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Tuesday, August 02, 2011

Speed bump on the highway to hell

I'm sure you've heard much about the budget crisis in Washington. A luxury it would be not to care.

"We've met the enemy and he is us." -Walt Kelly's "Pogo"

So much of our economy depends on government spending. We've become addicted to spending and can't admit it. So we pass a bandaid in order to get past the next election cycle.

You may have seen the now-famous Tea Party sign, "Government hands off my Medicare," illustrating the ignorance of Tea Partiers as to how deep their lives and futures are intertwined with the social programs they rattle on about.

Useless it would be to argue that the demographics are against their cause. The Tea Partiers have a point about too much spending too much per person, on government-paid medical expenses perhaps. It's not their organizational skills--or lack of them--that dooms the Tea Party.

It's their own success that dooms them. They've won elections, and been ushered into high places, but as they do, they must learn how to govern, and lose their positions as outsiders. Their electoral success brings popularity and with it vulnerability to corruption.

We can cut spending, yes, but it won't do any good without revenues. Imagine you're a family in debt. So much in debt, as a matter of fact, that you're falling behind, on the verge of missing payments. Would you--as one of the two responsible for managing your financial affairs--get more credit?

Our indebted couple might think to get an additional job unless one of the two wanted the other to stay home and raise the kids, or homeschool them. With only one spouse available to work, most people would reduce spending, but surely neither spouse would ignore the possibility of bringing in additional income from whatever source possible to pay off the debts.

Is the budget deal floating past the Senate going to cut spending anytime soon? The answer is probably not. Yesterday I saw an interview by Larry Kudlow of Senator John Cornyn (R-Texas), who confirmed that the initial savings were $7 billion for the first budget year. We're told to expect much more, through the new "supercommittee" which is to submit its recommendations this fall.

Well, $ 7 billion to come out next year but we're told to expect over two trillion in cuts over the decade. $7 billion! All this fiscal brinkmanship was over that tiny a sum? Heck, we're spending $2 billion + a week in Iraq and Afghanistan.

From the beginning, the "debt tax cut deal"--hardly much of a name I guess, but the PR is trailing the event, explaining the lack of polish--has been smoke and mirrors. We were told to expect real cuts. Weren't the Republicans adamant about stopping Washington's wasteful ways? That was the central tenet of the Tea Party. Unfortunately, whatever real virtue they offered has been compromised, replaced with a shell game.

The Tea Party can't be successful in Washington once it earns its spot at the table. Then it has its legacy to protect--its (mis)representation of the virtue of "shrinking government." Paradoxically, If it were to succeed in that mission, it'd lose its mantra, its raison d'etre. The Tea Party needs the big bad government as its Emmanuel Goldstein, to parade around during Hate Hour, just as Osama bin Laden was the boogeyman for not one but two preceding presidents 'til his usefulness elapsed.

So crass is our political system, and apparently naive our public, that saying that you are one thing is different from doing what you believe. Bush was a master of this Rovian-style approach. Obama is a fast student of this style of masquerading the public. The public--dumb, discounted or distracted--eat up all this drama. Or they ignore things: whatever happens happens. Baah.

If the people aren't willing to get informed and participate, nothing will change. There's enough ignorance about issues of great import like the impending collapse of our monetary system. I think it was Nicholas Biddle said, "If the American people only understood the rank injustice of our money and banking system - there would be a revolution before morning..."

Many good quotes can be found on this topic but here's one from Jefferson:
...this is the tendency of all human governments. A departure from principle in one instance becomes a precedent for a second, that second for a third, and so on 'til the bulk of society is reduced to mere automatons of misery, to have no sensibilities left but for sinning and suffering...and the forehorse of this frightful team is public debt. Taxation follows that, and in its train wretchedness and oppression.

Jefferson tells us our nation is headed towards dystopia under these circumstances--"no sensibilities left but for sinning and suffering." Jefferson just assumes taxation will follow some episode of public debt, presumably through self-dealing, corruption, and hubris.

Another meme to follow is Jefferson's use of the word "tendency" towards an political sequence of events that have far-reaching socioeconomic implications. "Tendency" as I readit seems to be firmer an interpretation than the word "tendency" might provide in a more current reading of the word.

In the quote, Jefferson talks about a sequence of "departures," which I believe refers to progressive abandonment of Jeffersonian ideals of liberty and good administration. Going to war without just cause, for example, might be seen as a departure from the established balance of power established in the Constitution. Jefferson would definitely see Obama's use of predator drones as a "departure" as would be the continued imprisonment without trial of the Gitmo detainees.

The idea of our nation facing a string of "departure(s) from principle" is like negative momentum building up, bad karma we might call it today. Like Jefferson, we know the eventual outcome--monster strikes, killing in order the expendables first, then comic relief, up to the main protagonist(s)--but we don't know when it will start or end.

In the same way, the feeble non-resolution of our fiscal crisis is a departure despite the barking of the dogs. We keep borrowing and the passage of the most recent bill will do nothing to stop the trend. The debt is already there, and will continue to build. Combined with all the other "departures," we achieve greater and greater momentum away from the proper exercise of government.

The initial transgression, which could probably be traced to Ronald Reagan's time, was borrowing too much, or when we didn't really need it. Now if the Keynesians are right, we should retire debt during times of economic expansion and borrow only out of necessity.

We can't have our cake and eat it too. The only way out of a predicament of too much debt is to stop spending, yes, but an equal measure of taxation will be needed.

Fraud by another name

We should have discovered during this process that social security is broke. Otherwise why else would social security be vulnerable to cuts? If the assets in the Social Security Trust Fund were truly liquid, then they could be sold to meet fiscal obligations quite separately from whatever was going on with the budget.

Subjecting social security the vagaries and political whims of future funding battles has to be considered a victory for the Right. For years, they've been saying how social security was going broke. Thanks to this budget-cutting deal, the Republicans can now put social security on the cutting block through the rest of the decade.

I think the progressives have aided them in this task. First Robert Reich has every reason for people to believe that social security is solvent, as it was in his role as Treasury Secretary during the Clinton administration that the Social Security Trust Fund was raided, its assets stripped to help balance the budget and even run a surplus, as Reich is so fond of saying.

Over the years since the theft, liberals have repeatedly explained that social security is solvent and that Republicans simply assail its solvency in order to dismantle the "third rail" of American politics.

If Reich and Clinton hadn't raided the fund, then liberal prognostications of solvency would be well founded , and their expose of Republican motives justified. Instead, Social Security now has a vast pile of IOUs--not marketable Treasuries mind you--that it can't sell. So now it must stand in a long line of creditors owed money by the federal government and depend on the whims of Congress to get back what was taken from it.

Way out

The more depressing and confusing our budget problems appear, the more expedient it becomes to simply print money. Now in defense of the Federal Reserve, whatever our government spends must be listed as borrowing. Thus the total debt(listed at some $14 trillion although the future liabilities are far greater) does grow when the Fed buys government bonds. They now own more Treasuries than anyone else, surpassing the holdings of China and Japan.

When the Fed loans vast sums to fiscal entities through its various discount windows and lending programs, those amounts aren't included in our nation's debt. Now as banks borrow from the Fed, they beef up its balance sheet. Our Treasury meanwhile sells debt to the Fed to fund government operations. The Fed is of course benefitting from free money which it creates digitally. And in return, tax receipts are fed directly to the Federal Reserve, to pay for all the interest on the people's debt held by the Fed.

This loop explains why the Federal Reserve and IRS were created at the same time. Without any real revenue--taxes--coming in, Congress could spend to infinity and there'd be no consequences because it need not pay any interest at all. So through interest rates, the Federal Reserve assigns a value to money, to make it worth something. Without the interest function, our money would be much more vulnerable to inflation. And with Congress in sole authority of the issuance of our money, chances are they'd issue a lot.

This could be good in a severe recession like that which we face today. The Nazis actually issued their own money; this helped speed the German out of the Depression. Rather than let bankers--many of whom were Jewish--control their money supply, they made interest-free loans available to middle class Germans. The act of simply removing any interest obligation does wonders for stimulating the economy.

Well, I'm afraid our Congress isn't run sufficiently well to take over the issuance of our money. The COngress as it turns out, votes every year, to re-authorize the Federal Reserve;'s control over our money. It's a flawed system but it does restrict spending by making government pay an interest rate.

As interest rates rise, so too does the proportion of spending that must be devoted to the payment of interest. Right now interest rates are very low and the interest burden is something like 7% of our budget.

Clarification: I have been caught correcting myself on the actual amount that our government pays in interest every year. Originally, I had it pegged at around $250bn, then I gathered it to be around $400bn. If the average interest rate on outstanding debt is 3% or so, our $14 trillion translates into more than $400bn a year.

In the course of my research on this matter, I see that the amount varies between how much is "public debt" or debt held by the public: investors, foreign creditors, banks, etc..

US government debt held by agencies of the government and Social Security isn't counted as public debt. Therefore the interest on publicly held debt was under $200 billion in 2010. Add in debt held by governmental entities, with social security holding perhaps $2 trillion in IOUS and you have another $60 billion plus of non-public debt, still far less than $400 bn.

As interest rates rise, it's likely that Fedgov will find creative accounting ways to avoid paying the vast sum of interest it owes, particularly to inter-governmental agencies.

I apologize for the inability to get the numbers correct, but perhaps I can blame the way government collects its statistics--and they're reported in the media--for some of my problems tracking interest payments, which are really one of the few ways government is held accountable for what it spends.

Finding a way out of our predicament could involve the creation of state-level banking, an idea that has North Dakota as an example. But as long as the Congress and its puppet-masters in banking control our monetary policy, we will be at their mercy. Our money will necessarily devalue and those who continue to hold it will see it buy less and less. This fundamental truth explains why gold is setting records.

Not to give advice, but you could go the way of the gold bugs and win simply by virtue of the inescapability of our fiat money system, coupled with the inevitability of imperial decline. I doubt many of my readers will want to be locked into an asset class that pays no dividends. Nor does investing in gold/silver stimulate our general economy. So some portion of everyone's portfolio can't be in gold. Plus gold is quite volatile and the current Depression could leave commodity price lower than they otherwise might be. Until recently, the money supply has actually been shrinking despite QE2 (see Ellen Brown's article from May.)

QE3 is likely on the way, made more likely by virtue of slower growth in government spending (G). Yet it remains to be seen if a push (expansionary) monetary policy can stimulate, judging from the results of QE2. Like any commodity, the more of it there is, the less of it is worth. So it is with the dollar. That's why gold is nearly $1650/oz. today.

Additional Sources

Here's a translation of an article from the French paper Le Figaro.

It considers the Republican methods "blackmail." The idea is that by pushing the nation to the brink of default, Republicans can exert control over the legislative process. Obama can only demur to the Right, and tack towards their position, namely that Medicaid and Medicare need to be cut.

Obama has a track record of moving to the Right--if he wasn't there to begin with and just posing as a progressive during his campaign. Reviewing his positions before and after his election, there's a trend towards appeasing the Right, as he did with the Afghanistan "surge" as well as keeping Gitmo open and unresolved, and now by caving on "entitlements."

While we may be spending far too much on medical care, and there's definite room for improvement, I think it's the Right that's won the budget debate. The passage of the budget in the House garnered more support from Republicans than Democrats. Going into the negotiations, I know that progressives were upset by the prospect of keeping taxes as low as they are on the rich, while putting benefits for the middle and lower classes in jeopardy but it would seem as if Obama has taken the Left for granted. I'm predicting this will be a big mistake in 2012.


Daily Bail. Great graphic summary of revenues and expenses. Fiscally sound antiwar perspective.

Center on Budget and Policy Priorities: Little dated but summarizes the situation with the now-failed Boehner about a week ago.

Previous defaults on US debts have occurred. See this article from blacklistednews.com

Lots of charts and data points here.


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