US credit rating.  S&P, in particular, has said it could move even if a debt-reduction deal is met and the $14.29 trillion federal debt ceiling is raised.”  It seems that the act of raising the debt ceiling, once deemed normal by politicians and investors, is now sending a signal of fiscal instability to many.  Kevin Williams had this to say:

The United States is not on a downgrade watch because the markets fear we won’t raise the debt ceiling in time to avoid a default; the United States is on a downgrade watch because the markets believe the debt-ceiling debate presents the last real opportunity for the government to enact a meaningful fiscal-reform program before it is well and truly too late to avoid a national crisis. The credit agencies, wisely or not, aren’t worried about the short-term political fight leading to an immediate default, but about the near- to medium-term fiscal situation, which is plainly unsustainable.

And this is the political red herring.  Although the U.S. has raised its debt-ceiling numerous times in the past, the implications that raising it now will fail to preserve the government’s credit rating suggests that the true issue is not the debt-ceiling, but an inadequate and fiscally over-extended government. 

 Average Americans will feel the effects perhaps the most.  Even a modest increase in interest rates resulting from a US credit downgrade will severely limit the government’s ability to pay down the national debt.    Moreover, a prolonged decrease in productivity will undoubtedly continue.  This could likely result in increased taxation, coupled with an already weak dollar and high unemployment rate, leading the average American to expect little in future earnings.  Consequently, savings for retirement and large purchases will decline, which will again target mainly middle class America, while the repercussions of decreased savings will detract from capital investments for future production.  This, in essence, is a death spiral for America.

From the politician’s viewpoint, the only solution left to the government is to stimulate the economy.  But this means printing more money (deficit spending), whence the call to raise the debt ceiling.  And the effects of that will be far more devastating to the average American than any politician or bureaucrat will publicly acknowledge.  While market analysts and rating agencies are beginning to see the US as perhaps a not-so-prudent bet, the market itself could very well dictate the movement of capital away from US shores.  The cause?  I would argue that depreciating any currency will always lead to decreased investment. Why invest in US business when dollars purchase less than other currencies?   When a nation creates its own currency out of thin air, i.e. without production regulating its creation and circulation, its value (how much it can buy, or its purchasing power) will only fall.  Joel Bowman has this to say of devaluing money via the printing press: “a money’s utility as a medium of exchange is directly proportionate to the amount of people who assign it value and, thereby, accept it as a store of wealth and facilitator of trade. To the extent that a money is easily reproducible, to the extent that it may be printed at whim or otherwise debased by the actions of central bankers, it loses its claim on the value to which we assign it.”  The essence of money relies not only on its ability to act as a universal medium of exchange, but on its ability to command a given amount (its value) in a market.  As this falls, so too does the prospect of investment by foreign and domestic investors.

These are the issues to consider, namely the effects of unlimited spending on the average American and the erosion of the monetary unit as a substantial medium of exchange by unsustainable fiscal and monetary policies.  The time for change is now, but raising the debt ceiling is irrelevant to money already spent and will prove inconsequential to the solvency and credibility of the United States government.

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Economic Cannibalism: A Lesson from the Soviets

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Simon Black’s June 14th article entitled “What are the Social Implications of Economic Collapse?” makes a clear-cut diagnosis of America’s imminent fall from its economic pedestal.  The point of no return is passed according to Black.  Foreign buyers of Treasury securities are undoubtedly nervous over the credibility of U.S. debt, and as we lose their business the only option for Washington is to turn up the printing press at the Federal Reserve.  Deficit spending has evolved into an all-out race to the bottom of the dollar.  The diagnosis is in.  Massive inflation and an attempt to continue government austerity via higher taxation will erode much of America’s purchasing power along with her savings.  The final result will be what Black and many others have termed economic cannibalism.  On this, Black makes a poignant reference that bears the full light of Ayn Rand’s vision as laid out in Atlas Shrugged.

In the best traditions of Atlas Shrugged, the government will continue its persecution of the productive class– professionals, investors, entrepreneurs, and skilled workers. Existing taxes will rise, new taxes will be created, trade barriers will be enacted, and a maze of cost prohibitive regulations will be passed.

In the private sector, the results will be stifled incentive, which translate into a serious lack of innovation and growth.  The public however will see still worse effects:

When inflation eats away at a family’s already meager standard of living, when austerity eliminates the benefits to which recipients have grown accustomed, when default vanquishes a retiree’s savings, when high taxes make workers feel like they’re just government serfs– this is when the real turmoil will begin.

Why do we continue down a path to ruin when it is so clearly lit by the beacon of bankruptcy?  One may be so bold as to draw a useful comparison between the fiscal inadequacies of the U.S. over the past two decades with that of the Soviets.  In 1982, President Reagan in a June 8th address to the English House of Commons, said with a wagging finger, “the Soviet system pours its best resources into the making of instruments of destruction.  The constant shrinkage of economic growth combined with the growth of military production is putting a heavy strain on the Soviet people.  What we see here is a political structure that no longer corresponds to its economic base, a society where productive forces are hampered by political ones” (my emphasis).  One may argue then, that the U.S. system of government no longer “corresponds” to the economic realities that dictate pragmatic policy.  Our political structure instead ignores  the logical implications of its policies in favor of safeguarding political interests, thus rendering such policies and the political structure itself highly illogical and contrary to our best interests.

So as we continue to look to government for solutions, perhaps we should ask ourselves if government is itself the source of the problem.  America has gone through many changes in its lifetime, but never has the social and ideological fabric been altered so drastically as since the Great Depression and the beginning of the American welfare state.  Since then, deficit spending (printing money in the name of economic recovery and future stability), government austerity, and continually growing defense spending has left America desperately insolvent, while declining investments in education and a shrinking middle class has left many clinging to the bosom of government like newborn pups.  This is not democracy.  This is not liberty.  It is the natural evolution of the welfare state.

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The Truth Concerning Quantitative Easing, Inflation, and the Federal Reserve

What in the World is Quantitative Easing?

The Federal Reserve’s second round of quantitative easing (QE) begun last November is scheduled to end this month and inject another $600 billion into the economy.  According to Bernanke and most high-profile economists, the effect of QE is stimulus, stimulus, stimulus. But what exactly is QE?  It is no surprise that Federal Reserve policy is cloaked in technical jargon, and this is just one more example. To clear things up a bit, QE is simply an economic euphemism for printing money. Think of the economy as a watch. While the gears are all the different markets, policies, and institutions (monetary and fiscal policies, interest groups, political parties, etc.) that make up an economy, money is simply the oil (no pun intended) that keeps the gears from binding.  The Federal Reserve System – against the better judgment of economists and elected officials of the early twentieth century – has become the watchmaker.

Recall the primary issue of 2008 was a liquidity crisis, which was essentially the unwillingness of banks to lend.  The result was a complete international market seizure, whereby cash was no longer circulating to keep the gears lubricated.  Once cash-flow stopped, the watchmaker knew he had only one option to save face.  He claims now, as he did in 2008, that injecting money into the economy will jump-start lending, reduce excess industrial capacity, and lead to more hiring and an eventual return to the natural rate of unemployment (4-5%).  Keynesian economics, particularly deficit financing, is the name of game here.  Keynes saw the inherent benefit of deficit spending as a tool of monetary theory, and consequently, was largely responsible for gaining the necessary acceptance for inflationary monetary policy as such.

Monty Pelerin (pen-name) translates this idea well to highlight what inflation means for the average worker and consumer.  “In his General Theory, Keynes advocated solving unemployment problems by “fooling” workers with higher nominal wages.  He assumed workers were too obtuse to differentiate between nominal and real wages.”  Keynes also recognized inflation for what it truly was.  That is, he was well aware that “The best way to destroy the capitalist system is to debauch the currency.  By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”  This is the hidden tax we call inflation, and its primary avenue of realization is the Federal Reserve system.  By using fiat money instead of pegging the dollar to a tangible commodity such as gold or silver, central banking is able to manipulate the value of our monetary unit, thereby controlling the future of its purchasing power.  The implication of this for us all is staggering.  QE, then, is just an additional mechanism the Federal Reserve and U.S. Treasury is currently employing to devalue our currency and diminish the purchasing power of our paycheck.

But there is, of course, a political agenda hidden beneath the surface of Keynesian theory.  The ability to directly control the money supply places the reigns of everyday life in the hand of our bureaucrats.  Statism is the name of the game here.  As Pelerin states, Keynesian economics (deficit financing)  “is not economics, but political manipulation of an economy. Politicians love it because its underlying thesis is that the economy, left alone, would stagnate at some level below full employment. This false claim is the basis for Statist government enabling government to grow bigger, take more from its citizens and involve itself into all aspects of peoples’ lives.”  I believe reference back to Alexander Hamilton, our nation’s first Treasury Secretary under President Washington, will make a sufficient point.  When debating with Jefferson the matter of a national (central) bank to consolidate the debt of the thirteen colonies, his position was strongly in favor, for to take on such a magnitude of debt would bring with it the power of a strong centralized government.

A Bit of History

A bit of history is needed in order to understand how exactly Keynesian economics was able to grab hold of the brighter minds of America.  Proponents of Keynesian doctrine often cite the Great Depression and the booming years afterward as proof that, indeed, Keynesian monetary theory is sound and advantageous to America.  However, despite the conventional wisdom – written largely by unconventional individuals with equally unconventional agendas – some credit U.S. entrance into WWII as the primary impetus of America’s return to economic growth.  This may seem trivial, but is quite important because our high schools, community colleges, and universities are teaching our children a watered-down version of American history.  This is just another example.  In fact, well-renowned historian Howard Zinn says,

“[T]he war economy created millions of new jobs at higher wages.  The New Deal had succeeded only in reducing unemployment from 13 million to 9 million.  It was the war that put almost everyone to work,  and the war did something else: patriotism, the push for unity of all classes against enemies overseas, made it harder to mobilize anger against the corporations….The war not only put the United States in a position to dominate much of the world; it created conditions for effective control at home.  The unemployment, the economic distress, and consequent turmoil that had marked the thirties, only partly relieved by the New Deal measures, had been pacified, overcome by the greater turmoil of the war.”

A People’s History of the United States, pp. 402, 425

Therefore,  as WWII created a tremendous expansion in wartime production, it spurred enough demand to absorb increases in the money supply that are today associated with monetarism.  In short, demand created by the newly evolving military-industrial complex furnished the necessary goods and services to keep prices and inflation steady. After WWII passed, Washington created an atmosphere of fear among the public – very much similar to today’s war on terrorism – and a general consensus for a “permanent war economy” throughout Congress that allowed the Cold War to continue to fill this role.  This is known officially as the “warfare state.”  It seems, then, Washington has turned its fear mongering toward the war on terrorism to justify its increased military spending.

A Snapshot of the Federal Reserve System

In order to understand this, let us first examine a bit of Federal Reserve history.  Much of this is summation from G. Edward Griffin’s The Creature from Jekyll Island: A Second Look at the Federal Reserve.  Contrary to conventional wisdom of our central banking system – that it uses interest rates to control the money supply in an effort to keep prices and growth stable, namely to avoid economic crises – Griffin’s view holds the Federal Reserve itself responsible for economic crises and the massive depreciation of the dollar we have seen over the past century.  But how does an institution achieve such destructive agendas?  It helps, Griffin says, that the Federal Reserve is cloaked in ambiguity.  It is neither a private nor a public bank.  Although claiming to be politically independent, it is neither a political unit of our government nor a private bank as we typically think of the idea. Rather, the Federal Reserve System is a cartel that is partnered with our government, but not a part of it like the the House, Senate, or Supreme Court.  Most important to realize are its five primary objectives:

(1) limit competition within the banking industry as a whole,

(2) to obtain the rights – which were granted by our government, whence the partnership – to create money out of nothing (fiat money),

(3) isolate smaller banks from banks runs by gaining control over banks’ reserves,

(4) convince Congress to bailout insolvent banks with taxpayer money, and

(5) also convince Congress that the purpose of the Federal Reserve System and bailouts is to protect the public from economic crises (boom and bust cycles).

These, of course, were their unstated goals when the Federal Reserve Act passed in 1913, and the watchmaker has achieved all five. To our central bankers, there have no interest in economic stability (only control), nor on reestablishing it. We are taught in college that its purpose is to mitigate the negative effects of the free-market’s natural tendency of boom and bust. What we were not taught, but becomes prevalent to those who study history, is the Federal Reserve actually facilitates the business cycle.  And with each major crisis, they are able to limit competition even more and concentrate even more wealth.  This is the purpose of our and all other central banks in the world.  That said, any banking system connected to a central government is likely to fall into this trap as history has shown.  Believe it or not, the Federal Reserve System is actually the fourth central bank of the U.S., all others having resulted in the same scenario we see now.  The printing of fiat money and massive inflation to the point that a gold standard is reestablished has been done numerous times throughout history. What makes today’s problem so different is the degree to which globalization has linked the world’s economies. Consequently, when the dollar falls, so too will many other currencies. It is at this point that the idea of a world currency may be introduced to the public under the same guise as the origin of the Federal Reserve – to create stable prices with moderate inflation, which will translate into a stable global economy. It is not to be believed!

But Isn’t Moderate Inflation Good for the Economy?

Moderate inflation, usually around 2-3%, has historically been viewed by economists as a healthy amount.  The purpose is that inflation serves to drive the economy via expanding credit to businesses and consumers.  But inflation from excess money creation without a like increase in the goods and services from which money is needed to circulate is more a political tool than an economic phenomenon.  It is a way to hide the fact that the U.S. government is insolvent.  Monty Pelerin stated, “Without QE it would likely be illiquid. It is doubtful the US could sell enough debt to arms-length buyers to sustain its current spending.  The current estimate of the deficit is $1.7 Trillion.  Without QE there would be added distress for government and the economy.  Domestic interest rates would rise to whatever level necessary to attract market funding.  Higher interest rates would provide a further drag on the economy.  They would also dramatically widen government deficits.”  This would be devastating for the credit rating of the U.S. Treasury, resulting in government expenditures of nearly three times its revenues.  Thus, in order to remain solvent, inflation has become the only monetary tool left at our government’s disposal.

Yet even as a result of economics, inflation promises no long-run tool for stable prices because in order for it to act as a stimulant to economic growth, it must increase exponentially.  Milton Friedman pointed out, “Inflation is like a drug. Its stimulating effect is temporary. Only larger and larger doses can sustain the stimulus, before the chaos of hyperinflation removes all the gains.”  One need only examine the most fundamental of economic assumption to understand why one bout of inflation must be followed by a new, larger one in order to continue the stimulus-effect.  If I believe the value of my dollar will decline in the near future, I am more likely to spend more dollars now, as they will command more goods and services.  This is simple economic incentive.  If inflation has become the only monetary tools left at our government’s disposal (the Federal Reserve exhausted its ability to lower interest rates long ago), then one sees larger and larger bouts of inflation until eventually the U.S. reaches that dreaded state economists call hyperinflation.

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