Solve Financial Crisis with a single coin?

Yeah, sure. Geithner's just gotta mint one before he leaves the Treasury Department:

A Trillion-Dollar Coin Brings a Jackpot of Jests

[...] WASHINGTON — A bizarre but seemingly legal idea to get around the country’s debt ceiling using a trillion-dollar coin is having its day in Washington.

The proposal, which originated in economics and business blogs and has a vanishingly remote chance of happening, has won ample attention and garnered new controversy as Republicans and the White House seem to be headed for yet another standoff over a legal limit on the country’s debt — a fight that may come as soon as next month.

[...]

The workaround would come from exploiting a 1997 law that allows the Treasury to “mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the secretary, in the secretary’s discretion, may prescribe from time to time.”

The idea was that a secretary might authorize the creation of a commemorative eagle coin, for instance, to be put on sale for collectors. But the law inadvertently gave the Treasury secretary the power to mint, say, a $1 trillion coin, or even a $5 trillion coin, or even a $1 quadrillion coin.

Rather than selling it, he might deposit it at the Federal Reserve. Presto! The shiny new asset would erase a trillion dollars in debt liabilities. Then, the Treasury could carry out its spending — including disbursing Social Security checks and Medicare payments — without hitting the ceiling, a cap on total debt issuance that currently stands at about $16.4 trillion.

When Congress raised the ceiling again, the administration could then take the platinum coin and destroy it. With a token the size of a penny, the White House could head off another round of Congressional brinkmanship and another run at a fiscal cliff.

Blog commentators came up with the idea in 2010, and it gained some attention from financial writers and monetary policy followers during the 2011 debt ceiling standoff. Now, with Republicans and the White House again at odds, the country is expected to run out of spare cash sometime between mid-February and early March. [...]

I find it unbelievable that ADULTS can even talk like this. Talk about clueless. And people wonder why we're in sh*t street.

How about a REAL solution:

Reforming a Congress that spends like teenagers

It used to be called common sense. Remember common sense? I do. And I say, bring it back!
   

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.
     

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?


   

The demise of the dollar as oil trading currency

The demise of the dollar
In a graphic illustration of the new world order, Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.

[...]

The decline of American economic power linked to the current global recession was implicitly acknowledged by the World Bank president Robert Zoellick. "One of the legacies of this crisis may be a recognition of changed economic power relations," he said in Istanbul ahead of meetings this week of the IMF and World Bank. But it is China's extraordinary new financial power – along with past anger among oil-producing and oil-consuming nations at America's power to interfere in the international financial system – which has prompted the latest discussions involving the Gulf states.

Brazil has shown interest in collaborating in non-dollar oil payments, along with India. Indeed, China appears to be the most enthusiastic of all the financial powers involved, not least because of its enormous trade with the Middle East. [...]

Read the whole thing, to see what this transition away from the US dollar is going to mean. What's next, dumping US dollars as a reserve currency, which would devalue our money even further? It would help bring about exactly what many countries have wanted: a weaker America. Or even worse.

I have to wonder if some people in our government would like to see our currency ruined, so they can switch it over for... something else? I've read that George Soros favors the creation of a Global Currency.


Related Links:

The Devaluing of American Currency Continues

Is Obama compounding Bush's mistakes?
     

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.