German cartoon explains "Inflation Monster"

I heard about this on a segment of NPR, and decided to look up the cartoon. Most of the names in the credits at the end seem to be German. The Germans know a lot about hyper-inflation, because it destroyed their currency in the 1920s, with devastating consequences, so it's not surprising that they want to teach about that danger to the rest of the EU.

This cartoon is also promoting the European Central Bank. It makes them seem ever-so reasonable, working to contain inflation and deflation. But I have to wonder about all Central Banks everywhere. Are the problems they are working to contain, problems that they created in the first place? Like printing too much money and debasing the currency? Some of the comments that were made on the Youtube page, posted beneath the video, offer food for thought:

ECB Inflation Monster Cartoon

[...]

Propaganda doesn't have to be lies. But it's subtly implying that the ECB is actually good for europe...

[...]

its not propaganda everything is true what it says but the ecb isnt explaining why they printed 1000 billion euros for the banks last year in this cartoon

[...]

That's a great question. Greenspan "talked" free market capitalism. The problem is, the Federal Reserve is NOT part of a free market. Controlling the price and amount of money (interest rates and inflation) is NOT free markets. A free market hasn't really been tried since 1913. It's a fallacy to say what we have today is a free market, when a central bank controls the money supply, along with government access to that "unlimited" supply, and while government is in partnership with big business.

[...]

This video is very misleading. Keynesian economics and central banking is now being proven out that it doesn't work! Free market economics (also known as the Austrian school of economics) is the way to prosperity for all! Also, deflation is a natural occurrence as technology increases and the cost of making things goes down, which is good for everyone!

[...]

This is banking propaganda rubbish. You don't need to fight off these "monsters" if you have "real" money, like silver or gold. A central bank is justified in existence because governments want to be able to spend without restraints, and big corporations want cheap loans from the central bank. That's why we get these freaking boom and busts!

[...]

So how does the Stockmarket feed this "Inflation Monster" thingy? With Futures and Futures of Futures leading to Concealed Inflation (4:54), once profits are cashed out of the Casino Stockmarket scene, and real world business become commodities, along with real estate, the Inflation Monster looks like Punch in a Judy show run by the "Stockmarket Index" monster, and Oliver twists in his grave, by Dickens!

[...]

Related Links:

Commentary: Stimulate the economy, not government

What would a U.S. currency collapse look like?

Argentina's Example: Are we heading there?

Our true national debt: $130,000,000,000,000.

The Literal High Price (or prices!) of QE3

Has US Currency already "collapsed"?

"The psychological pain will be much greater than the Great Depression, even though the physical conditions will be much better."

     

The Literal High Price (or prices!) of QE3

 QE3 Will Further Destroy U.S. Dollar

  [...] The actions of the Federal Reserve have a dramatic impact on the lives of every single American. The central bank essentially controls the value of the money that we have in our pockets. QE1 and QE2 can be blamed in large part for the skyrocketing price of food at the grocery store. The same supply and demand rules apply to money. The more dollars we have in the circulation, the less valuable the money becomes. The Fed is a main reason why it’s costing us more dollars to fill up our gas tank nowadays.

For decades, Rep. Ron Paul (R-Texas) was the lone voice in Washington speaking out against the Federal Reserve. He writes that “the inflation tax, while largely ignored, hurts middle-class and low-income Americans the most. Simply put, printing money... dilutes the value of the dollar, which causes higher prices for goods and services. Inflation may be an indirect tax, but it is very real — the individuals who suffer most from cost of living increases certainly pay a ‘tax.’” QE1, QE2 and QE3 are nothing more than stealing wealth from the people through the hidden tax of inflation.

Our Founding Fathers would surely be outraged by the existence of the Fed. These great men believed in a limited government that was held accountable to the people. The Federal Reserve, which is generally regarded as a quasi-governmental entity, has less oversight than even the Central Intelligence Agency (CIA). The most powerful central bank in the world makes all of its decisions without even a single vote from our elected representatives in Congress.

You can bet that the Fed is up to no good behind closed doors. Due to a provision under the misguided Dodd-Frank financial overhaul law, the Government Accountability Office (GAO) conducted a one-time, watered-down audit of the central bank back in July. It gave the American people their first peek into the central bank’s books but prevented investigators from peering into their deliberations on interest rates and the most crucial transactions of the Fed. We still need to pass a true audit the Fed bill like Ron Paul’s Federal Reserve Transparency Act of 2011 that would require comprehensive audits on a regular basis.

The first ever audit revealed that the central bank “loaned” out $16 trillion at a zero percent interest rate to corporations and banks around the world during the height of the financial crisis. To put that number into perspective, the Gross Domestic Product (GDP)—the value of all economic activity within a country— of the United States is only $14.12 trillion. It’s no wonder that the Fed is desperately trying to protect their privileged secrecy. 
[...]

There is much evidence to demonstrate that the Federal Reserve is a major part of the problem, not the solution:

Fed Up with the Fed?

[...] The policies of this administration make it risky to lend money, with Washington politicians coming up with one reason after another why borrowers shouldn't have to pay it back when it is due, or perhaps not pay it all back at all. That's called "loan modification" or various other fancy names for welching on debts. Is it surprising that lenders have become reluctant to lend?

Private businesses have amassed record amounts of cash, which they could use to hire more people— if this administration were not generating vast amounts of uncertainty about what the costs are going to be for ObamaCare, among other unpredictable employer costs, from a government heedless or hostile toward business.

As a result, it is often cheaper or less risky for employers to work the existing employees overtime, or to hire temporary workers, who are not eligible for employee benefits. But lack of money is not the problem.

Those who are true believers in the old-time Keynesian economic religion will always say that the only reason creating more money hasn't worked is because there has not yet been enough money created. To them, if QE2 hasn't worked, then we need QE3. And if that doesn't work, then we will need QE4, etc.

Like most of the mistakes being made in Washington today, this dogmatic faith in government spending is something that has been tried before— and failed before. [...]

Sowell goes on to show how history is repeating itself.

Owning a business is similar in some ways, to raising a child.  You have to anticipate all of it's needs in advance, and provide for them.   When the economic climate is uncertain, you have to maintain cash reserves to plan to deal with the unexpected, to insure that your business will continue to survive.  The current Administration seems to have no clue about this, just as it has failed to learn the lessons of history.

Germany in the 1920's learned a very hard lesson about Quantitative Easing, as the article at the following link demonstrates, with pictures of the actual currency in the final months. Absolutely horrific:

Quantitative Easing, Weimar Edition

Would it not be better to learn from the mistakes of those who have gone before us, instead of repeating those mistakes ourselves?    

Is it worth saving money anymore?

I still believe in keeping some savings, but what about long term financial planning?



I'm 31. Where should I be financially?

[...] Once you have a retirement goal in mind, you want to be able to refer to benchmarks along the way to see how you're doing. Otherwise, you could find yourself at the end of your career well short of the savings you'll need.

The best yardstick is the size of your nest egg relative to your income. To quit working at 65 with a decent shot at replacing 80% of your pre-retirement earnings, you'll need savings equal to roughly 12 times your income (that assumes you'll collect Social Security but no pension). [...]

I used to believe in this kind of advice. I still do, in theory. But is it worth doing NOW, when our money is being devaluated?

In my youth, till I learned to manage my money properly, I went hungry a few times between paychecks. Then, after going into debt with credit cards, I learned to save money to pay off the debt. After that, I was good at saving money so I kept doing it, enabling me to buy property. Since then, I've always had savings. But nowadays, I keep thinking I need to spend it, before it becomes worthless. Like it happened in Germany in the 1920's, where people's entire life savings were wiped out overnight.

James Turk did the following interview with Moneychanger.com. Turk maintains that our currency has already collapsed, that we are already in the "process", and it just hasn't reached critical mass yet. The interviewer argues forcefully against Turks assessments, but Turk holds his ground, answering a lot of good questions by the interviewer. Here's a sample:

JAMES TURK ON THE DOLLAR’S COMING COLLAPSE

[...]
Moneychanger Since, at least the New Deal and the succession of Roosevelt and all his monetary/inflationary tricks, people have been predicting that the dollar would collapse. Aren’t you ashamed to come along 70 years later and predict again that the dollar is going to collapse?

Turk By any logical interpretation the dollar has already collapsed. Today’s dollar only purchases five cents of what it purchased in the 1930s, ten cents of what it purchased in the 1960-70s, and maybe 50 cents of what it purchased in the 1980s. So inflation has already brought the dollar to an ongoing collapse. The sound money people have been warning about this through the decades: the dollar is no longer an effective form of currency.

That raises another question: will the dollar’s problems become more severe? That’s where it becomes a bit more troublesome in terms of projecting and looking at the future. Can this decades-long situation continue, or must it end in some cataclysm? In our view it must come to end in a cataclysm, and that’s what we lay out in the book.

Moneychanger But isn’t the word “collapse” misleading? The people who mange the dollar, the Federal Reserve and the Treasury, have managed the collapse from 1934 until 2004, 70 years, so that the economy did not collapse along with the dollar. Can you really call that a collapse? Also, what’s to prevent their managing it a bit longer, through this decade? Even if it loses (as I expect) at least 75% of its value in this decade -- and it’s already lost nearly 30% from February 2002 to March 2004 -- it still won’t disrupt the economy too terribly.

Turk Let’s look at the first part of that question, the claim that the economy hasn’t collapsed. You’re widening the point that I was making earlier about the dollar collapsing in terms of purchasing power. When you bring the economy into the discussion you have to ask yourself another question. Are people better off now than they were 20-30 years ago? Looking at real wealth and adjusting for the dollar’s debasement, people are less wealthy today than they were 20-30 years ago. Incomes are lower today than they were 20-30 years ago, partly because the dollar’s been debased, partly because people take home less money after taxes. By any logical measure, I don’t think people are as well off as they were in the 1960s or 1950s when the dollar problems weren’t as severe as they’ve become in recent decades.

But there’s more to that question: we’ve created a debt mountain, a debt bubble. Bubbles always pop. We mortgaged our future trying to maintain standards of living by debasing the currency and borrowing. This is unsustainable and will ultimately bring about the dollar’s collapse.

Moneychanger But the Federal Reserve and the Treasury have managed the collapse. That’s what they do. They are crisis managers. They exist to manage the debasement of the dollar so that this infection does not give the whole economy a fever resulting in death. Would you agree?

Turk Yes, and as a clear result of their managing an unsustainable situation, we have less and less freedom. The Patriot Act just presents the latest example. Look at US financial history. They continue to erode and encumber our freedom. Why? Because they recognise that the present system is not sustainable and they are trying to keep the bubble in the air.

Moneychanger You claim the present system is not sustainable. Allan Greenspan says it is. George Bush says it is.

Turk Well, are they going to tell you that it’s not sustainable?

Moneychanger No, but they have 70 years of success to argue on their side. What makes it different this time? In the dollar’s darkest hours of 1980, when gold hit $850 and silver $50 and they pushed interest rates over 20%, well, yes, it’s a crisis, but we’ll muddle through this one, too. They’ve been muddling through since 1934. What is to prevent their muddling through this time? What specific things will make the dollar collapse this time? By “collapse” I don’t mean “erode” or even “erode quickly”, but I mean collapse in the sense that currency collapsed in Germany in 1923 or Argentina in 2002.

Turk That is exactly what I envision for the dollar. To answer your question we have to consider both supply and demand. In recent decades demand for the dollar has been, more or less, fairly consistent. As the financial bubble has been inflated and the Debt Mountain was built, people have continued to demand the dollar. They still use it for their day to day transactions. But what happened in Argentina and in Germany in the 1920s? Eventually, in a very short period of time, people realised that the hollow promises they were using for currency weren't worth what they had previously valued them to be. Then began the flight from the currency. The demand for those currencies dropped dramatically. In a long-term time frame, you could say almost overnight, but it was really over a period of weeks and months. People moved out of that currency as quickly as they could into other alternatives.

Demand for the dollar will ultimately drop for essentially the same reasons that demand for the Argentine peso and the Reichsmark dropped: they were fiat currencies oversupplied to the market.

Today far too many dollars are sloshing around the global economy. All it takes is a little break in confidence, then people quickly understand that the dollar is not worth the paper it’s printed on. There are a lot of hollow promises backing your dollar. That will lead to the flight from the currency that will ultimately bring the dollar down. But it’s the same outcome for every fiat currency. That’s the point that Americans don’t yet get. There is no logical reason why the dollar should end any differently than any other fiat currency.

Moneychanger But help me see the unseen. In 1923 Germany the people had already suffered through the inflation of World War I. They had seen their currency lose value as prices rose 800%, they had caught on. That “catching on” was necessary to precipitate the flight from the currency.

In Argentina in the decades of the 1980s and 90s, they had three different currencies, if I’m not mistaken. It may have been four, I can’t keep up with it. All Latin America has a century-long tradition of monetary instability. In the U.S. the last two generations have grown up without seeing gold in circulation, the last generation has grown up without seeing silver in circulation. Since 1971, the whole world has been on a fiat standard. Every currency has been inconvertible, backed by nothing. So why would American confidence break now? They don’t know anything else. They have only known a regime of inflation and ever-depreciating dollars. What will put the idea in their mind now that they have to flee out of dollars?

Turk What will trigger the flight from the dollar? We can’t really predict that. It could be some geopolitical event, some domestic financial event, a bankruptcy of Freddie Mac or Fannie Mae. We just don’t know what the specific trigger will be.

Look at the overall picture of what the dollar is today, and ask yourself a question. Do I want to prepare for this coming event by moving assets out of dollars into other alternatives – other currencies, precious metals, tangible assets. Never mind asking what specific event will starts the flight.

Where we stand today in this country is not unlike where Russians stood in the Soviet Union in the late 1980s. If you had possessed the terrific foresight to say that in two years the Russian Rouble will collapse and the Soviet Union will be history, the average Russian would have just laughed at you. And you know what he would have said? “The government will never let that happen.” Exactly what Americans say today.

“The government will never let that happen.”

But the reality is that the market is bigger than the government. Truth can be hid for only so long, and we have been hiding the truth. We’ve been creating illusions of prosperity, while in reality we’ve been consuming infrastructure and building a debt mountain. The Debt Mountain is ultimately going to be the problem that causes the dollar to collapse. [...]

Turk claims that we have not had a sound currency since 1934, even though a sound currency was written into our constitution. He also predicts the American people will demand that we go back to it.

This interview was made in 2004. Yet he predicts some things that have since happened, or are happening now. Read the whole thing, it's a real eye-opener.

What can we DO about any of it? Idaknow. Do what we can, I suppose, to get ready for the Brave New World of Finance that seems to be inexorably coming our way?


Related Links:

Commentary: Stimulate the economy, not government

What would a U.S. currency collapse look like?

Argentina's Example: Are we heading there?

Our true national debt: $130,000,000,000,000.
     

Is it growth, or inflation?

Is job growth slow, because the economy isn't growing as much as they say it is?

Another view on why there is no robust job growth

[...] there's something else that almost nobody is considering: perhaps the economic recovery just isn't as strong as Washington thinks (which, incidentally, isn't very strong to begin with.)

Nobody, of course, wants to hear this. But let me make the case.

[...]

The December estimates put into the GDP are about as solid as a Jello mold.

Worse, according to economist John Williams, 3.44 percentage points of the annualized growth in the fourth quarter -- more than the total 3.2 percent reported -- came from a sudden, inexplicable decline in imports.

Without the reduction in imports GDP would have been down in the fourth quarter and we'd be hearing talk right now -- again -- about a possible double-dip recession!

The Commerce Dept. also attributed a lot of the gain in fourth quarter GDP to retail spending.

But we already know -- from a column I did during the holiday shopping season -- that much of the sales increase in December wasn't coming from a sudden burst in consumerism, but instead from rising prices on things like energy.

That isn't growth; it is inflation. And inflation is bad.

Despite all the inflation that you and I see in the real world, the Commerce Dept. barely noticed that prices were rising in its GDP calculations.

It used 0.3 percent as the annualized deflator in the GDP report when the consumer price index (the CPI, which itself understates inflation) is up 2.6 percent from a year earlier.

Let me explain it a different way.

Each point that inflation rises decreases the GDP by a point.

So, for instance, if the GDP deflator had simply stayed at the 2.0 percent reported in the third quarter the annualized GDP growth in the final three months of the year would have been an extremely modest 1.2 percent annualized, not 3.2 percent.

Countries get them selves into trouble when they publicize false economic data, whether the deceit is intentional or not. [...]

     

The book "When Money Dies" is back in print

When it was out of print, only used copies were available, and were selling for more than $900.00. Now the book has been republished and is available for a very affordable $10.00 on Amazon.com:



When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany

Product Description

When Money Dies is the classic history of what happens when a nation’s currency depreciates beyond recovery. In 1923, with its currency effectively worthless (the exchange rate in December of that year was one dollar to 4,200,000,000,000 marks), the German republic was all but reduced to a barter economy. Expensive cigars, artworks, and jewels were routinely exchanged for staples such as bread; a cinema ticket could be bought for a lump of coal; and a bottle of paraffin for a silk shirt. People watched helplessly as their life savings disappeared and their loved ones starved. Germany’s finances descended into chaos, with severe social unrest in its wake.

Money may no longer be physically printed and distributed in the voluminous quantities of 1923. However, “quantitative easing,” that modern euphemism for surreptitious deficit financing in an electronic era, can no less become an assault on monetary discipline. Whatever the reason for a country’s deficit—necessity or profligacy, unwillingness to tax or blindness to expenditure—it is beguiling to suppose that if the day of reckoning is postponed economic recovery will come in time to prevent higher unemployment or deeper recession. What if it does not? Germany in 1923 provides a vivid, compelling, sobering moral tale.

“Engrossing and sobering.” —Daily Express (London)

Chilling, because it really happened. A timely lesson from the past for us all. There are some interesting comments about the book in the customer review section too.

Also see:

Has US Currency already "collapsed"?

What would a U.S. currency collapse look like?

What happens when Tax Cuts Expire in 2011?

Our true national debt: $130,000,000,000,000.

Argentina's Example: Are we heading there?


   

A scary unemployment graph. Long term?

Median Duration of Unemployment

This recession looks very different, and much more troubling, than those in the recent past. I wonder how this dramatic change in the nature of unemployment will alter traditional macroeconomic relationships, such as Okun's Law and the Phillips curve. [...]

It's from the blog of a Harvard Economics professor. He goes on to suggest that long term unemployment may not exert as much downward pressure on inflation as people think.


Related Link:

The Great Recession is just the beginning
     

“Reinvestment Acts" of Carter, Clinton & Obama

It's the history of the Democrats, and it keeps on repeating itself, and landing us in sh*t street:

Barack Obama, Propaganda, Jimmy Carter, Inflation, High Interest Rates “Reinvestment Act” and The “Misery Index.”

[...] If you look back in history to the Jimmy Carter Administration you will find that during Jimmy Carter’s Reinvestment Act, much the same as Barack Obama’s, we went into years of double digit inflation because the dollar was so devalued (The fed printed a hell of a lot of money to fund the Reinvestment Act). To combat high, runaway inflation the Federal Reserve kept raising interest rates. Now, much to Jimmy Carter’s credit there were 10.5 Million Jobs created under his presidency. However people could not afford to buy anything because the price of merchandise and interest were well beyond the average person. The end result was the economy did not grow thus we had “STAGFLATION.”

Here is an interesting page from the Wall Street Journal:
http://blogs.wsj.com/economics/2009/01/09/bush-on-jobs-the-worst-track-record-on-record/

Note that during the George W. Bush years there was the lowest unemployment and the the lowest interest rates. One may argue that George W. Bush only created 3 Million jobs. But wait…. almost everyone was working. But as the economy began to collapse because of Bill Clinton’s expansion of the Community Reinvestment Act in 1997, the unemployment number skyrocketed in the last months of George W. Bush’s term. This was not George W. Bush’s fault at all.

Carter: Interest rate, 21%. Inflation, 13.5%. Unemployment, 7%. The so-called “Misery Index,” which Carter used to great effect in his 1976 campaign to win election.

Reagan’s last year: Interest rate, 9%. Inflation, 4.1%. Unemployment, 5.5%.

George W. Bush: Interest rate, 8% down to almost 0%. Inflation, 2.6%. Unemployment, 4.5%. [...]

And it was Clinton's Community Reinvestment Act in 1997 that made all the bad loans, the sub-prime mortgages, that led to the meltdown. And once again, it looks like there is inflation in our future.

We are told that 10 million jobs were created during Jimmy Carter's presidency, but the benefits of that were negated by high inflation, which ran the economy into the ground, ending his presidency with a recession.

Obama has started his Presidency with a recession, and hasn't created any significant number of jobs. He has continually attacked the private sector, increased taxes, created uncertainty in the market place, and added enormously to our already overburdened national debt. When inflation comes, it will be worse than Carter's presidency, because we won't even have the jobs people had back then; it will be high unemployment AND inflation. And if we continue on this path, we may even be facing a U.S. currency collapse.

Think Cloward-Piven strategy. The hard-core Marxists are. I don't claim that everybody in the Obama Administration is a hard-core Marxist; some are just Marxist sympathizers, or useful idiots. But in the end the distinction won't much matter, if the end result is the same.


Also see:

Has US Currency already "collapsed"?

What happens when Tax Cuts Expire in 2011?

# Our true national debt: $130,000,000,000,000.

     

Our economy: when will inflation begin?

Perhaps as soon as next year? 5.5 percent inflation, or higher:

Angry Voters Are Right: Growing Debt Can Slow the Economy

[...] Anyone who ponders the question of why voters are so hot about public sector debt will quickly discover that otherwise diverse voters are relatively united in their apprehension that ballooning sovereign debt threatens our economy.

Are voters right to be so worried about how rising debt threatens their economic future, or are some politicians and most pundits right that, once again, the voters’ emotions have won over their reason?

Well, it turns out that the voters are right, if new research from Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard University stands up under academic scrutiny. Reinhart and Rogoff study the relationship between rising debt levels, inflation and economic growth rates for 44 developed and developing countries. Their dataset contains 3,700 annual observations across a wide range of political and economic settings.

What did they find? For the period 1946 through 2009, developed countries (which includes the United States) grew at an annual rate of just shy of 4 percent when debt was no greater than 30 percent of GDP. For debt burdens above 30 but below 90 percent, economic growth slowed down but remained, on average, around 3 to 3.5 percent per year. However, a debt burden of over 90 percent of GDP was associated with a significantly slower economy: the average growth rate is negative and the median rate is just at 2 percent.

When Reinhart and Rogoff focused just on the U.S., the association of high debt burden and economic slowdown becomes even more pronounced. They use data from 1790 through 2009. When debt rises to 90 percent of GDP, both the average and the median economic growth rates are negative and the inflation rate skyrockets to above 5.5 percent.

What makes this research so telling is the commonly accepted prediction that U.S. sovereign debt is on its way to 100 percent of GDP and doing so quickly. The International Monetary Fund predicted that total U.S. government debt would reach that level in 2015, just four years from now. The Congressional Budget Office forecasts that debt will be above 90 percent by 2020. If one adds in the debt U.S. government agencies owe one another, the U.S. debt could be above 100 percent next year. [...]

That may go a long way in explaining some of the grim financial forecasts for next year. Is it true? We shall see soon enough.


Also see:

Our true national debt: $130,000,000,000,000.
     

When Financial Chickens come home to roost

Takuan Seiyo has a long rant.

[...] The Nobel-laureate in economics Gary Becker linked the financial travails of Argentina in the mid-1990s to government spending at more than 30% of GDP. The Swiss economist Peter Bernholz has linked hyperinflation triggers to government deficits exceeding 40% of expenditures. But government spending in Obamerica is 45% of GDP, and its deficit stands at 43.3%. Peronism has acquired a permanent perch in Washington, DC.

But there is more. In a long chain of catastrophic errors and intentional malpractice since the days of Lyndon Johnson, America’s ruling elite of both parties has run up an unpayable debt to its own retirees, to its bondholders, its foreign creditors. Having designed to turn the country into a banana republic demographically, the Club of Crooks and Loons has turned it into a banana republic fiscally too.

[...]

A freefalling dollar cannot help by increasing exports, when you have off-shored your manufacturing, and your main industries are predatory lawsuits, selling shoddy American housing to Salvadorians with faked mortgages, and marketing financial weapons of mass destruction worldwide. And a falling dollar is not a good inducement for the world to keep buying dollar-denominated U.S. debt. The cessation of that buying has such dire consequences to the United States that Chinese strategists have named them “the nuclear option.”

The American people can’t do anything about it either, except mailing tea bags to the crooks and loons who govern them. Their only electoral choice is between the party of demented progressives, and the party of progressive dementia.

[...]

We are ruled by lying clowns, forever trying to postpone the moment of truth. To the next election cycle, next government, next century. They have been destroying the West year by year for 55 years now by mismanaging government finances in order to bribe voters or to buy feel-good, do-good euphoria for their Body Snatcher vanguard. As the deficits grow, productive citizens are taxed up to double the 1/3 ratio of medieval serfs, more money printing and government borrowing is necessary, the value of money erodes and moral hazard gnaws at the foundation.

The government then cooks up “solutions” to the problems it created in the first place through its overspending, incompetence or corruption. The “solutions” camouflage the damage for a while longer and prolong the comforting illusion, just like the frantic “stimulus” to stave off a corrective deflationary depression now -- at a cost of devaluation or hyperinflation later. The “solutions” are often written up in 2000-page bills that nobody reads until their rot crawls out in litigation and 15-figure costs overruns years later.

All such “solutions” just multiply the damage and roll it forward so that the “crack-up boom” (4) boom now but crack up in the future, on somebody else’s watch.

But the future has arrived. It’s piled up all around us in heaps of diversity-enriching primitives from failed cultures bearing European and American passports, or silos full of mad mullahs and NorKor nightmare leprechauns thumbing their noses at the white castrati. It’s in the 24/7 stream of rotten mass culture that the harlots of Nineveh might envy, and in mountains of unnecessary junk purchased with nonexistent money. It’s in the giant vaults full of flimsy dollars worth 2% of their value in 1913, bloated deficits of generations of venal politicians raining borrowed currency onto client voters, and enormous industrial landscapes in China pumping out products that the now-crazed West once made at home and better.

The future is here. It can no longer be rolled over but maybe for a year with respect to Iran, three years with respect to hyperinflation, fifteen years with respect to the reconquest of the West by Muhammad and Montezuma. A delay just long enough for the misruling clowns to cash in their Goldman Sachs stock options, pass veto-proof immunity laws, declare national emergencies, and build for themselves impenetrable bunkers with landing strips in Andorra or Aruba.

[...]

The collapse is by no means over. The Bank for International Settlements estimates the banksters’ total derivative losses at $4.1 trillion. But this is, as such things always are, just a calming nostrum for frayed nerves. In case of a Black Swan event, which such estimates never take under consideration, the $4.1 trillion figure is probably too optimistic by a good-sized fraction of a quadrillion. But what’s a quadrillion or two between friends.

People forget that Adam Smith was not an economist but a moral philosopher. Before he wrote The Wealth of Nations, he had written The Theory of Moral Sentiments. The free market is no place for cutthroats and purse snatchers. [...]

There is a lot more, more financial stuff with links and footnotes... but it's long and rambling, and interspersed with rants about other things.


Related Links:

Has US Currency already "collapsed"?

The euro and the yen have surpassed the dollar as the favored currency by central banks

The Argentina example: are we heading there?

Utopian Socialism and the damage it inflicts

     

Has US Currency already "collapsed"?

A post I did a while back, "What would a U.S. currency collapse look like?", has been getting more hits and rising up in my site meter. I found out it's been linked to at Ask.com, regarding the search words "currency collapse". I went to that page, and there were many interesting links to that topic. Here are a few that I found informative:

How Does a Currency Collapse? and the U.S. $?

When a currency loses the confidence of its people, its fall becomes exponential, as has happened to the Zimbabwe $, where in 1982 one U.S.$ equalled 1 Zimbabwe $. Today around Z$200,000 buys one U.S. $ if you can find someone idiot enough to sell one for the Z$.

In day-to-day terms, the smallest note in Zimbabwe a Z$500 is the size of a U.S.$. The price of a single-ply sheet of toilet paper is more expensive at around Z$867.

The U.S.$ is nowhere near there, but clearly the U.S. Administration has no plan or even desire to rectify the U.S. Trade deficit. Consequently, we are seeing a growing number of Central Banks turning to the Euro for its reserves and away from the U.S.$.

Whilst most observers and particularly U.S. observers like to have tangible facts and numbers with which to mathematically gauge the present and the different possible futures, a collapsing currency situation is not as neatly gaugeable. Indeed it is driven in stages of ‘confidence’, which are rarely measurable in advance.

For instance we see today the move of the Pension and other long-term funds into the gold E.T.F. one finds there are no mathematically measurable factors with which to measure the pace of change to these funds. Yes, the number of ‘Road-shows’ the World Gold Council does affects this move to some extent, but how do you measure the spread of that knowledge and resulting investment in the E.T.F.s outside of that? How does one measure the forces causing uncertainty and falling ‘confidence’.

It is an emotional progression, one that moves in lurches as particular incidents destroy confidence limb by limb. In such a climate a steady degeneration of confidence lead to an effect we shall call a "plateau - cliff" process.[...]

Read the whole thing. See the steps of the "process". See the graph. Yikes.


Then James Turk does an interview with Moneychanger.com. Turk maintains that our currency has already collapsed, that we are already in the "process", and it just hasn't reached critical mass yet. The interviewer argues forcefully against Turks assessments, but Turk holds his ground, answering a lot of good questions by the interviewer. Here's a sample:

JAMES TURK ON THE DOLLAR’S COMING COLLAPSE

[...]
Moneychanger Since, at least the New Deal and the succession of Roosevelt and all his monetary/inflationary tricks, people have been predicting that the dollar would collapse. Aren’t you ashamed to come along 70 years later and predict again that the dollar is going to collapse?

Turk By any logical interpretation the dollar has already collapsed. Today’s dollar only purchases five cents of what it purchased in the 1930s, ten cents of what it purchased in the 1960-70s, and maybe 50 cents of what it purchased in the 1980s. So inflation has already brought the dollar to an ongoing collapse. The sound money people have been warning about this through the decades: the dollar is no longer an effective form of currency.

That raises another question: will the dollar’s problems become more severe? That’s where it becomes a bit more troublesome in terms of projecting and looking at the future. Can this decades-long situation continue, or must it end in some cataclysm? In our view it must come to end in a cataclysm, and that’s what we lay out in the book.

Moneychanger But isn’t the word “collapse” misleading? The people who mange the dollar, the Federal Reserve and the Treasury, have managed the collapse from 1934 until 2004, 70 years, so that the economy did not collapse along with the dollar. Can you really call that a collapse? Also, what’s to prevent their managing it a bit longer, through this decade? Even if it loses (as I expect) at least 75% of its value in this decade -- and it’s already lost nearly 30% from February 2002 to March 2004 -- it still won’t disrupt the economy too terribly.

Turk Let’s look at the first part of that question, the claim that the economy hasn’t collapsed. You’re widening the point that I was making earlier about the dollar collapsing in terms of purchasing power. When you bring the economy into the discussion you have to ask yourself another question. Are people better off now than they were 20-30 years ago? Looking at real wealth and adjusting for the dollar’s debasement, people are less wealthy today than they were 20-30 years ago. Incomes are lower today than they were 20-30 years ago, partly because the dollar’s been debased, partly because people take home less money after taxes. By any logical measure, I don’t think people are as well off as they were in the 1960s or 1950s when the dollar problems weren’t as severe as they’ve become in recent decades.

But there’s more to that question: we’ve created a debt mountain, a debt bubble. Bubbles always pop. We mortgaged our future trying to maintain standards of living by debasing the currency and borrowing. This is unsustainable and will ultimately bring about the dollar’s collapse.

Moneychanger But the Federal Reserve and the Treasury have managed the collapse. That’s what they do. They are crisis managers. They exist to manage the debasement of the dollar so that this infection does not give the whole economy a fever resulting in death. Would you agree?

Turk Yes, and as a clear result of their managing an unsustainable situation, we have less and less freedom. The Patriot Act just presents the latest example. Look at US financial history. They continue to erode and encumber our freedom. Why? Because they recognise that the present system is not sustainable and they are trying to keep the bubble in the air.

Moneychanger You claim the present system is not sustainable. Allan Greenspan says it is. George Bush says it is.

Turk Well, are they going to tell you that it’s not sustainable?

Moneychanger No, but they have 70 years of success to argue on their side. What makes it different this time? In the dollar’s darkest hours of 1980, when gold hit $850 and silver $50 and they pushed interest rates over 20%, well, yes, it’s a crisis, but we’ll muddle through this one, too. They’ve been muddling through since 1934. What is to prevent their muddling through this time? What specific things will make the dollar collapse this time? By “collapse” I don’t mean “erode” or even “erode quickly”, but I mean collapse in the sense that currency collapsed in Germany in 1923 or Argentina in 2002.

Turk That is exactly what I envision for the dollar. To answer your question we have to consider both supply and demand. In recent decades demand for the dollar has been, more or less, fairly consistent. As the financial bubble has been inflated and the Debt Mountain was built, people have continued to demand the dollar. They still use it for their day to day transactions. But what happened in Argentina and in Germany in the 1920s? Eventually, in a very short period of time, people realised that the hollow promises they were using for currency weren't worth what they had previously valued them to be. Then began the flight from the currency. The demand for those currencies dropped dramatically. In a long-term time frame, you could say almost overnight, but it was really over a period of weeks and months. People moved out of that currency as quickly as they could into other alternatives.

Demand for the dollar will ultimately drop for essentially the same reasons that demand for the Argentine peso and the Reichsmark dropped: they were fiat currencies oversupplied to the market.

Today far too many dollars are sloshing around the global economy. All it takes is a little break in confidence, then people quickly understand that the dollar is not worth the paper it’s printed on. There are a lot of hollow promises backing your dollar. That will lead to the flight from the currency that will ultimately bring the dollar down. But it’s the same outcome for every fiat currency. That’s the point that Americans don’t yet get. There is no logical reason why the dollar should end any differently than any other fiat currency.

Moneychanger But help me see the unseen. In 1923 Germany the people had already suffered through the inflation of World War I. They had seen their currency lose value as prices rose 800%, they had caught on. That “catching on” was necessary to precipitate the flight from the currency.

In Argentina in the decades of the 1980s and 90s, they had three different currencies, if I’m not mistaken. It may have been four, I can’t keep up with it. All Latin America has a century-long tradition of monetary instability. In the U.S. the last two generations have grown up without seeing gold in circulation, the last generation has grown up without seeing silver in circulation. Since 1971, the whole world has been on a fiat standard. Every currency has been inconvertible, backed by nothing. So why would American confidence break now? They don’t know anything else. They have only known a regime of inflation and ever-depreciating dollars. What will put the idea in their mind now that they have to flee out of dollars?

Turk What will trigger the flight from the dollar? We can’t really predict that. It could be some geopolitical event, some domestic financial event, a bankruptcy of Freddie Mac or Fannie Mae. We just don’t know what the specific trigger will be.

Look at the overall picture of what the dollar is today, and ask yourself a question. Do I want to prepare for this coming event by moving assets out of dollars into other alternatives – other currencies, precious metals, tangible assets. Never mind asking what specific event will starts the flight.

Where we stand today in this country is not unlike where Russians stood in the Soviet Union in the late 1980s. If you had possessed the terrific foresight to say that in two years the Russian Rouble will collapse and the Soviet Union will be history, the average Russian would have just laughed at you. And you know what he would have said? “The government will never let that happen.” Exactly what Americans say today.

“The government will never let that happen.”

But the reality is that the market is bigger than the government. Truth can be hid for only so long, and we have been hiding the truth. We’ve been creating illusions of prosperity, while in reality we’ve been consuming infrastructure and building a debt mountain. The Debt Mountain is ultimately going to be the problem that causes the dollar to collapse. [...]

Turk claims that a sound currency was written into our constitution, and he predicts the American people will demand that we go back to it. And that we have not had a sound currency since 1934.

Also, this interview was made in 2004. Yet he predicts some things that have since happened, or are happening now. Do read the whole thing.
     

Debt servicing, America's GDP, and inflation

From the Financial Times:

Exploding debt threatens America

[...] Under President Barack Obama’s budget plan, the federal debt is exploding. To be precise, it is rising – and will continue to rise – much faster than gross domestic product, a measure of America’s ability to service it. The federal debt was equivalent to 41 per cent of GDP at the end of 2008; the Congressional Budget Office projects it will increase to 82 per cent of GDP in 10 years. With no change in policy, it could hit 100 per cent of GDP in just another five years. [...]

Inflation could lower the debt to GDP ratio, but would cause prices to rise. It could quickly become unmanageable.

The article says there is still time to reverse this. But does anyone in government have the will to do it?
     

Understanding the meaning of "Trillions"

Nowadays we are seeing numbers mentioned in government spending, that should belong in astronomy rather than accounting. They are so HUGE, it's hard to grasp. Here are some sites that can help:

What does one TRILLION dollars look like?

All this talk about "stimulus packages" and "bailouts"...

A billion dollars...

A hundred billion dollars...

Eight hundred billion dollars...

One TRILLION dollars...

What does that look like? I mean, these various numbers are tossed around like so many doggie treats, so I thought I'd take Google Sketchup out for a test drive and try to get a sense of what exactly a trillion dollars looks like.

We'll start with a $100 dollar bill. [...]

It's a good visual presentation. Here is one example of what One Hundred Million Dollars (in $100 bills) would look like, stacked on a palette:



Follow the link to see what a Trillion Dollars would look like in $100 bills. It's mind boggling. Then multiply THAT by 10, and you will have our current National Debt. Unbelievable... and unsustainable.

HT: Walker at Subtle oak flavor; Pleasing finish


Here's another article that tackles the topic:

Obama’s dangerous budget leaves GOP at loss for words

[...] Insensitivity to scope is a major obstacle to understanding the Obama administration’s $3.6 trillion 2010 budget. People simply have trouble understanding a number so big. A recent poll asked Americans how many million are in a trillion. Twenty-one percent of respondents got the answer right — it’s a million million. Most people thought it was a lot less.

Republicans are facing that obstacle as they try to explain the dimensions of Obama’s spending plan. The GOP pollster told me he tries to explain it by asking people to think of a dollar as a second — one dollar, one brief tick of your watch. A million seconds, the pollster explained, equals eleven days. A billion seconds equals 31 years. And a trillion seconds equals 310 centuries.

The task of educating voters got a little more urgent Monday, when the government announced the not-terribly-surprising news that federal tax revenues will be smaller this year than previously thought. After a review of the Obama budget’s numbers before formal submission to Congress, Budget Director Peter Orszag said this year’s deficit will be $1.841 trillion — $89 billion more than previously estimated. If you’re listening to the ticks of your watch, that’s about 570 centuries. [...]

570 centuries worth of seconds... dang. Such numbers, applied to currency and accounting balance sheets, are very scary indeed. And for good reason.
     

What happens when Inflation returns?

Inflation WILL return once the economy starts to recover, because we will also have massive debt and compounded interest to pay on it. We are facing an unsustainable situation.

Obama sows seeds of demise

[...] Right now, Obama’s ratings must be pleasing to his eye. Voters like him and his wife immensely and approve of his activism in the face of the economic crisis. While polls show big doubts about what he is doing, the overwhelming sense is to let him have his way and pray that it works.

But beneath this superficial support, Obama’s specific policies run afoul of the very deeply felt convictions of American voters. For example, the most recent Rasmussen Poll asked voters if they wanted an economic system of complete free enterprise or preferred more government involvement in managing the economy. By 77-19, they voted against a government role, up seven points from last month.

[...]

For Americans to conclude that they disapprove of their president in the midst of an earth-shaking crisis is very difficult. But as Obama’s daily line moves from “I inherited this mess” to “There are faint signs of light,” the clock starts ticking. If there is no recovery for the next six months — and I don’t think there will be — Obama will inevitably become part of the problem, not part of the solution.

And then will come his heavy lifting. He has yet to raise taxes, regiment healthcare or provide amnesty for illegal immigrants. He hasn’t closed down the car companies he now runs and he has not yet forced a 50 percent hike in utility bills with his cap-and-trade legislation. These are all the goodies he has in store for us all.

Obama’s very activism these days arrogates to himself the blame for the success or failure of his policies. Their outcome will determine his outcome, and there is no way it will be positive.

Why?

• You can’t borrow as much as he will need to without raising interest rates that hurt the economy;

• The massive amount of spending will trigger runaway inflation once the economy starts to recover;

• His overhaul of the tax code (still in the planning phases) and his intervention in corporate management will create such business uncertainty that nobody will invest in anything until they see the lay of the land;

• His bank program is designed to help banks, but not to catalyze consumer lending. And his proposal for securitization of consumer loans won’t work and is just what got us into this situation. [...]

I think there are many on the hardcore Left who don't want to see the economy fixed; they would like to see capitalism, our consumer-driven economy, and the system of government that supports it, ruined, so they can replace it with something else.

Pat's been telling me that sounds to much like a conspiracy theory; that in reality they are just dumb Marxists who haven't got a clue what they are doing. That's quite possibly true. But either way, I think it's going to end the same; in a mess. Jimmy Carter Redux. Only this time, with trillions of dollars of debt and interest payments on that debt, which will ultimately mean... what?


Related Links:

The problem with the banks: illiquidity

Advice to the GOP: "Shut up and remain calm"
     

The Devaluing of American Currency Continues

Commentary: Time for another tea party?

[...] as the federal government continues to print money that isn't worth the paper it's written on and as our national debt soars past $11 trillion, a United Nations panel is set to recommend that the world ditch the U.S. dollar as its reserve currency in favor of a shared basket of currencies.

One of the enduring strengths of the dollar has been that it has always been the currency of choice in times of crisis. But that's not the case anymore. Our ballooning deficits have driven down the value of the dollar so much that the Chinese government recently asked for guarantees from Washington that the Treasury bills they own are safe. [...]

If the dollar is perceived as unreliable, it could lead to global "dumping" of all assets in American currency, further devaluating the dollar.

Fed to pump another $1 trillion into U.S. economy

[...] to the surprise of investors and analysts, the committee said it had decided to purchase an additional $750 billion worth of government-guaranteed mortgage-backed securities on top of the $500 billion that the Fed is already in the process of buying.

In addition, the Fed said it would buy up to $300 billion worth of longer-term Treasury securities over the next six months.

[...]

In effect, the central bank has been lending money to a wider and wider array of borrowers, and it has financed that lending by using its authority to create new money at will.

Since last September, the Fed's lending programs have roughly doubled the size of its balance sheet, to about $1.8 trillion, from $900 billion. The actions announced on Wednesday are likely to expand that to well over $3 trillion over the next year.

Despite a trickle of encouraging data in the last few weeks, Fed officials were clearly still worried and in no mood to cut back on their emergency efforts.

Fed policy makers sharply reduced their economic forecasts in January, predicting that the economy would continue to experience steep contractions for the first half of 2009, that unemployment could approach 9 percent by the end of the year and that there was at least a small risk of a drop in consumer prices like those that Japan experienced for nearly a decade.

The Fed rarely buys long-term government bonds. The last occasion was nearly 50 years ago under different economic circumstances when it tried to reduce long-term interest rates while allowing short term rates to rise. [...]

So we are creating this massive debt for ourselves, which is also devaluating the dollar internationally, which also weakens it at home. We have to pay interest on this debt, which keeps growing. What happens when interest rates go up, the interest on our debt it compounded, nations globally begin dumping our currency, and we can't borrow any more? And that causes a massive run on our banks, requiring the Fed to print up even more money, in order to comply with the FDIC? You might as well ask, What would a U.S. currency collapse look like?
     

Democrat Gamble makes Republicans Scramble

Harry Reid has criticized Republican's for not being bipartisan enough, claiming that they want President Obama to fail. But how can they be "bipartisan", if by definition it means jumping off a cliff with the Democrats? Is not agreeing to mutual suicide really "wanting Obama to fail"?


Ironically, I think if the Democrats would have worked on a truly bi-partisan approach to solving the crisis, they could have, with Republican help, insured Obama's success for improving the economy and creating jobs. Instead, they are taking a terrible gamble that seems suicidal to many of us.

This article in the San Francisco Chronicle attempts to make a very positive pitch for Obama's budget and the Democrat's agenda. But even with all the gushing and praise, it acknowledges many of the risks being taken:

Obama taking big political risk with budget

[...] After two years of protecting her conservative Blue Dog Democrats by signing off on farm subsidies and avoiding immigration votes, Pelosi has signaled a leftward shift, warmly embracing the Obama budget as the culmination of a vision she has fought years to achieve. "We are very excited, I guess is the word," Pelosi told liberal media representatives last week. "Now we have a president who shares our values and has the right priorities."

Like former President Reagan, who inherited an economic calamity from a deeply unpopular predecessor, Obama is using the crisis to change government's role in the economy. "We are at an extraordinary moment that is full of peril but full of possibility," Obama told PBS' Jim Lehrer, "and I think that's the time you want to be president."

If the polls are accurate, the economic meltdown has altered public attitudes about government, be it the appetite for health care reform, regulation of banks or higher taxes on the wealthy.

"What you've got is a context that makes a very ambitious budget strategy possible in a way that wouldn't be possible in times we would call normal," said Bruce Buchanan, a presidential scholar at the University of Texas. "This is a rare moment." [...]

I read the whole thing. I can follow the logic of the arguments being put forth in favor of what's being done. Yet I can't see that it's going to work, because it's the same flawed logic that got us into this mess. Even the article warns there are a number of pitfalls that could cause it to fail:

[...] Historically, a president's first year is almost always his most productive. "If you can't do it in your first term with your first budget, you almost never get a chance to do it later," said Stan Collender, a veteran budget expert now with Qorvis Communications, a Washington public relations firm. And when a new president comes from a different party than his predecessor, big changes are expected. [...]

President Obama's $3.6 trillion spending and tax plan is the most ambitious effort to shift the federal government's role in the economy since former President Ronald Reagan's in 1981. But instead of rolling back government, Obama advocates spending in three key areas, each dependent on the others. If Congress declines to raise taxes on carbon emissions, for example, money for the middle-class tax credit vanishes, forcing the deficit even higher. [...]

If Obama would only cut taxes to create jobs and increase investment, he would increase the tax revenue from new and expanding businesses, which could fund many of his programs. A true bi-partisan compromise could have achieved that. The problem is, in the name of "fairness", he's instead punishing business with higher taxes, causing investors to sit on their money, shrinking the tax payer base, and borrowing trillions to pay for the Democrat's massive budget agenda. It's growing a bubble that's bound to burst.

Debt is the problem, not the solution. Many Republican's turned against George Bush and the Republican Party for continuing to spend money we don't have, increasing our debt massively and weakening the dollar. And now ironically, Obama is compounding that problem.

If it works I'll eat these words, but I honestly don't see how it can. Jimmy Carter threw endless money at problems, with very bad consequences. It's looking more and more like Barack Obama intends to do the same.

This Administration is still new, and they could conceivably learn from their mistakes. Carter didn't learn from his mistakes, and had one term. Will Obama?


Related Links:

More than a bad day: Worries grow that Barack Obama & Co. have a competence problem

Is Obama taking on too much at once, at economy's expense?

President Obama: a "Leader" or a "Figurehead"?

Does Obama Know What He Is Doing?

HANSON: Maxing out a crisis card
     

Deep Impact: The Federal Deficit

From Maynard at TammyBruce.com: The Federal Deficit

This graph, taken from this Wall Street Journal article, shows what we're up against. It's a crime beyond imagination against the American people.

This monster is not of Obama's creation. It's a product of long-term rot and corruption; the consequence of fools and demagogues pandering to the lowest common denominator, promising ever-more goodies to an ever-needier mob.

For a brief moment, I hoped the shock of the current crisis would bring an element of reality to the debate in Washington. Certainly Obama would do the right thing. Not because he wanted to, you understand, but because he had no choice. I thought the nation had reached that late stage of addiction where the addict has hit bottom, and finally faces his issues head-on.

I stand corrected. We haven't hit bottom yet, but Obama is working on that. His "stimulus" package may become our final binge. What Reagan did to the Soviet Union, Obama is now arranging for us.

This is only the beginning. [...]

He goes on to say that as the baby boomer generation continues to age, demands on Social Security and Medicare will increase, consuming a greater portion of the GNP than the entire current Federal budget.

And hardly anyone is talking about the compounded interest on all the debt. What do you think will happen if interest rates rise? We just keep printing more money? Can you say "Currency collapse"?

This isn't about partisan politics. It's just simple math. Does anyone in the Federal government know how to do that anymore?


Related Links:

Is Obama compounding Bush's mistakes?

What would a U.S. currency collapse look like?

Washington really is broken. See how it "runs"
     

Is Obama compounding Bush's mistakes?

I'm talking about financial mistakes, such as inflating our currency by spending money we do not have. It makes no difference what the money is used for; the end result will be the same: inflation, and all the dangers that entails. From George Melloan at the WSJ:

Why 'Stimulus' Will Mean Inflation
In a global downturn the Fed will have to print money to meet our obligations.

As Congress blithely ushers its trillion dollar "stimulus" package toward law and the U.S. Treasury prepares to begin writing checks on this vast new appropriation, it might be wise to ask a simple question: Who's going to finance it?


That might seem like a no-brainer, which perhaps explains why no one has bothered to ask. Treasury securities are selling at high prices and finding buyers even though yields are low, hovering below 3% for 10-year notes. Congress is able to assure itself that it will finance the stimulus with cheap credit. But how long will credit be cheap? Will it still be when the Treasury is scrounging around in the international credit markets six months or a year from now? That seems highly unlikely.

Let's have a look at the credit market. [...]

He goes into detail about out trade relationships with China and Japan, who hold the majority of U.S. Treasury securities that are held by foreign owners. But our financial relationship with them is changing. The dynamics will not continue as they have, and the results to us will be dramatic.

[...] The Congressional Budget Office is predicting the federal deficit will reach $1.2 trillion this fiscal year. That's more than double the $455 billion deficit posted for fiscal 2008, and some private estimates put the likely outcome even higher. That will drive up interest costs in the federal budget even if Treasury yields stay low. But if a drop in world market demand for Treasurys sends borrowing costs upward, there could be a ballooning of the interest cost line in the budget that will worsen an already frightening outlook. Credit for the rest of the economy will become more dear as well, worsening the recession. Treasury's Wednesday announcement that it will sell a record $67 billion in notes and bonds next week and $493 billion in this quarter weakened Treasury prices, revealing market sensitivity to heavy financing.

So what is the outlook? The stimulus package is rolling through Congress like an express train packed with goodies, so an enormous deficit seems to be a given. Entitlements will go up instead of being brought under better control, auguring big future deficits. Where will the Treasury find all those trillions in a depressed world economy?

There is only one answer. The Obama administration and Congress will call on Ben Bernanke at the Fed to demand that he create more dollars -- lots and lots of them. The Fed already is talking of buying longer-term Treasurys to support the market, so it will be more of the same -- much more.

And what will be the result? Well, the product of this sort of thing is called inflation. The Fed's outpouring of dollar liquidity after the September crash replaced the liquidity lost by the financial sector and has so far caused no significant uptick in consumer prices. But the worry lies in what will happen next. [...]

Remember the late 1970's? Something like that is coming, only potentially even worse. The chickens will come home to roost. Then what? stagflation? Look what we have done already:



And we are going to compound this mistake further? And when that fails, then what? Print up even more money? What goes up must come down. The higher that blue line goes, the sharper it will fall. It's already taken a sharp turn straight upward. Now we are going to push it up even further? Has everyone gone mad?

At the very least, it's making our currency fragile. A large terrorist attack or some other event that disrupts our economy could cause a run on our banks. Because of FDIC, the Feds would be required by law to print up even more money. Then what... Hyper-inflation, like Zimbabwe? What ARE we doing?


Our current National Debt is $10.7 Trillion!

Related Links:

Commentary: Stimulate the economy, not government

What would a U.S. currency collapse look like?

THE GREAT BUST AHEAD
     

What would a U.S. currency collapse look like?

Since the '70's, our government has steadily been printing more money:


This graph in a recent post by Pat (Inflation and our "funny money" supply) is startling in it's implications. Neither Republicans nor Democrats have done anything to stop the devaluing of our currency since the 1970's. In fact, they all have been printing even more money and devaluing it even further. When will it stop? Will it stop? And if it doesn't stop? Where will it lead us?



I've been reading a book called "PATRIOTS: surviving the coming collapse. It's a novel, in which a severe economic meltdown in the USA takes place. It was the description of the understated "crunch", the economic collapse when the dollar fails, that really gave me the creeps. What would the collapse of the American dollar actually look like?

The story starts with the US having 19 trillion dollars of debt, with interest on the national debt consuming 96% of government revenue. Most of it is "off budget", like the debts for the Iraq war, but it's still national debt. There is still interest to pay on it.

Ok, at this point you might say, "19 TRILLION DOLLARS of debt? No way, it could never happen." I would hope it wouldn't. But if you told me 10 years ago that we would even be talking about trillions of dollars of debt today, I would have said "No way, our government would never be that irresponsible". Yet, here we are. And our government has been taking debt "off budget", and borrowing from Peter to pay Paul. If they think it's ok to run debt up another 1 trillion, or 3 trillion... once you say it's alright to go down that road, then where does it stop? How much is too much?

In the story, European bankers start to express doubt that the US government can make the interest payments on it's growing debt, with serious results: foreign central banks and international monetary authorities began to dump their trillions of dollars in U.S. Treasuries. Foreign investors begin liquidating their U.S. paper assets.

The value of the dollar plummets. Businesses fail. Unemployment goes to 20% and higher. Ultimately it leads to a stock market collapse, and domestic runs on U.S. banks begin. Like in the Great Depression of the 1930's long lines of people form at the banks, wanting to withdraw all of their money. But unlike the 1930's, this time there is the promise of FDIC, "All deposits insured to $100,000." But the only way to let everyone withdraw their money, is to print even more money. This leads to hyper-inflation; the more money the government prints, the less it's worth. Think of Zimbabwe as a recent example.

In the novel, the government can't stop the inflation unless they stop printing money, but they can't stop printing more, because people are demanding their FDIC protected cash. With the resulting hyper inflation, soon a can of beans costs $150.00.

Now this is, to me, where the story really gets scary. I figured that if a 1930's type "depression" happened, it would be bad, but we would all somehow muddle through it, just as we had in the 1930's. But there are some significant differences between then and now.

In the 1930's, the government hadn't over-borrowed and raked up trillions of dollars in debt. In the 1930's, roughly half of American families lived on farms. They may have been made poor by the Depression, but they still had means to grow their own food and scrape by.

Nowadays, the population of the United States is much larger. The majority of U.S. citizens live in cities. Only 2% of the population lives on farms anymore. The majority of Americans must buy their food at stores. Think what would happen if they could no longer do that?

The story goes on to describe a situation where American cities are gripped with rioting and looting. The National Guard and the Army Reserve are called up to quell the rioting, but many of them don't report in, because they are staying home to protect their families.

Inner city areas are burned to the ground, and no one can stop it. Factories near cities close down "temporarily", but never open again. The Freeways that run through the cities become impassable, due to the riots, and due to fuel shortages, with people running out of gas and leaving their cars on the roads.

Most of the goods and fuel shipments in the US are transported on 18 wheel diesel trucks that use the interstate highway system. They all pass through cities. The cities become impassable, so the shipments of goods and fuel stop.

Trains pick up some of the slack, but not enough, and even they are vulnerable; mobs soon learn they can rip up the tracks to derail the trains, and loot them.

Without fuel shipments to power plants, the electrical grid begins to shut down. The few remaining factories that are operating are shut down by this, as well as the oil refineries that make our fuel. Even the refineries can't produce enough of their own electricity to keep operating, because they, like everyone else, always assumed they could count on the national power grid.

As the power grid shuts down from lack of fuel, so do the telephones, the internet, radio and TV stations. We are plunged back into the dark ages, literally. Our civil institutions and the rule of law break down completely.

THAT never happened in the 1930's.

You'll have to read the book for the complete picture the author paints. Now I grant you, the author is a survivalist. His reason for writing the novel was to use it as a vehicle to teach many of the survivalist strategies and related knowledge he has compiled, in the context of a story where such knowledge would be applied. Therefore, he has painted the bleakest picture possible, as a canvass for that story (See review in link below).

One can argue that a real crash might not be so... severe? I'm sure there are lots of variables, but the story Rawles tells is very compelling none the less. If nothing else, you have to wonder, WHERE is all this endless deficit spending leading us? The disaster described above is completely avoidable, but will we? It often seems like everyone in government is either oblivious to or unwilling to deal with the dangers of huge deficits and inflated currency.

I know that with a personal or a family budget, if you start having "off budget" debts, your finances will be headed for trouble. Government budgets are no different. We must all live within our means. The consequences of ignoring that could be too horrible.

As for this book, I have to read it in parts, and then give it a break. It's intense. I'm not really of a survivalist mind-set. I like to be an optimist, balanced with a boy-scout "be prepared" attitude. The book is full of all sorts of useful tid-bits of information, such as "how long can you store gasoline before it's no longer useful in an automobile?" (about two years, unless you add chemicals to extend it's life). But the story... argh. I don't want to go there, not even mentally.

But even worse would be to go there actually, in reality. That's why I made this post about it. Let's NOT go there.

Lest this all sounds too depressing, the author says on his website that each of us has to decide for ourselves how bad things could get, and what preparations we want to make. Fair enough.

I hesitated to make this post at all, lest it sound too grim. I'd like to just forget about it, but then I keep seeing headlines like this one today:

New Bank Bailout Could Cost $2 Trillion

Our national debt is already more than 10 trillion dollars. Where is it going to stop? It just makes me want to ring the warning bell. Forewarned is forearmed.

We should not go down this road. But if the nation does anyway, we had best keep our wits about us, try to steer for "damage control", and make preparations along the way as we think might be wise for our circumstances. And never give up hoping, praying, and affirming the best outcome.


Related Links:

Patriots: a customer review on Amazon

An Economic 9/11? A Depression? Trends...

The Federal Deficit and the American Dollar


UPDATE 07-08-10:

Has the slow portion of the collapse already begun? A case is made for it:

Has US Currency already "collapsed"?

Has our nations current financial policies accelerated the collapse process? We may see as soon as next year:

What happens when Tax Cuts Expire in 2011?

Is there anything that can be done about it? I'm not sure, but I think the November elections this year will be our last chance to vote in politicians who can deal with the reality of our present situation:

Our true national debt: $130,000,000,000,000.

November is probably our last chance to stop the runaway gravy train, before it derails.