I wonder...
Bud Conrad, Chief Economist
Longer-Term Implications
The problem with printing money and promising to do so for years ahead of time is that the negative consequences of inflation only happen after a delay. As a result, it's difficult to know if a policy has gone too far until years down the road at times. Unfortunately, if confidence in the dollar is lost, the consequences cannot be easily reversed. One problem for the Fed itself is that it holds long-term securities that will lose value if rates rise. The federal government faces an even more serious problem when interest rates rise, as higher rates on its debt mean greater interest payments to service. Due to this federal-government debt burden, the Fed has an incentive to keep rates low, even if the long-term result is higher inflation. However, for now the Fed's statement suggests it sees inflation as "subdued," so it's putting those concerns aside for now.
The Federal Reserve's Explicit Goal: Devalue The Dollar 33%
The Federal Reserve Open Market Committee (FOMC) has made it official: After its latest two day meeting, it announced its goal to devalue the dollar by 33% over the next 20 years. The debauch of the dollar will be even greater if the Fed exceeds its goal of a 2 percent per year increase in the price level.
An increase in the price level of 2% in any one year is barely noticeable. Under a gold standard, such an increase was uncommon, but not unknown. The difference is that when the dollar was as good as gold, the years of modest inflation would be followed, in time, by declining prices. As a consequence, over longer periods of time, the price level was unchanged. A dollar 20 years hence was still worth a dollar.
But, an increase of 2% a year over a period of 20 years will lead to a 50% increase in the price level. It will take 150 (2032) dollars to purchase the same basket of goods 100 (2012) dollars can buy today. What will be called the “dollar” in 2032 will be worth one-third less (100/150) than what we call a dollar today.
The Fed’s zero interest rate policy accentuates the negative consequences of this steady erosion in the dollar’s buying power by imposing a negative return on short-term bonds and bank deposits. In effect, the Fed has announced a course of action that will steal — there is no better word for it — nearly 10 percent of the value of American’s hard earned savings over the next 4 years.
Why target an annual 2 percent decline in the dollar’s value instead of price stability? Here is the Fed’s answer:
“The Federal Open Market Committee (FOMC) judges that inflation at the rate of 2 percent (as measured by the annual change in the price index for personal consumption expenditures, or PCE) is most consistent over the longer run with the Federal Reserve’s mandate for price stability and maximum employment. Over time, a higher inflation rate would reduce the public’s ability to make accurate longer-term economic and financial decisions. On the other hand, a lower inflation rate would be associated with an elevated probability of falling into deflation, which means prices and perhaps wages, on average, are falling–a phenomenon associated with very weak economic conditions. Having at least a small level of inflation makes it less likely that the economy will experience harmful deflation if economic conditions weaken. The FOMC implements monetary policy to help maintain an inflation rate of 2 percent over the medium term.”
In other words, a gradual destruction of the dollar’s value is the best the FOMC can do.
The sad thing is, The Fed's devaluing of the Dollar is being sold to us, dumb Americans, as a path to "growth", and full employment. F***ing rediculous notion that....
If prices rise, things cost more...if we spend more, receipts for goods sold rise...rising sales receipts are reported as "growth in the economy"...when in fact the only thing growing is the money supply.
America's economy has been a statistical and mathematical lie since August 15, 1971 when President Nixon closed the US Dollar/Gold exchange window at the US Treasury. The ONLY "growth" in America, in over 40 years now, has been the growth of the money supply. How can the Fed even pretend to call it "economic growth" when wages have failed to keep up with the rise in prices [care of the rise in the money supply].
Consider the value of Silver. For most of recorded history, 1/10 of an ounce of Silver equated to a days pay for labor.
If the federal minimum wage is $7.25 an hour, a days labor today equals $58. [This is outrageous by the way.]
If a "days pay" were equal to 1/10 of an ounce of Silver, $58 Dollars a day would equate to the "implied value" of Silver being $464 an ounce! Today, February 10, 2012, Silver is $33.56 an ounce. Either Americans are overpaid [NOT!], or Silver is severely under priced.
Is the price of Silver being suppressed to keep wages under control, or to keep monetary inflation disguised so as not to effect a rise in wages?
Is the Federal Reserve really serious about "maintaining full employment"? How can they be? If the jobs market were really growing, wages would be rising with it. The Fed is deperately opposed to rising wages as that would expose their inflationary policies that are now masked by a global Gold and Silver price suppression scheme.
A wage-price spiral is one of the consequences of monetary inflation...if the Fed is serious about a Zero Interest rate policy [ZIRP] thru 2014, and a 2% cap on inflation, a falling unemployment rate is NOT going to make the Fed's ZIRP functional.
"We still have a long way to go before the labor market can be said to be operating normally," Bernanke said in testimony prepared for the Senate Budget Committee Tuesday that is identical to remarks he gave on Feb. 2 to the House Budget panel. "Particularly troubling is the unusually high level of long-term unemployment."
The Federal Reserve recently announced important policy changes after its
Federal Open Market Committee (FOMC) meeting. Here are the three most important
takeaways, in its own words:
- The Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions – including low rates of resource utilization and a subdued outlook for inflation over the medium run – are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.
- The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. In the most recent projections, FOMC participants' estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 percent to 6.0 percent.
- The Fed released FOMC participants' target federal funds rate for the next few years.
The problem with printing money and promising to do so for years ahead of time is that the negative consequences of inflation only happen after a delay. As a result, it's difficult to know if a policy has gone too far until years down the road at times. Unfortunately, if confidence in the dollar is lost, the consequences cannot be easily reversed. One problem for the Fed itself is that it holds long-term securities that will lose value if rates rise. The federal government faces an even more serious problem when interest rates rise, as higher rates on its debt mean greater interest payments to service. Due to this federal-government debt burden, the Fed has an incentive to keep rates low, even if the long-term result is higher inflation. However, for now the Fed's statement suggests it sees inflation as "subdued," so it's putting those concerns aside for now.
Along with the promise of low rates, the Fed for
the first time gave an inflation target of 2%, as measured by Personal
Consumption Expenditures. The actual and target inflation show that the Fed is
currently not under major pressure from missing its target… not yet.
(Click on image to enlarge)
The Fed has not even tried to set a target for the unemployment rate, which is only expected to edge below 8% by 2013. The Fed says that that the longer-run unemployment range is 5% to 6%. The big difference from the current level of 8.5% indicates that the Fed faces a greater challenge with unemployment than inflation now.
(Click on image to enlarge)
My conclusion from the Fed's actions is that it doesn't care as much about its inflation target as it does about improving the unemployment rate. Thus, it will err on the side of letting inflation rise, if it would improve unemployment. But holding rates too low too long fueled the housing bubble. Repeating the same game will have consequences of malinvestment in the form of new bubbles in the economy. The Fed hopes to restore employment before the negative consequences of loose monetary policy show up.
The Fed provided the accompanying chart of the Fed funds rates expected by the seventeen members of the FOMC. Each dot indicates the value (rounded to the nearest quarter-percent) of an individual participant's judgment of the appropriate level of the target Federal funds rate at the end of the specified calendar year. Over the long run, the Fed expects the funds rate to rise to around 4.25%. Eleven of the members indicate that the rate will rise before 2015. Only six expect the rate to stay close to zero through 2014.
The above chart should not be taken very seriously, as Fed predictions have been notoriously inaccurate. Furthermore, it's likely that rates will rise before 2014 as a result of market forces pushing them upward due to mistrust of the currency – measured by rising gold and commodity prices.
The Federal Reserve balance sheet expanded dramatically as the credit crisis became acute in 2008. The Policy Tools (shown below in black) grew by $2 trillion with the QE1 purchase of mortgage-backed securities and the QE2 purchase of long-term Treasuries. This was an unprecedented effort to support those markets, provide liquidity, and drive rates down to zero. A simple extrapolation of similar expansion policies to the end of 2014 suggests that the Fed may require an additional $2 trillion to extend its goals. The problem is that such action would surely weaken the dollar and drive gold much higher. If confidence is lost, rates could rise even as the Fed continues to print and buy securities. The Fed says that it will change its policy if conditions warrant. I think they will be forced to stop this policy well before 2014 is over. Nonetheless, in the meantime, they will plant the seeds of rising prices with ultralow rates.
(Click on image to enlarge)
The gold price is driven by Fed policies and its bias toward printing money rather than defending the dollar's purchasing power. This Fed bias was again reconfirmed by this announcement. With all the Fed's renewed vigor toward keeping rates low longer, we can once again reconfirm the ongoing downward slide for the dollar. As a result, gold remains the best investment against the damaging government deficits and central bank policies around the world.
(Click on image to enlarge)
The Fed has not even tried to set a target for the unemployment rate, which is only expected to edge below 8% by 2013. The Fed says that that the longer-run unemployment range is 5% to 6%. The big difference from the current level of 8.5% indicates that the Fed faces a greater challenge with unemployment than inflation now.
(Click on image to enlarge)
My conclusion from the Fed's actions is that it doesn't care as much about its inflation target as it does about improving the unemployment rate. Thus, it will err on the side of letting inflation rise, if it would improve unemployment. But holding rates too low too long fueled the housing bubble. Repeating the same game will have consequences of malinvestment in the form of new bubbles in the economy. The Fed hopes to restore employment before the negative consequences of loose monetary policy show up.
The Fed provided the accompanying chart of the Fed funds rates expected by the seventeen members of the FOMC. Each dot indicates the value (rounded to the nearest quarter-percent) of an individual participant's judgment of the appropriate level of the target Federal funds rate at the end of the specified calendar year. Over the long run, the Fed expects the funds rate to rise to around 4.25%. Eleven of the members indicate that the rate will rise before 2015. Only six expect the rate to stay close to zero through 2014.
The above chart should not be taken very seriously, as Fed predictions have been notoriously inaccurate. Furthermore, it's likely that rates will rise before 2014 as a result of market forces pushing them upward due to mistrust of the currency – measured by rising gold and commodity prices.
The Federal Reserve balance sheet expanded dramatically as the credit crisis became acute in 2008. The Policy Tools (shown below in black) grew by $2 trillion with the QE1 purchase of mortgage-backed securities and the QE2 purchase of long-term Treasuries. This was an unprecedented effort to support those markets, provide liquidity, and drive rates down to zero. A simple extrapolation of similar expansion policies to the end of 2014 suggests that the Fed may require an additional $2 trillion to extend its goals. The problem is that such action would surely weaken the dollar and drive gold much higher. If confidence is lost, rates could rise even as the Fed continues to print and buy securities. The Fed says that it will change its policy if conditions warrant. I think they will be forced to stop this policy well before 2014 is over. Nonetheless, in the meantime, they will plant the seeds of rising prices with ultralow rates.
(Click on image to enlarge)
The gold price is driven by Fed policies and its bias toward printing money rather than defending the dollar's purchasing power. This Fed bias was again reconfirmed by this announcement. With all the Fed's renewed vigor toward keeping rates low longer, we can once again reconfirm the ongoing downward slide for the dollar. As a result, gold remains the best investment against the damaging government deficits and central bank policies around the world.
___________________________
Charles Kadlec, Contributor, Forbes
An increase in the price level of 2% in any one year is barely noticeable. Under a gold standard, such an increase was uncommon, but not unknown. The difference is that when the dollar was as good as gold, the years of modest inflation would be followed, in time, by declining prices. As a consequence, over longer periods of time, the price level was unchanged. A dollar 20 years hence was still worth a dollar.
But, an increase of 2% a year over a period of 20 years will lead to a 50% increase in the price level. It will take 150 (2032) dollars to purchase the same basket of goods 100 (2012) dollars can buy today. What will be called the “dollar” in 2032 will be worth one-third less (100/150) than what we call a dollar today.
The Fed’s zero interest rate policy accentuates the negative consequences of this steady erosion in the dollar’s buying power by imposing a negative return on short-term bonds and bank deposits. In effect, the Fed has announced a course of action that will steal — there is no better word for it — nearly 10 percent of the value of American’s hard earned savings over the next 4 years.
Why target an annual 2 percent decline in the dollar’s value instead of price stability? Here is the Fed’s answer:
“The Federal Open Market Committee (FOMC) judges that inflation at the rate of 2 percent (as measured by the annual change in the price index for personal consumption expenditures, or PCE) is most consistent over the longer run with the Federal Reserve’s mandate for price stability and maximum employment. Over time, a higher inflation rate would reduce the public’s ability to make accurate longer-term economic and financial decisions. On the other hand, a lower inflation rate would be associated with an elevated probability of falling into deflation, which means prices and perhaps wages, on average, are falling–a phenomenon associated with very weak economic conditions. Having at least a small level of inflation makes it less likely that the economy will experience harmful deflation if economic conditions weaken. The FOMC implements monetary policy to help maintain an inflation rate of 2 percent over the medium term.”
In other words, a gradual destruction of the dollar’s value is the best the FOMC can do.
___________________________
If prices rise, things cost more...if we spend more, receipts for goods sold rise...rising sales receipts are reported as "growth in the economy"...when in fact the only thing growing is the money supply.
America's economy has been a statistical and mathematical lie since August 15, 1971 when President Nixon closed the US Dollar/Gold exchange window at the US Treasury. The ONLY "growth" in America, in over 40 years now, has been the growth of the money supply. How can the Fed even pretend to call it "economic growth" when wages have failed to keep up with the rise in prices [care of the rise in the money supply].
Consider the value of Silver. For most of recorded history, 1/10 of an ounce of Silver equated to a days pay for labor.
If the federal minimum wage is $7.25 an hour, a days labor today equals $58. [This is outrageous by the way.]
If a "days pay" were equal to 1/10 of an ounce of Silver, $58 Dollars a day would equate to the "implied value" of Silver being $464 an ounce! Today, February 10, 2012, Silver is $33.56 an ounce. Either Americans are overpaid [NOT!], or Silver is severely under priced.
Is the price of Silver being suppressed to keep wages under control, or to keep monetary inflation disguised so as not to effect a rise in wages?
Is the Federal Reserve really serious about "maintaining full employment"? How can they be? If the jobs market were really growing, wages would be rising with it. The Fed is deperately opposed to rising wages as that would expose their inflationary policies that are now masked by a global Gold and Silver price suppression scheme.
A wage-price spiral is one of the consequences of monetary inflation...if the Fed is serious about a Zero Interest rate policy [ZIRP] thru 2014, and a 2% cap on inflation, a falling unemployment rate is NOT going to make the Fed's ZIRP functional.
"We still have a long way to go before the labor market can be said to be operating normally," Bernanke said in testimony prepared for the Senate Budget Committee Tuesday that is identical to remarks he gave on Feb. 2 to the House Budget panel. "Particularly troubling is the unusually high level of long-term unemployment."
Ben says this, for the whole world to hear, just days after the President, and all the financial news media claim that the US Economy created 243,000 new jobs in January, and the "headline" unemployment rate fell again, to only 8.3%? The President might want to see the unemployment rate fall to boost his re-election chances [good luck with that], but Ben Bernanke does not, and he can not afford to see the unemployment rate fall.
A falling unemployment rate would trigger a rising inflation rate, and interest rates would begin to rise. Ben does NOT want to see rising interest rates...and neither does the US Treasury Department. Keeping the unemployment rate high, allows the Fed to keep interest rates low.
Is it any wonder why the American median income has been stagnant for the past 20 years?
In constant price, 2010 American median household income is only 0.75% higher than what it was in 1989.
Have American wages been held low, and unemployment kept high to support lower interest rates to finance US Government debt over the past 20 years? Have the prices of Gold and Silver been suppressed to allow wages to be kept low, and unemployment high?
If the minimum wage began to rise, so would the implied price of Silver. Suppress the price of Silver, and contain the cost of labor.
Name one commodity whose price today is below it's price in 1980. There is only one: Silver.
Silver is called the "poor man's Gold" for a reason. Silver has historically been the blue collar workers "money". Keep the price of Silver suppressed, and keep the global labor pool afordable. Nothing says profits to big business like "cheap labor".
___________________________
Eric Fry, The Daily Reckoning
attributed to:
Sir Josiah Stamp
(1880-1941) President of the Bank of England in the 1920's
__________________________
SPECIAL REPORT: $500 SILVER & Hyperinflation
Why Our Currency Will Fail
Wednesday, February 8, 2012, 9:18 am, by cmartenson
Eric Fry, The Daily Reckoning
The Fed is a crime syndicate that relies on deception, coercion and grand
larceny. It is a racketeer.
“Several forms of racket exist,” Wikipedia explains. “The best-known is the protection racket, in which criminals demand money from businesses in exchange for the service of ‘protection’ against crimes that the racketeers themselves instigate. Traditionally, the word racket is used to describe a business (or syndicate)...that it is engaged in the sale of a solution to a problem that the institution itself creates or perpetuates, with the specific intent to engender continual patronage.”
“Several forms of racket exist,” Wikipedia explains. “The best-known is the protection racket, in which criminals demand money from businesses in exchange for the service of ‘protection’ against crimes that the racketeers themselves instigate. Traditionally, the word racket is used to describe a business (or syndicate)...that it is engaged in the sale of a solution to a problem that the institution itself creates or perpetuates, with the specific intent to engender continual patronage.”
___________________________
Has the Fed and it's banking buddies, thru a decades long suppression of the price of Silver, created an environment of high unemployment solely to support a low interest rate environment in an effort to make the US Government's debt habit affordable?
I'll admit, I have made some outrageous assumptions here,...but something has to explain the global banks AND governments desperation to keep the price of Silver so severely undervalued. Why is Silver the only commodity that has NOT breached it's 1980 high price? And when it approached that 1980 $50 an ounce high in April 2011, it was quickly, and viciously attacked by the banks and tomahawked by almost 50% in just a couple of weeks time. What is it about Silver that scares the global banks and governments?
Perhaps what scares them most is that a strong Silver price would give "power to the people" and take it away from the banks.
We live in world today where all money is debt.
Publilius Syrus said: "Debt is the slavery of the free"
Could a price for Silver of over $50 an ounce result in an emancipation "we of the people" from the debt slavery the banks have imposed upon us?
"Banking was conceived in iniquity and
was born in sin.
The Bankers own the earth. Take it away from them,
but leave them the power to create deposits,
and with the flick of the pen they will
create enough deposits to buy it back again.
However, take it away from them, and
all the great fortunes like mine
will disappear and they ought to disappear, for
this would be a happier and better world to live in.
But, if you wish to remain the slaves of Bankers
and pay the cost of your own slavery,
let them continue to create deposits."
The Bankers own the earth. Take it away from them,
but leave them the power to create deposits,
and with the flick of the pen they will
create enough deposits to buy it back again.
However, take it away from them, and
all the great fortunes like mine
will disappear and they ought to disappear, for
this would be a happier and better world to live in.
But, if you wish to remain the slaves of Bankers
and pay the cost of your own slavery,
let them continue to create deposits."
Sir Josiah Stamp
(1880-1941) President of the Bank of England in the 1920's
__________________________
SPECIAL REPORT: $500 SILVER & Hyperinflation
Why Our Currency Will Fail
Wednesday, February 8, 2012, 9:18 am, by cmartenson
When we back up far enough, it is clear that money and debt are there to reflect and be in service to the production of real things by real people, not the other way around. With too much debt relative to production, it is the debt that will suffer. The same is true of money. Neither are magical substances; they are merely markers for real things. When they get out of balance with reality, they lose value, and sometimes even their entire meaning.
This report lays out the case that the US is irretrievably down the rabbit hole of deficits and debt, and that, even if there were endless natural resources of increasing quality available at this point, servicing the debt loads and liabilities of the nation will require both austerity and a pretty serious fall in living standards for most people.
However, of all the challenges that catch my eye right now, the one most worrisome is the shredding of our national narrative to the point that it no longer makes any sense whatsoever. I'm a big believer that our actions are guided by the stories we tell ourselves. To progress as a society, having a grand vision that aligns and inspires is essential.
But when words emphasize one set of priorities and actions support another, any narrative falls apart. At a personal level, if someone touts their punctuality but chronically shows up hours late, the narrative that says "this person is reliable" begins to fall apart.
Likewise, if a company boasts about being green but its track record belies them as a major polluter, the "green" narrative fizzles.
And at the national level, if we say we are a nation of laws, but the Justice Department selectively prosecutes only the weak and relatively powerless while leaving the well-connected and moneyed entirely alone, then the narrative that says "we are a nation of blind justice and equal laws" falls apart.
I wish this was just some idle rumination, but I see more and more examples validating the importance of alignment of narrative and behavior. Because when there is a disconnect between words and actions, anxiety and fear take root.
Unfortunately, there is quite a lot to fear and be anxious about in the most recent State of the Union address and GOP response.
State of the Union
The recent State of the Union speech by Obama, and its Republican response, are both remarkable for what they say as well as what they don't say. The summary is this: The status quo will be preserved at all costs.
Here are a few examples of the sorts of disconnects between rhetoric and reality that are absolutely toxic to the morale of all who are paying the slightest bit of attention.
Obama
Let's never forget: Millions of Americans who work hard and play by the rules every day deserve a government and a financial system that do the same. It's time to apply the same rules from top to bottom. No bailouts, no handouts, and no copouts. An America built to last insists on responsibility from everybody.
We've all paid the price for lenders who sold mortgages to people who couldn't afford them, and buyers who knew they couldn't afford them. That's why we need smart regulations to prevent irresponsible behavior.
It's time to apply the same rules from top to bottom? Is Obama aware of what Erik Holder is up to over there in the Justice Department? The robo-signing scandal alone has thousands and thousands of open and shut cases of felony forgery that can and should be applied to as many individuals as were directly involved, from top to bottom in every organization that was engaged in the practice.
Here's the reality. Under Obama, criminal prosecution of financial fraud fell to multi-decade lows during what is and remains one of the most target-rich environments in living memory.
(Source)
Obama
And I will not go back to the days when Wall Street was allowed to play by its own set of rules.
So if you are a big bank or financial institution, you're no longer allowed to make risky bets with your customers' deposits. You're required to write out a "living will" that details exactly how you'll pay the bills if you fail -- because the rest of us are not bailing you out ever again.
Has Obama checked with the Federal Reserve to assure they are on board with the new 'no bail out' policy? Because last I checked, they were the ones mainly involved in bailing out the big banks and providing swap lines and free credit to anyone and everyone that needed help, US or foreign.
To be fair, Obama can make no statement or claim about what the Federal Reserve can or can't or will or won't do. It is not under executive nor even legislative control. If, or I should say when, the Federal Reserve bails out the next bank or country or whomever, it's "the rest of us" who will be paying the bill -- in the form of eventual inflation.
Obama
[W]orking with our military leaders, I've proposed a new defense strategy that ensures we maintain the finest military in the world, while saving nearly half a trillion dollars in our budget.
Let's review the proposals for military spending then. The language above is nearly impossible to decode. What is really being said is that proposed defense increases have been scaled back, and that this is what is being called savings.
In 2000, Defense spending was $312 billion dollars. In 2012, the proposed budget calls for $703 billion, a 125% increase in 12 years.
What the plan he mentions really calls for is spending increases in 5 out of the next 6 years. The lone holdout is 2013, when the plan calls for cutting spending by a whopping $6 billion less than the amount already approved for 2012.
Somehow that all translates into rhetoric that implies cuts of "nearly half a trillion dollars."
As Lily Tomlin used to say, "As cynical as I am, I find it hard to keep up."
GOP Response
“The routes back to an America of promise, and to a solvent America that can pay its bills and protect its vulnerable, start in the same place. The only way up for those suffering tonight, and the only way out of the dead end of debt into which we have driven, is a private economy that begins to grow and create jobs, real jobs, at a much faster rate than today."
This platitude-laden set of ideas is blissfully blind to the role of energy in the story, the amount of debt in the system, and the fact that both parties have contributed equally over the years to the predicament at hand.
How exactly is it that the private economy is supposed to flourish here, with the Federal government borrowing more than a trillion dollars a year and oil at $100 per barrel? The simple truth is that the US government needs to begin borrowing at a rate lower than the previous year's economic growth. If GDP grows at 2%, then the total debt pile must not grow by anything more than 2%. That is the only way that the official debts can shrink relative to the economy.
GOP Response
“We will advance our positive suggestions with confidence, because we know that Americans are still a people born to liberty. There is nothing wrong with the state of our Union that the American people, addressed as free-born, mature citizens, cannot set right."
Last I checked, the original vote tally in the Senate on the National Defense Authorization Act, which empowered the armed forces to engage in civilian law enforcement activities and selectively suspended the habeas corpus and due process rights (as guaranteed by the 5th and 6th amendments to the Constitution), passed by a voice vote of 93 to 7 in the Senate.
It's kind of hard to swallow the idea that the GOP stands with Americans as "a people born to liberty" when their members are in perfect lock-step with the Democrats, chipping away at the most basic and cherished freedoms. There's no difference between the parties when both seem intent on limiting individual freedom and increasing the power of the government to reach into and examine our daily lives.
When Words Hurt
The above examples are not meant to pick on any one person or party or set of ideas, but to illuminate the profound gap that exists between what we are telling ourselves at the national level and the actions we are undertaking.
Again, it is the gap between what we tell ourselves and what we do that creates a sense of unease, anxiety, and oftentimes fear. When we hear words "X" but see actions "Y" over and over again, it is hard not to come to the conclusion that the words are meaningless; empty rhetoric designed with polls and focus groups in mind, but little else.
It is the blind obedience to the status quo that worries me the most, as it raises the likelihood that nothing of any substance will be done until forced by circumstances, at which point, like Greece, we will discover that the remaining menu of options ranges from bad to worse.
Left Unsaid - Our Missing Narrative
In neither Obama's address nor the GOP response do we hear anything about Peak Oil, a stock market that has gone nowhere in ten years, or the fact that with two wars winding down there ought to be massive savings from defense cuts that we can capture. There's lip service to the idea of using more natural gas to begin weaning us off our imported oil dependence, but no commensurate trillion-dollar program offered to rapidly build out the infrastructure necessary to utilize that gas in a meaningful way.
A more honest set of messages would note that mistakes were made, opportunities squandered, and priorities misplaced. It would note that the US is on an unsustainable course with respect to spending, debts, and liabilities. There would be an explicit admission that having your central bank print trillions in "thin air" money in order to enable runaway deficit spending is a dangerous and foolish thing to entertain.
Most obviously missing is a national narrative that is coherent and comports with the facts. Both parties basically imply that if we elect a few more of their type, do a little of this and then tweak a little of that, then we will get our nation back on track.
There is no call to a shared sacrifice for something greater. There is nothing to rally around except a laundry list of disconnected programs; a little something for everyone. There is no overarching theme under which everything else can be hung, such as a space race, a civil rights movement, or a massive upgrading of our national infrastructure.
A good narrative is one that inspires people and is based in reality but also asks something larger of us that we can share in. What is our vision for this country? Where do we want to be in ten years? How about twenty? How will we get there, and what will be required? What should we stop doing, what should we start doing, and what should we continue doing?
None of these things are on display, and all are badly needed if we are going to make the most of the next twenty years.
The Troubling Facts
Of all the facts that got skimmed over or avoided in the State of the Union extravaganza, the fiscal nightmare in DC was probably the most glaring. Yes, both parties have decided to talk about the deficit, but neither is giving the appropriate context.
For FY 2012, the federal government is projected to run a $1.1 trillion deficit. Let's compare that number to the projected revenues:
(Source)
The $1.1 trillion deficit is 42% of total revenues and 73% of all income taxes. That is, in order to spend what the US currently spends without going further into debt (i.e., to have no deficit), income taxes must immediately increase by 73%(!).
This is the sort of territory that, were the US any other country, would have already landed its debt markets -- and likely its currency, too -- in very hot water.
Historically, countries that have run deficits 40% greater than revenue for more than two years have experienced profound financial and political crises. The US is now in its fourth year of inhabiting this rare territory.
How can it keep doing this when every other country that has tried has gotten into trouble? Simple. The Federal Reserve has enabled such egregious deficit spending by buying up mind-boggling amounts of government debt. This has both kept rates low and created a lot of additional buying demand for Treasuries.
Exactly how much US debt is the Fed buying? Under Operation Twist, the Fed has bought anywhere from 51% to 91% of all gross issuance of bonds dated six years or longer in maturity.
(Source)
It is quite obvious that the Fed has been a major participant in the bond markets and a major reason why Treasurys are priced so high and offer so low a yield.
It seems that it is well past time to speak directly to the enormous fiscal deficits in a credible way, not merely bemoaning them being too high. And we're also overdue for an adult national conversation that it's unwise and unsustainable for a country to lean on its central bank to print up the difference between receipts and outlays.
Oil and Recoveries
There is a clear relationship between high oil prices and recessions, confirming the idea that the price of oil has the same impact on the economy as higher interest rates (perhaps even more so nowadays). Both are a source of friction. With higher interest rates, less lending and less consuming happens. With a higher price of oil, more money gets spent on energy, much of it sent to foreign producers of oil, and thus less money is available for other consumption.
Both higher oil prices and higher interest rates cause people to think a bit more before pulling the trigger on either ordinary spending or a big capital project.
Note that all of the six prior recessions were preceded by a spike in oil prices. In the case of the double-dip 1980's twin recessions, oil remained elevated after the first recession was (allegedly) over. Don't be fooled by the logarithmic nature of the chart below -- note that the typical decline in oil prices between the recession-inducing peak (blue lines) and the recovery-enabling trough (green lines) was a substantial 30%-50%:
(Source)
Also note in the most recent data that oil prices happen to be at roughly the same level that triggered the first recession in 2008 (the purple dotted line).
If we needed one simple chart to help us understand why trillions of dollars of stimulus and handouts are not causing the economy to soar, this is the chart that explains the most. High oil prices and recessions are highly correlated, and it's not too much of a stretch to postulate that economic recoveries and high oil prices are inversely correlated.
Note also that the above chart is not inflation-adjusted. If it were, it would show that there have been exactly zero recoveries when oil prices are near or over $100 per barrel.
For those counting on an economic recovery here to lift all boats and assist the bailout efforts, the burden of history is upon them to explain why this time we should ignore the price of oil.
I say we cannot. Policy planners and citizens alike should be ready for disappointing market and economic activity in response to the usual bag of printing, borrowing and delaying tricks.
Dead Ahead: A Currency Crisis
The State of the Union speech and GOP response neither accurately portray the true fiscal condition of the US, nor present a compelling narrative that speaks either to the realities of today or a future we might like to head towards.
The US is simply on a fiscally ruinous path, and neither party seems up to the task of laying out the story in a way that is mature, clear, and direct.
No recovery has ever been possible from oil prices this high, nor with debt levels this extreme, and it is quite improbable to think that both conditions could be overcome with anything less than a completely clear-eyed view of the true nature of the predicament faced.
Decades ago, Ludwig Von Mises captured everything discussed here elegantly:
There is no means of avoiding the final collapse of a boom brought about by credit expansion.
The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.
Our current dire fiscal condition, our leaders' dysfunctional unwillingness to address the flawed behavior that caused it, plus many other recent events both in the US and in Europe, point to the idea that a voluntary abandonment of further credit expansion is just not on the menu.
That leaves us with some final and total catastrophe of the involved currency system(s) as the inevitable outcome.
In Part II: Surviving a Currency Crisis, we explain what a currency is, what happens when a currency collapses, and, most importantly, how to position yourself prudently in advance.
At this point, time to prepare is your greatest asset. But as we can see from the precarious global economic situation described above, time is running out. Use what remains wisely.
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