Posted by Ray on July 25, 2011 under Economy, Main, Markets, Politics | 
Listening to the talking heads TV and our political leaders about this debt crisis is merely subjecting you to unneeded heartburn. First and foremost, the USA is not “defaulting” on anything on August 2nd, period. The USA will not be downgraded on August 2nd by any of the ratings agencies, even though we should not be carrying the AAA rating to begin with. Bonds only default is interest or principal payments which will not happen on August 2nd as the Treasury brings in enough money to cover our debt payments on a monthly basis. Social Security checks and Medicaid/care checks will go out and the sun will rise in the East and set in the West.
All that happens on August 2nd is the Treasury Department looses the ability to issue new debt beyond the stated debt ceiling. I have not witnessed such scare tactics in my entire life and the misinformation the media and politicians are giving the public is shameful. In fact this entire debate is shameful as we are not having an honest discussion about debt and the US government. Everything you hear being discussed is merely kicking the can further down the road and I believe the markets will not let this can kicking continue on forever. Everything comes to an end at some point and our crazy spending will have to end and we all need to pay the Piper.
Let’s get real about our debt problem. We are hearing all sorts of nonsense about $4T in deficit reducing spending cuts or a combination of cuts with higher taxes over a ten year period. That means we are raising taxes or cutting spending, or a combination thereof, of $400B a year, big deal. If we subtract the $400B a year from our recent annual deficits we are still running $1 to $1.2T of deficits per year for as far as we can see. These tax hikes and spending cuts are meaningless to our long-term financial health and all the talk we are hearing from Washington or the other experts is meaningless until they lay out the facts like I just did. In my opinion even if we raised taxes and cut spending by $400B a year the USA will be downgraded within 2 years anyhow, which is what should have happened a long time ago.
The talk we are hearing from the left about wasted tax surpluses is so far off base it is ridiculous. The talk from the right about spending controls and how a 4% tax increase will kill jobs is equally as moronic. The surpluses in the late 1990’s and in 2000 were bogus to begin with. We had massive surpluses on Social Security and Medicare which the government simply took and replaced the entitlement surpluses with IOU’s and called them budget surpluses. It was accounting gimmickry and those surpluses should have remained in the entitlement programs. Do tax cuts really spur more jobs? I don’t think so and there is no proof that it does either. What spurred job growth in the 1990’s was technology. What spurred job growth in the 2000’s was housing, both bubbles I might add, but in both cases it was a new “killer app” that spurred economic growth and I do not believe we have anything like that in today’s world. Not to say we couldn’t have a new technology or other “killer app” materializes as fast as tomorrow, but there simply is nothing I see right now that will spur growth and jobs which is the real problem here.
Most people do not want to hear this, but taxes do need to go up, I hate taxes for the record. To prove my point we often hear the right complain that 47% of the USA’s citizens do not pay anything in taxes. Well, if you are going to use that line you simply cannot support tax cuts. Why would I say such a thing? Well, it was the Bush Tax cuts that caused 47% of people to not pay anything, which is not exactly true either, in taxes. The reductions in middle class tax rates were massive and the lowest tax bracket was erased. It is also important to realize that 20-30% of the population will never pay taxes because they do not earn enough to live on.
The Bush tax cuts, all of them, cost the USA $3.7T over a 10 year period or $370B a year, interesting figure don’t you think? The left says the rich need to pay more, but the rich in terms of the Bush tax cuts only account for $700B over 10 years. Raising the top income tax brackets only raises $70B a year which is nothing when we are spending $4T a year. Simply raising taxes on the rich will do nothing to solve our problems as it is the totality of the Bush tax cuts that are part of the problem. I do not like taxes, but let’s get real about this, OK? We cannot reduce our debt with phantom spending cuts and tax increases on a select few people, everyone needs to pay up.
We are in serious trouble and no one has put it all together yet. It is unreal to me that the President can say; “I cannot guarantee that Social Security checks will go out on August 3rd” and no one questioned him about why that would be. Social Security was supposed to be fine until 2036 and self funded but if we cannot issue new debt the checks will not go out… what! Well, our Einstein news anchors and the political talking heads simply do not want you to know that Social Security has no money in it, it is broke. I just talked about this earlier, our political leaders took the surpluses in Social Security and spent it replacing those surpluses with IOU’s. Since Social Security has only IOU’s in order for checks to go out the government must issue debt. That should scare you to death, we have to fund Social Security with debt. That is also why Social Security can never be privatized either. However, no one has put this together yet, unreal.
The fact that the US government cannot do anything without issuing new debt should be a real wake up call for the citizens of the USA, but no one seems to get it. The USA, the so called richest nation in the world, is bankrupt! If we cannot survive without using the credit card we are technically insolvent, if I am wrong what would you call it? The USA has also never paid of our debt, except for when Andrew Jackson was president, and simply rolled over all of our national debt year after year and this was hidden from you by using certain terms like we retired the 30 year treasury instead of we called in and paid off all of our 30 year treasuries, we simply rolled that debt into shorter term debt instruments. The USA also has “grown” our way out of recessions and past debt problems. Growing our GDP is a great way to hide the debt problem and it causes the government to do everything possible to always grow our GDP which is why hedonics accounts for over $2T of our annual GDP, hedonics is made up benefits for certain things like free checking, Google it.
You should be terrified about what you are seeing and not because we are going to “default” but because this whole show is basically telling you how bankrupt the USA really is. If our world shuts down because we cannot issue new debt we are in huge trouble and that is exactly what is happening now. The reasons I have listed here are the reason why everyone should own gold and silver as it is the ultimate hedge against out of control government spending and if the truth was ever told we have already defaulted on our debt through depreciation of the dollar and by simply rolling over old debt into new debt. If we ever really got real about our debt issues I can assure you that the story is even scarier than what I have just laid out. Luckily we have politicians that will always lie to us and hide the truth until it is so obvious you already knew it and it is too late to do anything about it. Good day and good luck.
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Tags: august 2nd, debt ceiling, debt crisis, debt problem, financial health, misinformation, nonsense, political leaders, scare tactics, social security checks, treasury department, US default, US government
Posted by Ray on April 20, 2011 under Main |
Mutual assured destruction, M.A.D., is the term du jour out of Washington and Wall Street over the past 3 or so years. Regardless of who is in charge there seems to be fear mongering for every situation in today’s world. The latest MAD scare is over the debt ceiling and if it is not raised the world will stop and we all will die. I can assure you that none of this is true and the sun will surely rise and set the day after if the debt ceiling is not increased.
I am not saying that by not increasing the debt ceiling everything will be fine, but I am saying it is not as bad as we are all being told. It is insane to believe that the world will shut down if the debt ceiling is not increased and the fear mongering must stop. If the debt ceiling is not raised it simply means that government spending would slow down and be limited to what the Treasury Department collects everyday and no debt can be issued in excess of the designated debt ceiling. However, the debt that matures, since most interest is paid before maturity (I am simplifying this) the debt that has matured can in fact be rolled into longer term bonds. Basically, nothing major would happen right away but in time there may be issues.
What would happen is many federal employees would be fired and many agencies would close. Obviously this is not good news, but it is not horrible news either. The government collects some $200B in taxes or fees a month which means that all our debt servicing costs would be covered in just one month’s tax collection, obviously interest payments are spread out, but you get the idea. Interest rates will not rise out of control and we are not defaulting on our debt, don’t forget the Federal Reserve is our largest creditor and they hand over 95% of their profits to the treasury which reinforces my point since the government is paying interest to itself on over a trillion dollars of our debt.
If the debt ceiling is not raised things will be tough and unemployment, from government employees, will rise but life will go on and much of the private sector will remain untouched. In fact the private sector might just flourish since many regulations could not be enforced because government agencies are closed down. Subsidies would end and waste would be purged from the system, again I see no downside here. The government would be forced to live on what it collects and this clearly bothers the powers that be since they are buying political favor through wasteful spending.
Contrary to popular belief Social Security checks would go out and Medicare payments would still be paid since FICA withholdings cover these costs for now. Well, in theory that is what would happen, but since the government raids those programs excess reserves all the time they are not technically solvent. Even though these programs are safe through their own taxation Washington is telling you the exact opposite which is a lie unless they used those tax withholdings for something else. This is how MAD works though, scare you to death so you don’t question anything and do what you are told.
You see if the debt ceiling is not increased the house of cards begins to waver and that is the problem. The government and the powers that be do not want you to realize that this whole thing is very wobbly and unsound, meaning our economy. They do not want you want you to know that money is debt and the Federal Reserve cannot print money without being paid interest from the treasury department. They do not want you to know that things can get done on less money. They want to scare you into keeping the status quo which is on its last leg anyhow because debt cannot increase forever. Eventually everything comes to an end, look at Greece and Ireland.
Ultimately the debt ceiling will be increased without much of a fight some grandstanding of course, but no real resistance will come and the vote will come and go quietly. What is so crazy is the use of the MAD policy that is used for everything nowadays. No matter what is happening we are told that we are all going to die if so and so bill is not passed which is not true, ever. Why we all fall for this is beyond me, but most Americans do and insist that the wrong decision be made, i.e. preserving the status quo. However, the status quo is unsustainable even in the short-term and is completely evident when one looks at the value of the dollar and the price of commodities.
To be clear on my stance, I know longer term the debt ceiling must be increased as we would eventually default, but I am confident that the US could make it much longer than anyone thinks without issuing new debt. It is just most people who depend on the system for their survival would not like this and that is why the MAD card is being played. We should all be appalled that our leaders are using the MAD card so often and it should be perfectly clear to everyone that when the MAD card is played it is to preserve our leaders and it usually is not in our best interest to continue with their status quo. In time we must start to call our leaders out and see what would really happen if they do not get what they want and I am very sure that MAD will not happen.
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Tags: creditor, debt ceiling, fear mongering, federal reserve, government spending, interest payments, interest rates, MAD, mutual assured destruction, scare, treasury department, trillion, wall street
Posted by Ray on September 26, 2009 under Main |
According to Harry Schultz and many tin foil hat wearers on the internet there will be a currency collapse and embassies should stock up on local currencies to last at least a year. This led to rumors of bank holidays and runs on the banks and other far out there rumors. Are these just paranoid people trying to conjure up publicity or is there any truth behind these strange stories.
I have to say that it is possible that some of these stories hold water, scary right? As you may know the Fed has had a huge currency swap program that has corresponded with the sudden strength and weakness of the USD which is quickly unwinding and may lead to new lows in the USD. That could lead to new lows in the USD and potentially start a currency crisis and, as I have said many times before, the Fed is unwilling to defend the dollar. However, it is unlikely that that alone will cause a complete collapse of the currency. It would take the foreign buyers of our debt to sit out of a few auctions, we would call these treasury auctions ‘failed’ auctions, along with new lows in the USD to trigger a collapse on our currency. I would say this has a probability of 65% of actually happening, it is there, but not a certainty.
What I think is more realistic is an actual bank run in the near future, I know here comes the tin foil hat. I want you to really think about what I am about to say, because it is all true. The FDIC is basically broke, really, it is. By my estimations it has just 4-6 billion in cash left and that is assuming it has not had to make good on any of the loss-share agreements in place. We are at our limit as far as the amount of debt the US is allowed to issue, hence the pending vote to raise the debt ceiling to $13 trillion dollars, which I have signed a petition against, in the effort of giving full disclosure.
So, if we have another few institutions go belly up over the next few weeks, which we will, and the new bailout for medium to smaller banks is not approved by treasury and the debt ceiling is not raised the FDIC will be officially insolvent. I put forth the idea that the only reason banks did not go under last year is because we knew the FDIC was there to guarantee our deposits. Now if the FDIC was suddenly incapable of providing that guarantee, would Americans really keep their money in the bank? No way. That would lead to a bank run like we have never seen before.
Thanks to our wonderful fractional reserve banking system all banks would then be in trouble when depositors pulled money from institutions. We should also face the fact that we should not even have the FDIC as it encourages banks to assume more risk and it encourages depositors to ignore how much risk their banks take, just my personal belief, but if you think about it there is validity to that thought. I do believe this is a very real possibility in the near future unless the debt ceiling is raised or the TARP bailout is designed for small institutions, which I am against.
If this bank run happens, which is possible, but unlikely, then it will be a much bigger problem than you think. It will force all cash loans to be called in. If you recall your history this was the cause of the 1929 stock market crash and the very beginning of the Great Depression. However, unlike 1929 the leverage we have today is much larger than back then which means the losses will be much, much worse. I contend it will make last year look like good times. Leverage is not our friend and leverage is the reason why we saw everything decline, including gold which usually goes up during times of trouble, but when you have hedge funds buying on 30 times leverage then they sell everything including gold.
A bank run is possible this year and I think a much bigger threat than a currency collapse. Actually, I think we are in a double edged sword situation because raising the debt ceiling will not help the dollar either which could lead to a currency collapse down the road, but nevertheless the banking system is still the biggest problem America faces in the near-term. This is not some conspiracy theory nonsense, but real life issues that are coming to fruition and that have to be dealt with. The only reason the Fed is pulling any of the stimulus is because we are so close to the debt ceiling. Of course, you have not heard about reaching the debt ceiling because the media is too busy talking about other nonsense issues.
My guess is that at the first sign of a major bank run we will have a bank holiday to sort out the problem. This would involve a recapitalization of the FDIC and probably some emergency action taken to restore faith in the banking system. However, no matter what they do, it is merely postponing the inevitable because we are a debtor nation who has to borrow trillions every year and we have a declining tax base. We will never be able to dig ourselves out of this hole because we do not have the political strength to do so nor do we have the assets either. Keep liquid, keep money around the house, buy physical gold and silver, I really like silver, and do your own homework, but I think you will find even I am soft peddling the news to you.
ha
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