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!

The token FEMA "critique starlet" (Dr Paul) takes his final bow.

As we all know by now, unfortunately, we had another unexpected natural disaster last week, this time in a vast multi-state reach, covering much of the Midwest and into parts of Tennessee. This was a deadly storm that took many lives resulting in tear jerking tragedies. Like this heart wrenching story, where a 15^th month old survived the initial trauma from being thrown by a twister into a nearby field. Her entire family perished that day; both parents and two siblings. Sadly, she suffered the same fate just a few days later. Or like this 36-year old mother, who lost both of her legs; in order to protect her children.

The economic impact of this storm will be in the hundreds of millions, if not approaching the billion dollar range when its all said and done. This will require all hands on deck including those at FEMA. With that said, it appears, like every Tornado and Hurricane season, a reporter (or I should say reporters), tap Congressman Dr Ron Paul on the shoulder to ask him his view on the role of government in the event of natural disasters. This is by no accident.

Dr Paul's response was already prerecorded and written on their notepad, all the crossing of the t’s and dotting of the I’s was already done. That is because Dr Paul’s consistency, can and will always allow, a lazy reporter to get a cheap story that will attract buzz, with little effort in terms of leg work. All they need him to do is go on record and their story is complete, a Presidential candidate says something off the beaten path; It’s a win-win for the reporter and his publisher.

Here is the problem with this.

Does Ron Paul believe FEMA should exist? No.
Does he believe in the federal government having a hands on role in natural disasters? No. 
Is FEMA one of the worst bureaucracies in government in terms of lack of accountability and waste? YES. 

Why does Dr Paul feel this way? Its because the constitution doesn’t specifically allow for it to be funded… period. It’s that simple. So why do they cherry pick this story? Because, asking him what role we have in building up an empire then the subsequent invading of other country’s or allowing the FED Reserve to manipulate interest rates, creating bubbles, isn’t a story. Even though the amount of wealth, blood and treasure those “programs” waste are astronomically higher and oh yeah; neither are written in the constitution either (sorry neo-conservatives, what we have isn’t a defense, its clearly offense).

Now, as Ron Paul has said many times, he has a prioritized pecking order in which he would see programs and departments eliminated and/or trimmed down; specifically aiming at the most costly and unconstitutional programs or agencies we have. Do you know where FEMA would rank on that list?

First, you would have to look to see where FEMA's budget comes from and that would be none other then Homeland Security. How fitting, an agency that was created in 2002 overseeing another program that was initially funded and created in 1979. Hardly constitutional and it fits the exact model and voting record of the self described “defender of the constitution”, but I don’t want to defeat my own point before I have even made it, so I will ignore that tidbit.

Last year, FEMA spent about 13 Billion dollars. That is a big number but it terms of our budget? Is it? It is roughly 0.003% of our budget. I would assume clearly, Dr Paul would look elsewhere for the cuts. Why not start with the national debt? Sure, we couldn’t pay off the 15 Trillion, but what about that 250 Billion interest payment on that debt? Imagine the savings if we actually started to balance the budget annually?

Why not defense? The funding for defense, as I have reported numerous times, is outright offensive and hardly a defense department. Its become a slush fund for big business and a "global force for good", their words, not mine. There is not any justification i can understand in fighting rouge terrorists who claim no allegiance to any nation on principal, let alone for the amount we have spent, and to boot - in this economic environment. The Department of Defense’s base budget has increased 81% nominally and 43% inflation adjusted since 9-11. Throw in the Nuclear budget, and that spending itself has increased 21% (inflation adjusted) since 9-11.

Imagine the savings if we knocked those back to the 2001 levels or at least cut them in half? Or, what about the 1.3 Trillion spent in endless wars in the Middle East? Surly we could find savings there. We are talking about saving TRILLIONS, not to mention lives on both sides and actually using our defense to I don’t know, maybe even defending our own borders? Now that is a novel approach, eh? Using the National Guard to actually guard the nation, as opposed to fighting wars across the globe? Who knows, maybe even providing assistance, logistics and overall support for natural disasters would be available??

Quit these wars, bring the troops home. Let them spend their money here. Let’s have a real stimulus package. We are up to our ears in debt. Trillions and trillions of dollars and no end in sight for these wars. Then we could take care of our people. Matter of fact, I have even proposed on many of these programs that I don’t fully endorse because technically they are not permissible under the constitution. But taking care of sick people and the elderly and children I have nothing against that… IF YOU CUT THE SPENDING. - Ron Paul

Those are places where Ron Paul would start. Even though FEMA is one of the worst bureaucracies in terms of waste and inefficiency, its small potatoes in the grand scheme of things, it would not be a top priority. Cutting FEMA or asking about the role of food stamps surly create emotional responses, but in reality these issues are not what is draining us. In a vacuum, those are philosophical questions that would make an interesting debate… but we are living in a time where the stakes couldn’t be higher as we fight to remain solvent, vacuum type thinking is irrelevant. We need solutions to problems and until we start asking the right questions, we will never have those debates; thus we will never fix the real problems.

"Republicans are starting to realize you cant say “oh, lets cut money for food stamps but not the food stamps for the military industrial complex” because its just not going to work. - Ron Paul

So, the next time a reporter wants to tap Dr Paul on the shoulder for a quick story when hurricane or tornado season comes around, he wont be around. He is retiring form congress at 76 years old. He, as I write this, is well behind on Super Tuesday; thus he will not be our next President. They will have to find someone else to do the work for them. Maybe, they could go out and do actual reporting. Cover the minutes from the FED meetings. Maybe go out and find Stephanie Decker, the mother who lost her legs and bring her story to the masses. Or maybe seek out these heroes from Branson Missouri, who risked their lives in order to save others in the face of a deadly tornado or the hundreds of others  if not thousands from this past week who saved lives.

There are plenty of stories waiting to be told, they just need to be reported. If that’s not juicy enough, cover the destruction of our dollar and our nation through crony capitalism, fractional reserve banking and a debt driven economy that results in war and more spending (debt) to finance it. That, however, may not make it past their publisher or editors desk. We can’t have people actually learning how bad off things really are, now can we?