Tuesday, July 26, 2011

Flawed American Perception

Conversations surrounding the debt ceiling seem to permeate every meaningful American social setting these days.  People press  for an answer with increasing urgency.  These useless dinner table conversations always end with someone saying, "YOU are not providing any solution with your theory."  Our job here is not to offer solutions; we deliver something far more valuable in the form of an accurate assessment of what is going on.  If you objectively listen to these emotionally charged conversations you will begin to see the effects of a society that has not been subject to economic law for 75 years.

Inevitably the small business man feels that he is most qualified to lecture his dinner guests on how the nation should be run.  "Cut the fat, get rid of the handouts, don't raise my taxes" seems to be the standard opinion.  Maybe it is time to tune this character out entirely.  His understanding of economics is going to punish him dearly in the near future.  For now, we should play with his theory as a mental exercise.

Steve, the small business owner, is now president and he is slashing benefits.  45,000,000 people now want to kill him because he just cut their food stamp benefits.  Don't worry about that though, they will eventually thank him.  There are 30,000,000 people unemployed or severely underemployed and unfortunately those receiving benefits will not be happy.  Finally, as of June 2011 there were 21,000,000 people receiving social security benefits that were not over the age of 65.  This is due to disability or any other qualifying reason.  This number is in addition to the 38,500,000 that are receiving benefits legitimately.  Get ready for stories about granny having to eat dog food to survive.  This better happen long before his reelection campaign kicks off.

In 2010 the federal government spent an estimated $3,600,000,000,000 on tax revenues of $2,200,000,000,000.  Social security and safety net programs represent roughly 34% of federal outlays so having successfully enraged an estimated 100,000,000 people Mr. President has not even closed the operating deficit.

Now he has to raise taxes slightly so that everyone is paying something to get this great country turned around.  This is where it gets tricky though because he just sucked more than 10% out of the GDP with the reduction in benefits.  So, local governments are not getting sales tax revenues and businesses are producing less marginal profit.

Next, the ratings agencies become alarmed at the lower level of revenue flowing into the treasury and begin to warn the investment world.  Don't be surprised when the cost to borrow turns marginally higher.  Someone failed to tell Steve that most of the debt issued matures in less than 50 months so refinancing is a real concern.

This sure is overwhelming but don't worry because soon the merchant bankers will come to Camp David on a weekend and give you a great idea.  All we need to do is rally the nation around a cause.  Does this sound familiar?

Gold Standard

Now this is a topic that Steve, our distinguished pest control company president turned leader of the United States, is big on.  You would expect your editor to make some positive statements in this light but you have not been reading this site correctly.

The United States has never been on a gold standard.  In fact, gold standards are a terrible idea.  For many years the dollar was exchangeable in the ratio of $20.67 per ounce.  In 1933 FDR confiscated all gold held by lawful citizens and changed this ratio to $35.00 per ounce.  If this math is difficult for you consider the fact that if you held $10,000 at the time it bought you 484 ounces of gold one day and 286 the next.  Doesn't if feel good to do your part?

The creation of the Bretton Woods System allowed the dollar to reign supreme as the worlds currency denominator.  At any time $35 of these stable dollars could be exchanged for an ounce of gold.  This gave the world certainty that trade could grow around this stable medium of exchange.  It only took about 15 years for the natural tendency of human beings wanting just a little more to kick in.  Why not spend just a bit more so that we can have what we deserve?  Well, people were paying attention.  International traders would gather up these excess dollars and bring them back to the United States and rightfully exchange them for gold.  After World War II the victorious United States had over 22,000 tons of gold which is 15% of the total supply.  Now they claim to have 8,000 tons but will not allow an audit.

In August of 1971 we abolished this exchange policy and currency began to float freely.  We are approaching the 40th anniversary of this event.  Is it not ironic that we face these issues today?  If we had stuck to the exchange rate we would be far wealthier as a nation but personal gain always overpowers man's instincts.  Politicians are too tempted to secure their slice.  In fact, they are at times totally blind to the facts.  Financiers know this and play to these weaknesses.

Don't think for a second that there is not tremendous pressure on our elected leaders to raise this debt ceiling. The primary dealers that own the Federal Reserve system have an interest in this happening.  If they can increase the amount of debt issued their profits rise accordingly.  Every treasury auction flows through the privately owned primary dealer system.

Solution

Readers will not like this solution but we need to take that debt ceiling as high as possible.  This standard of living that American's are used to is not going to last and we need to take what we can get as long as we can. The currency will eventually be devalued to deal with this problem.  Austerity will only make that happen sooner.  Hear us clearly, this is not a situation that can be turned around like a small business.  Any thought along those lines is stupid, ignorant and doomed for the slaughterhouse.

Unfortunately what we are saying will happen.  This is international finance in its most true form.  Economic law will rule.  American's who have worked for years doing what they are told will lose all of their wealth.  401k stock accounts managed by Wall Street, savings account, life insurance policies, annuities and any dollar denominated asset held will be reduced to their intrinsic value which is that of the paper they are printed on.  Good news is paper prices are rising too.

3 comments:

FM said...

Wow. Thanks - please pass the small firearm and paper towels, please! ;)

You are 100% correct - this can not be turned around like a small business.

We find ourselves in a gnarly dilemna - a bird's nest of tangled laws, regulations, politics, and bad math, and every effort to untangle the mess, by law or reform, simply pulls another snag and makes the mess bigger.

Alexander the Great had the solution to this Gordian Knot, and we must do the same.

Reset. 2012. Get ready.

Romocop said...
This comment has been removed by the author.
Romocop said...

Watch the news lately (I know you don't) for a demonstration of the maxim that a lie told often enough becomes the truth (or becomes accepted as the truth, which is pretty much the same thing for our purposes when "democracy" is involved).

The talking heads and all commentators universally agree that a default would be terrible and must be avoided at all costs. Wait a minute... why? Is not increasing the debt load on our backs merely pushing this problem down the road? Where is the turnaround going to come from (because we know these things just come to us when we need them)? Does anyone in news actually think through what is given them by editors, guests, and telepromters? Wait, they're not paid to think, but to toe the line for the global elite, I forgot!