The sky IS FALLING (in graphs)

The NCAA tournament isn’t over yet but we know its coming to an end in exactly 16 days. If I was to tell you it’s not over yet, I would be correct. But does change the fact that is will end? Of course it doesn’t. For many people, because we haven’t seen bread lines or riots in the streets the “sky isn’t falling” yet. Does that change the reality that our economy is on the downside of the bell curve?

When the FED dropped interest rates back in ’07 the idea was that it would incur borrowing from the public & private business; therefore creating new/bigger business and in the process creating jobs or at least not hemorrhaging more than the economy was already in the process of doing. Then the rates kept dropping and dropping and wont go up until the very least 2014 and then what? Go up? The debt will explode in a hyperbolic fashion.

This graph shows we paid MORE in interest on our debt in 2008 (10,024,724,896,912.49) then we did in 2012 (16,066,241,407,385.89). How do you pay LESS interest on six trillion more in principal? There is only one solution; you pay substantial less interest. 

As we know, unemployment has dropped from its high of 10.0% back in ’09 to 7.7% as of last month but at what cost?

GDP has only seen moderate gains during the last five years and in fact, as you can see below, the last quarter actually seen our GDP in decline; despite the fact that private GDP rose in the same period. 

Some people will point to the cuts in defense spending as the main culprit and they would be correct (as defense have seen a 22% drop in spending) but if running nothing short of an empire and that is how we are keeping afloat in the first place, well… 

Mortgage rates are now at their lowest rate in recorded history and this has been a yearly trend these last few years. Only now in March of 2013, are we beginning to see signs of the real estate market coming back to life; despite a plummet in interest rates the last six years that were supposed to (as said in my opening) entice borrowers. Was it worth it?

Was it worth it and at what cost are the two questions I pose to you today. At what cost and is it worth it to live for today at the expense of tomorrow?

The CBO estimates of this nation’s debt keep getting worse, study after study. This is a quite simple process: the interest rates remain low, the debt piles up and the economy barley moves. These projections below are based on current conditions. Remember, zero is the end game; there isn’t much that can be done after that. We are basically at zero interest rates now.  

These examples I gave are just the tip of the iceberg and they are all interconnected. And that iceberg is the general public of this nation being so inundated in debt, so much so that we are getting to the point where offers of basically free money can’t move the needle any longer. These last four years of record low interest rates with barley a crawl until four, five sometimes six years later illustrates this quite luminously.

With wages not keeping up with real inflation (not the phony government statistics) and the globalization of the market, incomes for the average American (an overwhelming majority of) are stagnated; if not in decline. Is there any way that changes? Of course not, this is the new reality.

So to keep up, for most Americans, debt is the only logical solution. Afterall, we know saving via the conventional bank route is futile with rates being under 1%. And as we know debt = money, so when the economy can’t jump start and the FED’s QE programs don’t jump start growth; what else can the FED do? It’s been said by Bernanke that the quick death of deflation will not occur, so that only leaves one alternative; go to zero and close its eyes. Then hold on for limb and life as the decent to a slow death via hyperinflation begins.

The political process here has become a joke. A crooked game ran by self-serving lawyers and career politicians hell bent on seeing who can kick the can down the road the furthest. What was once a calling of statesmen has been replace by a bloodthirsty pack of statists. Republicans blame Democrats for not cutting spending despite having no solution themselves and god-damn you if you want to cut a bloated defense budget! Democrats want to actually ADD to the problem with a monstrosity addition to healthcare. While both “sides” will tell you it’s the other guys fault. Then all the puppets and zombies watching/reading the propaganda will parrot it. You think this is going to change?

At this moment, under these terms we are watching the beginning of the end finally become visible before our very eyes. Americans and their distractions have reached the crescendo. They can no longer afford them. The sky isn’t falling, but our economy is. It’s circling the drain, not as fast as Greece or Spain but its circling nonetheless. So move over American Idol, the freak show isn’t just in your living room its right outside your window. Get ya’ popcorn ready.

The chequeing scheme, where micro meets macro

This is about as a rounded and admittedly loose connection as one can make but a connection nonetheless. Let me get straight to the back story.

My lady friend of 18 years & counting refuses to use a debit card. She despises credit. She also prefers to not use cash either. She's still the mindset of 20 years ago when everything revolves around cheques. Now, in her defense there is a practical reason behind it. She feels if you really want to buy something that added step of writing it out reduces impulse buying and judging by her sterling accounting of our finances; I offer no debate.

A few weeks ago she unexpectedly ran out of cheques. Unfortunately this coincided with the long Martin Luther King Day weekend thus the banks were closed. So with no ability to access her money, she had two choices: use credit or dont buy what she needed until the next day. As we were just one day from our annual winter getaway to Florida... I enter with option three: me picking up the tab. And being the loving spouse I am, I chose to use my cheques. One part out of respect for her and partly because I just haven't written one in so long. At the same time, I felt it would make it an interesting exercise to practice my cursive. 

So a few transactions and a few chicken scratches later, we were on our way. When we got back home is when it got interesting. It seems due to inactivity and I moving my direct deposit out of that bank, my account was closed. Unbeknownst to me, I had written three cheques without having an account at all. I quickly made contact with the vendors and paid in cash the amount + fees. This suddenly made me remember why I stopped using cheques over a decade ago: overdrafts.

Now at this point It was behind us. One week later came the letters from collection agencies demanding the funds to cover said cheques. So, I called to explain to them the situation. A manager on duty of the collection service then hit me with this...

"Sir, if you dont have proof you made good on these cheques we require a payment to take care of that. We except two forms of payment. Western Union and Cheque by phone."

Cheque by phone, I asked? I told her I wrote a bad cheque, why would they accept another cheque? She then begins to tell me it happens all the time. That people knowingly write bad cheques and then make payments to the collection agencies with more bad cheques. If this process seems completely irrational and made up; its only the same exact thing that our government does (and gets away with) regarding the dollar.

Now I did say it was a loose connection and you made it this far so bare with me.

We effectively print dollars with no tangible backing whatsoever, just "confidence" that the dollar will not crash and that in turn will not lead to a run on the bank. Remember, due to the modern practice of fractional reserve banking, bank's tend to only keep a small fraction in liquid reserves. Thus any major fluctuation of withdrawals in a one day period can make things very interesting for a bank.

Now with that said, after the banks make these monopoly based dollars, they just sit back and operate the biggest shakedown modern civilization has ever seen.

By way of OPEC taking only US dollars for its oil (thank you President Nixon and King Faisal), it forces oil buying nations (read the entire world) to naturally obtain US dollars so they can obtain the OPEC oil (which holds about 2/3 of the worlds oil supply). OPEC then takes those US dollars and reinvests them into US banks further strengthening our place as the preferred empire of the world over.

So, like a guy armed with a closed chequing account and a fistful of cheques, you too can play the game of tangible assets/commodities for nothing too. Buy the goods and services with cheques that, like our dollar, are essentially worthless paper backed by nothing; THEN use the same cheques to pay off the creditors! You come out with goods and everyone else is stuck holding worthless paper. Then rinse & repeat.

The difference between the guy running that scheme with a closed chequing account is eventually the jig will be up. Unless you’re real slippery and willing to constantly move and change your name quite often; it will all come to an end. But what about the US petrol-dollar scheme? How long before that hustle is over? When you think about it, from the US point of view, it’s paramount that the US remains the reserve currency for oil. For if not, we can expect a lot of dollars coming back home and when I say a lot, I am talking the SHIT-TON of quantities.

If that happens our standard of living (even at a declining rate) will all but disappear. This will create instant hyperinflation and eventually a sell-off so large that the immigration issues on the borders wont be commonly known from Mexican people trying to get as they are today but instead it will be American citizens trying to get out.

Its pretty obvious the lengths our leaders will go to keep this asset bubble propped up. So, what happens if you don't agree with this petrodollar recycling scheme? What if you are in favor of, say a more "open competition" regarding how to pay for oil? As I stated last year in this piece; it usually doesn’t end well for you.

Now with Iraq and Afghanistan wrapping up, all the sabers are waving towards Iran and they are running out of time. Friday, President Obama put them on notice Friday saying:

"Right now, we think it would take over a year or so for Iran to actually develop a nuclear weapon"

Then eloquently added:  "but obviously we don’t want to cut it too close.”

The President then went on to call a nuclear Iran "a red line". You have less than a year Iran. Less then a year before you continue or end your nuclear program. But remember, the nuclear program is a guise. The real threat remains the precedent you are making with disrespect for the dollar. So, close your oil bourse and fall back in line or else.

Now picture that guy again with the cheques and the false chequing account. Hes cashing cheques and receiving goods and when you want to collect or end the scheme he shows up at your place of business with an army and guns and tells you if you dont change your ad's or paint your store Tropicana yellow hes gonna shoot the place up and remove you. You like your job dont you? Your kids eat waffles dont they? You need money to buy waffles. The American hegemony alive and well; Tony Soprano don’t have nothin’ on us. 

Hyperinflation, the end game or will it be crippling interest? Choose your side.

Recently I saw an interview done with Kyle Bass, which was done in early November as a part of AmeriCatalyst 2011. The interview was over an hour in but if you start at the 46-minute mark, I assure you will be glad you did as it will lead you to the same conclusion that I came to and its one I want to address today. That is concerning the Keynesian debt system and interest payments on the debt. 

Kyle Bass, who founded Hayman Capital in 2006, made a fortune betting against the sub-prime mortgage bond market. Yes, that same bond market that was at the forefront of the great meltdown in 2008-present. You can also find Bass’s surging rise to the top in Michael Lewis’s book 'Boomerang: The Meltdown Tour'.

Towards the latter part of this interview, Mr Bass says that if the FED raises the interest rates, for every 1% point moved higher it will “create an additional 140 billion in interest expenses”. That got me thinking.

The FED is already on record saying they will not move interest rates until 2014 at the earliest, so the amount of liquidity in the system will only explode until then. That we know is a given.

What isn’t a given is what happens when they do raise interest rates. Kyle Bass seems to think that the Keynesian end point is zero and that, of course, would lead to massive hyperinflation. I assume that to be somewhat true as well, although I think the FED will do something to intervene to prevent that from happening, because:

A. they are too arrogant not to

B. their sole responsibility is to control our money supply.

So, even with unemployment news getting better the last few months, we are still (as we have said before) in the period of time of the worst, extended lack of job growth; then any point in modern Keynesian history. There is another factor and that is the FED isn’t going to raise rates for the next few years; then it hit me.

What happens when the FED has to go the Volckeresque route and raise rates too early 80’s height to stave off inflation, assuming zero isn’t the end game?

Will we see a repeat of the “October massacre” of ’79 sometime in the future, where interest rates were raised dramatically? In 1979 inflation was running at 13%. After those interest rate hikes by Volcker over the next few years, inflation dropped to 3.2%.

That, however, was not the politically smart thing to do at the time but it was the prudent thing for the country going forward. It also brought on a recession and I can’t think of any politician let alone anyone from the FED willing to do so in this day in age outside of Ron Paul.

“Strictly speaking, it probably is not “necessary” for the federal government to tax anyone directly; it could simply print the money it needs. However, that would be too bold a stroke, for it would then be obvious to all what kind of counterfeiting operation the government is running. The present system combining taxation and inflation is akin to watering the milk; too much water and the people catch on.” – Ron Paul

 

It is also important to note, that interest rate hike also made the perfect organic soil for a vast economic expansion to blossom as well, go figure.

If we know the interest payments are 450 Billion on the debt last year (combining both public and intra debt) and we have heard from Kyle Bass that for every point raised brings about an additional $140 billion in interest… and if we approached the prime rate today what Volcker’s prime rate topped out at 21.5 percent, what would our interest payment be?

It would be a whopping 2.9 Trillion in additional interest payments…annually. On top of the 450 billion currently obligated by law to pay… annually. Thus the interest payment today, on the debt, at early 1980 levels; would be about as much as the entire federal budget is today. If that isn’t a sign of the times and further proof of us living beyond our means, I don’t know what else is. No wonder Bass thinks the end game is zero. No wonder he has over 20 million nickel coins and bars of gold in his drawer… hyperinflation here we come!