Liberal economic policy, the catalysis for our destruction

Back in February, NSA Director General Keith Alexander called cyber-espionage “the greatest transfer of wealth in history.” Symantec (SYMC), a Fortune-500 security software company has said the cost of intellectual property theft for U.S. economy is around $250 billion a year.

No question, that’s a chunk of change and maybe that’s why (sic) SOPA is so important?

Now, while I’m not in the NSA and I don’t have the stripes of a General, much less anyone in the intelligence community, I do however possess something that is awfully lacking in DC these days… common sense. This caught my eye last night. Its a post on the blog for Pew Research posted on 4-23:

A Rise in Wealth for the Wealthy; Declines for the Lower 93%

Common sense would tell you that the greatest transfer in wealth in our history doesn’t lie in some computer laden sweat shop in Nepal or China. And no, its doesn't lie in these last three years among the rich nor is this an attempt to wage "class warfare". No, the greatest transfer of wealth has been a slow drip in the form of decades. It also lies at the doorstep of every American. Because the greatest transfer of wealth has been the systematic liquidation of the middle class.  

If you read this blog on a somewhat regular basis you know this seems to be a repeated topic. Earlier this year, we had the laugher that was the "fiscal" "cliff". More recently, back on April 3^rd, it was in large part centered on the influx of women working and the struggle even with two incomes to stay afloat in the middle class. As I pointed out then, as I do now, even with two incomes, the middle class has shrunk for four consecutive decades.

Today I want to center on a broader topic and that is the American public’s transition from a conservative saver- to a liberal spender. 

All across the US, the transition has taken place and its starts out with even the youngest of Americans. The piggy bank has been replaced by a cell phone and a data plan. The savings bond has now become an X-Box. College savings account has been earmarked as a vacation or a mortgage payment. Most people don’t want to live on top of each other so they move out to the suburbs to escape the crime and crumbling schools. Since both parents are working and commuting most need two cars. And the beat goes on.

I left off one segment of the population when it comes to consumption for a reason and that is the retired, older generation. Those that grew up in and around the time of the great depression have an appreciation for conservative economic principals if not on merit it was simply out of necessity. They fought in the wars and were the foundation for not only the middle class but were the trailblazers of the greatest economic expansion in world history. 

Why the disconnection between generations? Does the American public deserve the blame for this? How many times have you heard people use American’s obsession with consumption and “keeping up with the Joneses” as a defense for the economic plight of the country? I’m not going to write this in defense of American consumption. There is no question our habits are, in large part, a component of this destruction, but how much?  

How much weight in this destruction of the middle class needs to be laid at the feet of complicity and conditioning via the FED & its bankers, its congress, lobbyists and otherwise big business interests?

There have always been rich and poor. There have always been success and failure. This is the reality of what makes our system so successful. This is what has made as the beacon of light to the world. Hard work will always pay off. Save your money, be frugal and you too can walk the path that leads you to the American dream. Somewhere along the way this path was hijacked. 

The timing says it all. Ever since the early 70’s, America has changed. We know that is when women started entering the workforce in droves. This was also the same time of the “Nixon Shock” which ended Bretton Woods. This, severing the dollar from gold, as we entered the fiat currency phase full force. It was also the start of Americans shifting discretionary income from savings to consumption. All of this coincided with the beginning of the decline for the middle class.

What’s the common denominator in this decline and destruction?

Here’s an exchange back from 1941 that says its all. Marriner Eccles was the Governor of the Federal Reserve System. He was giving testimony before the House Committee on Banking and Currency, which was headed by Congressman Wright Patman. Mr Patman was asking how the FED got the money to buy bonds:

"Eccles: We created it.
Patman: Out of what?
Eccles: Out of the right to issue credit money.
Patman: And there is nothing behind it, is there, except our government's credit?
Eccles: That is what our money system is. If there were no debts in our money system, there wouldn't be any money."

When someone or a government (under this system) goes into debt, three elements are automatically triggered. The principal you borrowed of course must be paid back. The interest rate you have to pay back for borrowing the money and the inflation that comes with the newly created money (that is debt) that eats away at the existing money supply.  

I have pointed out before what would happen if we ever returned to the interest rates of the early late 70’s to early 80’s. We would see our annual national debt interest payment be in the trillions. Now, that would be a real fiscal cliff. But that’s not going to happen, and because the interest rates stay low, the money supply (debt) will continue to pile up. And since we know the FED’s stance on inflation (helicopter and all) its only natural to assume inflation will always eat away at our wallets. As time goes on it nips at the heels, dragging those on the edge of the class into the class of the dreaded “working poor”. Thus the decline in wealth for almost everyone despite having two incomes is to be expected.

It doesn’t take an economist to figure this out.

Now this is the part where the writer gives his opinion of how to fix the problem he or she presents. That would be the perfect way to end an article where you point out problems to close it with a solution... except I don’t have a solution.

Yesterday, I went to bankrate.com to check out the current rates and here is what I found:

Money Market Accounts and Savings Accounts rates are below one percent with most being under .70%. A six-month CD will fetch you anywhere from .50-.88%. These are less than one-percent. You can’t even get a five-year CD over 1.75% and that’s even including Jumbo CD’s (100k or more).

I said before the average American has to carry some blame but how much blame can you lay on someone that is conditioned to spend while being discouraged to save? How can the average American save for his children’s college when the price of tuition has increased over 500% since 1985? 

But buy a car? Zero percent interest. 

Need new furniture made of cardboard and plastic? Zero percent interest and no payments for four years. 

Buy a house? 3% interest and you only need 3% down. 

I wonder what the average person is going to do.

What is the alternative, save anyway, right? Buy gold & silver and I would agree (as I do the very same thing) but if everyone did this deflation would come calling. It doesn’t matter if you or I like it, the truth of the matter is - debt is money and money is debt, just like the FED chairman said. Remember, a deflationary death spiral is much swifter than an inflationary death spiral. That is not going to be allowed to happen. Gold suppression anyone? Hint: its happening right now.

As you can see and surly already know, it doesn’t pay to save conventional routes that don’t take a financial adviser like our grandparents did. This is why, people today will not live as well as their parents... its all catching up to us. 

The only alternative is to funnel your money into Wall Street and spend, spend and spend some more. Any instruments that can yield you a decent return in a savings or investment all lead to Wall Street. Where did those gains made over the last two years occur? This isn’t about class warfare or the 99% or in this case the ninety-three percent; this is about the choice to be frugal and fiscally conservative like those before us that built this country and how that choice simply doesn’t exist. That choice has been robbed by banksters and it would be hysterically ironic if it wasn't so sad. So spend and slave on, the world economy is counting on you.

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!

Thou not lead us to temptation

When I was working on my last entry concerning FEMA and Ron Paul, I started to get into a bit of a tirade concerning the debt. This, in this writers opinion, is the United States greatest threat, not some foreign enemy. With most people showing no interest or regard for it, its up to those of us who do hold these truths to be evident, to keep putting that word out there... and that word is debt (specifically insurmountable debt) is slavery and nothing more then a transfer of wealth; from the many to the few. 

In this article I want to tackle two situations that I see problematic and the key cogs to insurmountable debt. First, there is the federal government and our elected "leaders" role in this failure to be reasponsible. Secondly, is the Federal Reserve and its banks, that have been culpable in allowing (through the manipulation of interest rates) this economy to take a path that will see it fall off a cliff. What the recoil will be from QE 2,3,4,5,6,7 bailouts and stimulus remains to be seen, but there can be only one thing we know for sure. 

 (Sodahead.com)

That is, we are accumulating debt. And vast amounts of it. The implication of compound interest makes these actions basically treasonous by our elected leaders and criminal by the FED. How can Congress and the executive branch both complicity push the cost of running the government so far out of the realm of practicality? How is it legal for the FED to lend huge sums at what amounts to no interest to those banks that were all considered "too big to fail" who then take that liquidity and invest in T-Bills that will actually yield a 2-3% interest? These practices destroy existing savings and the incentive to save; thus creating only one desired effect - consumption. 

Because, without people borrowing and spending the whole thing blows up. Money = debt, debt = money.  The biggest problem is that the American population are over saturated in debt thus why the sub-prime in housing was needed. Like its population, the US government, is over saturated as well. They, unlike you and I, have no limits and that defies logic. Lets look at the executive's role.

The Interest payment is the only debt payment required by the Constitution that must be accounted for in the budget each year to be paid.

With that said, every President hopeful on the Republican side and President Obama have all released a budget or a proposed budget.

Not one of them have a plan to balance the budget next year, neither will any one of them do so in four years either (with the exception of Ron Paul). We will without a doubt have continuous mounting deficits that will probably be in the 1-2 Trillion mark annually regardless of who is in office (with the exception of Ron Paul). Starting to notice a trend here?

We have seen Obama’s appetite for destruction already regarding deficit spending; so let’s take a peek at the eventual Republican nominee’s (Mitt Romney) insanity.

Mitt Romney wants to increase defense spending by putting 100k more troops on the ground and rebuild parts of the Navy and Air Force. He would not have left Iraq, appears to have an itch to scratch in Iran and will not leave Afghanistan until its won (the forever war) or at least until his generals say to leave??? His budget has the wealthiest Americans (who pay the most income taxes) getting a significant tax cut on top of the existing tax cuts that are already in place.

Romney has no plans to offset the lost revenue that will surly happen when these cuts take place, nor does he have any plans to make any significant cuts in existing outlays to recoup the ramped up defense spending. This defines logic. Mitt Romney's plans are contrary to anything sane in regards to the federal government living within its means. He’s fiscal policy’s will be train-wreck like.

That however, is not how Romney sees it. He thinks if he cuts taxes the gains in receipts will pay for this increase in spending. The problem with that is that the FED doesn’t think the economy is going to grow by all that much… and they control the money supply. This leads us into the second part of the equation: the insurmountable tag team.

 The FED’s long term forecast is a relatively weak one going forward with long term GDP growth outlook being in the 2.3 to 2.6 percent ranges. The FED has also said it will not look to raise interest rates until, at the earliest, 2014. Here you have the economy just barley keeping its head above water for the foreseeable future, the FED continuing its non-stop intravenous liquidity therapy into bank’s reserves creating a soon to be inflation tsunami all the while our elected representatives continue to show no regard for the situation.

I want to take a look at two charts that really speak volumes for what is going on and what we will being seeing soon enough in our own backyards. Lets start at 2006, when the FED stopped tracking M3. As you can see below, when Shadowstats picked up the tab of tracking M3, the growth in money supply was steadily rising until early 2008. As the recession came, the Fed lowered interest rates to avoid the fire of deflation but banks weren’t loaning, so the money supply dropped with it.  

(shadowstats.com)

A curious situation started occurring by the middle of 2010. M3 started to rise and its rising still as of now. Meanwhile, Interest rates from 2009 on have stayed basically at zero and as we’ve already heard from the FED, they will remain that way for years. This does not bode well for the dollar or anything equity wise going forward in my opinion. If the economy continues its "recovery” like so many in the media says it is, the eventual outcome will be a pretty substantial increase in inflation. This would, by default, put relatively the majority of commodities into buy, buy and buy more mode. Most specifically gold and silver.

Equally alarming will be the federal governments penchant for debt as we have also seen, they will not live within our means, thus piling more debt on to the insurmountable existing amount. What happens when the FED has to raise interest rates? If we are seeing 450 Billion interest payments already (Intragovernmental and Public) imagine what will happen to those when interest rates go up? They could look something like this:

Just for a little perspective. In 1988, the national Debt was 2.6 Trillion. The interest payment on that in the budget was 214 Billion. The interest payment in 2011 was 450 Billion, roughly double. The principal, as we know, was 14+ Trillion.

The US government will not cut spending and we will continue to finance the welfare/warfare system. What happens in 10 years from now will be interesting thou. Can the FED really raise rates, without completely tanking the economy? And if they did, what would happen to the interest payment on the debt outstanding (besides sky rocketing into the trillion dollar mark). If the FED does not raise rates out of the fear of deflation, isn’t massive inflation the only alternative?

George Carlin said it best:

When you're born you get a ticket to the freak show. When you're born in America, you get a front row seat.

Get 'ya Popcorn ready!