With the growing list of bailouts and stimulus packages (not to mention Obamacare, and U.S. troop presence in over 200 countries), multi-billion and even trillion dollar expenditures by our Federal Government have become a common occurrence. Where is the money coming from? A major source is the seemingly never-ending supply of dollars from the Federal Reserve and many predict that this setting up an untenable future for the value of the dollar. In this podcast, James Wilson of Downsize DC speaks with Michael Ostrolenk about what value-backed competing currencies might emerge in the event the public loses faith in fiat money.
Category Archives: economics
Obama presents “gutsy” budget; Clinton begs in China; Treasury writes obituary
Obama presented Congress with an agenda described as “breathtaking in its scope and ambition,” “gutsy,” or “bold and courageous”—by his supporters. Passing it won’t be easy, Obama admits, because “it represents a threat to the status quo.” But his enormous popularity might make it possible to get a big share of what he wants (Charles Babington, Associated Press 3/1/09).
Some analysts called the budget “almost radical,” and the U.S. Chamber of Commerce noted that “You don’t rebuild a house by blowing up its foundations.”
Spending
The budget assumes a deficit of $1.75 trillion this year, quadrupling that from the year before: that is 12.7% of the GDP. Federal outlays will balloon in 2009 to $4 trillion, or 27.7% of GDP, up from $3 trillion or 21% of GDP in 2008, and 20% in 2007 (“The Obama Revolution,” Wall St J 2/27/09).
To “reform health care” by vastly expanding insurance coverage, Obama proposes a $630 billion fund for a national insurance program to cover all Americans. This amount will just be “a start.” Costs are soon expected to exceed $1 trillion. Savings will be achieved by cutting payments to providers, reducing hospital admissions, and “promoting efficiency.”
Revenue
The money will come from tax increases on “the rich”—for now defined as singles earning $200,000 or more, or couples earning $250,000 or more. High earners would also see limitations on personal exemptions and itemized deductions, including charitable contributions. The estate tax would be reinstated, and capital gains taxes increased. Revenue projections assume that taxpayer behavior will not change.
A key new source of revenue (“but don’t call it a ‘tax’!”) is an expected $78.7 billion from a cap-and-trade carbon emissions scheme, such as one recently rejected by the U.S. Senate, growing to more than $646 billion by 2019. In effect, this constitutes a very large tax increase on 100% of Americans.
Of the windfall, $15 billion/year is supposed to subsidize alternative energy—which can become relatively economical only if the cost of hydrocarbon fuels soars because of taxation, cap-and-trade, or EPA “Clean Air” regulations. The rest will help fund a promised $800 tax “rebate” or “credit” to people who pay little if any tax, creating a new constituency for keeping the current regime in power—and for “fighting global warming.” Recipients of this new entitlement may not notice that $800 is not nearly enough to offset a $4,000 loss in purchasing power owing to higher energy costs spread throughout the economy.
These revenue projections assume a robust market for carbon emissions permits. After peaking at nearly 30 euros ($38) in mid-2008, carbon dioxide traded at 9.95 euros ($12.60)/tonne on Feb 28 (AFP 3/1/09). Opposition to cap-and-trade schemes is building worldwide; it could bring down the Australian government (Business Spectator 3/2/09).
Until the Next Generation of Taxpayers Grows Up….
Secretary of State Hillary Clinton wrapped up her first overseas trip by urging China to continue buying U.S. debt, saying it would help jumpstart the flagging U.S. economy and stimulate the buying of Chinese imports. China is the top holder of U.S. Treasury bills, owning $696.2 billion worth in December, 2008. Its help is needed to finance the $787 billion stimulus package.
Clinton said that concern about the human rights situation in China should not be a distraction from the vital issues of the economy and climate change. A journalist reported seeing plainclothes police taking away some visitors attempting to enter a church where Clinton attended Sunday service (Britbart.com 2/22/09).
Is the U.S. Treasury Solvent?
Between January 2008 and January 2009, the M2 money supply increased from $7.3 trillion to $8.2 trillion, meaning that the Federal Reserve created $1 trillion out of thin air in one year. It has used this money to buy distressed assets. It claims that when the economy recovers it will sell the assets and retire the money before it causes runaway inflation. This assumes, of course, that somebody will want to buy these assets (Downsizer Dispatch 2/23/09).
The quality of the assets held by the Federal Reserve has deteriorated substantially, starting in August 2007, write Philip Baggus and Markus H. Schiml. The Fed’s leverage has increased from 22 to 50. This means that the Fed is insolvent if a mere 2% of its assets go into default.
In the “2008 Financial Report of the United States Government,” the Treasury wrote an obituary for the U.S. government, even before the “stimulus bill,” Secretary Geitner’s proposed TARP II, [and the proposed gutsy budget], states Craig Cantoni.
Some highlights:
- The government debt held by the public will be 650% of GDP by 2080, compared to “only” 109% during World War II (Chart 2, p 2).
- The balance sheet (p 10) lists government assets of $1.9 trillion and liabilities of $12.1 trillion. The bonds of a corporation with such an unhealthy balance sheet would be rated as “junk.”
- The footnote to the balance sheet states that the unfunded liability of $49 trillion for Social Security and Medicare is not counted as a liability on the balance sheet.
- In an addendum entitled “Management’s Discussion and Analysis,” retirement benefits for veterans and civil servants increased from $90 billion to $550 billion from 2007 to 2008 (Table 1, p 3).
- The net operating cost of the federal government increased 266.3% from 2007 to 2008.
- A letter from the Government Accountability Office states that: “The material weaknesses discussed in our [audit] report continued to …. hinder the federal government from having reliable financial information to operate in an efficient and effective manner.” [Cantoni’s translation: “The government cooks the books.”]
Additional information:
Is wealth redistribution America’s future?
As worldwide economic meltdown continues, and the cost of the U.S. bailout/”rescue” soars, the question looms: how will government pay even the short-term costs? Political candidates are not addressing this issue.
The make-somebody-else’s-children-pay-later strategy may soon reach the ultimate limit. Somebody has to load money into the Treasury now. Investors have been fleeing to the supposed safety of U.S. Treasuries, but how much debt can even a superpower accumulate before would-be creditors begin to worry about repayment?
The take from income taxes depends, of course, on the amount of income people have. If that isn’t enough, what next?
France and a number of other welfare states have a net wealth or “solidarity tax.” In 1999, Donald Trump once proposed a one-time net worth tax of 14.25% on individuals and trusts worth $10 million or more, claiming it would generate $5.7 trillion, which could be used to pay the national debt—before it got swollen by the bailout/”rescue.” This is not likely to be indexed to inflation.
No political candidates, of course, are publicly announcing a plan to confiscate assets. However, in a 2001 Chicago Public Radio interview, Barack Obama signaled his approval of wealth redistribution—and said it was a tragedy that the civil rights movement did not accomplish that. A tape including Obama’s discussion of using legislative or legal means to force redistribution is posted on the Drudge Report.
Of particular note was Obama’s answer to an audience member, probably a small businessman, who said, “Your plan’s gonna tax me more, isn’t it?”
“It’s not that I want to punish your success,” Obama said. “I just want to make sure that everybody who is behind you, that they’ve got a chance at success too. I think than when you spread the wealth around, it’s good for everybody.”
This doesn’t sound like the redistribution of wealth from the foolish to the prudent that occurs in a free market when a bubble bursts, but rather government redistribution, bailing somebody out of trouble by putting somebody into trouble, with a hefty “toll for the troll,” as Arthur Laffer describes recent government panic reactions (“The Age of Prosperity Is Over,” Wall St J 10/27/08).
Obama’s remarks are compatible with Marxist ideology—and he has yet to disavow the ideas of his Communist associates (Wes Vernon, RenewAmerica 5/28/08, Cliff Kincaid, Schwarz Report, October 2008).
“Whenever people make decisions when they are panicked, they are rarely pretty,” writes Laffer.
The election is occurring in a time when panic may be just beginning:
- A front-page article in the overseas edition of the People’s Daily said Asian and European nations should banish the U.S. dollar. “The grim reality has led people, amidst the panic, to realize that the United States has used the U.S. dollar’s hegemony to plunder the world’s wealth,” said Shi Jianxun of Shanghai’s Tongji University (Reuters 10/24/08).
- The dollar rally, in the face of deteriorating fundamentals, has been called a “death dance.” The gap between the paper gold market and physical gold market is widening. In Toronto, a multimillion-dollar off-market transaction in physical gold involved paying $1,075 per ounce—settled in euros. Foreigners may force changes causing the U.S. dollar to lose its global currency status. A freeze in short-term credit could interfere with distribution channels of railways and truckers in the U.S. (Jim Willie, Hat Trick Letter 10/23/08).
- The Federal Reserve is inflating at 341% per annum. Banks are buying Treasury debt; the Treasury spends the money. Businesses must compete with the Treasury to get money. Without productivity, it is not possible to emerge from a recession (Gary North 10/24/08). See charts from Federal Reserve Bank of St. Louis and other sources.
- A £516-trillion derivatives “time bomb” is ticking away. Warren Buffet called derivatives “financial weapons of mass destruction” (Independent 10/12/08).
Apparently, both parties hope that the day of reckoning can be postponed until after November 4.
Additional information:
Which candidate’s health plan will hurt the most?
The basic difference in the major candidates’ proposals for “health care reform,” according to Mark Pauley, writing in Health Affairs, is that McCain recognizes that workers earn their health benefits, while Obama apparently views benefits as the employer’s money (Greg Scandlen, Consumer Power Report 10/16/08).
Obama and supporters claim that the McCain plan will cause workers to lose employer-sponsored insurance, while Obama’s will permit those who like their employer-sponsored plan to keep it.
Summarizing the only two academic studies of the McCain and Obama plans,
John Goodman writes that, according to the Lewin study, 9.4 million would lose employer coverage under McCain, and 13.9 million under Obama. That means for every three people who lose coverage under McCain, four would lose it under Obama. The loss under Obama could be much higher. Employer-based coverage could actually increase with the McCain plan, while dropping by 60 million under Obama, according to the analysis by Roger Feldman of the University of Minnesota.
Obama promised that people buying insurance on their own would have access to the same coverage as members of Congress. The Lewin study assumes that the government-sponsored “national plan,” with the same on-paper benefits, would pay providers 25%, or even 40% less than private plans do.
Medicaid rolls would swell by 16.6 million under Obama, and shrink by 12 million under McCain, as Medicaid enrollees shifted to private plans.
Neither candidate has proposed a realistic way to pay for his proposal. The estimated 10-year cost is $2.1 trillion for McCain and $1.1 trillion for Obama (according to Lewin), and $2 trillion for McCain and $6 trillion for Obama (according to Feldman).
According to an analysis by the Pacific Research Institute (PRI), the McCain plan would help to end job lock, and result in a wage increase averaging $9,000 per year. PRI states that the Obama “job-killing” taxes would be especially harmful to low-income workers, and his reforms would lead to a “death spiral” for privately chosen health insurance (John R. Graham, “Presidential Prescriptions: Diagnosing the Candidates’ Health Reforms, PRI 10/14/08).
The McCain tax credit would correct the “arbitrary, unfair, and wasteful” distribution of tax benefits for health insurance, writes John Goodman. The Obama proposal would “build on today’s regressive, discriminatory subsidies for employment-based insurance,” while new rules would make insurers “little more than functionaries in a new federal government regulatory regime,” states Grace-Marie Turner (Health Care News, September 2008).
Senator Obama seems to be confusing a tax credit with a tax deduction, suggests Ralph Weber, who spoke at the 2008 AAPS annual meeting. A $5,000 tax credit is the equivalent of a $20,000 deduction for most families. It actually is enough to pay the average family health insurance premium in New Mexico, leaving $2,000 to start building up health savings. McCain has also proposed allowing the purchase of health insurance across state lines (FlashReport 10/16/08).
The New England Journal of Medicine shows its political colors in its Oct 16 article, “Primum Non Nocere—the McCain Plan for Health Insecurity.” It concludes that “Senator McCain’s plan does not demonstrate the kind of judgment needed in a potential commander in chief of our health care system”—assuming a “system” that has a commander in chief (David Blumenthal, N Engl J Med 2008;359:1645-1647). For balance, however, Joseph Antos of the American Enterprise Institute writes in an accompanying article that Obama’s “hopes are too audacious to be believed.” A pay-or-play mandate amounts to a tax on labor (N Engl J Med 2008;359:1648-1650).
The “usual suspects show up as savers: health information technology, prevention, and comparative-effectiveness research”—but none is “likely to produce savings any time soon,” Antos writes.
Additional information:
Fed rolls printing presses
For more than three decades, savvy world investors have feared that in any serious deflationary crisis, the U.S. would panic and open the floodgates of printed fiat currency, writes Richard Maybury.
Maybury believes that the deflationary crisis has arrived; dollars are being created by the Federal Reserve at an astounding rate. The steady upward slope of BASE, the St. Louis Adjusted Monetary Base has become vertical.
Since officials don’t know the location of the threshold that would trigger an inflationary crisis, making the U.S. dollar worthless, they are dropping money into the economy in increments instead of one huge infusion.
Americans see each of the smaller injections as a failure. Thus, each one makes them more fearful. The velocity of money falls, nullifying the inflationary effect of the injections, Maybury writes (U.S. and World Early Warning Report, Special Bulletin #3, 10/10/08).
The only silver available for purchase is in 1,000-oz. bars. One explanation, suggested by Arthur Robinson, is that Americans are so frightened that they have bought up all the silver coins.
Nonetheless, “we have the tools to manage the crisis,” writes Paul Volcker reassuringly (Wall St J 10/10/08). Volcker was Federal Reserve chairman from 1979-1987. “Financial authorities, in the United States and elsewhere, are now in a position to take needed and convincing action to stabilize markets and restore trust.”
If confidence is restored, the game can proceed. At least for a time.
The international confidence-builders have had an “unprecedented crisis” come up at a most awkward moment: Just after World Bank president Robert Zoellick called for a “radical revamping of multilateral organizations in light of the global economic meltdown,” it was found that the security of the World Bank Group’s computer network has been compromised by cybercriminals. Intruders have had access to the Bank’s most sensitive systems for at least 6 months. Officials have been scrambling to find the cause of the problem, while also trying to keep news from leaking to the public.
Maintaining the Bank’s information infrastructure costs about $280 million per year. One disgruntled staffer complained that it doesn’t even have an internal search engine that works. But investigators found that intruders were “downloading anything and everything.” Among other problems, spyware had been covertly installed on workstations in the Bank’s Washington headquarters (Fox News 10/10/08).
As President Bush told Americans, the crisis is global.
Neither the Federal Reserve nor the World Bank is offering a confidence-inspiring path to financial stability.
Additional information:
- “A Trillion-Dollar ‘Rescue’?” AAPS News, November 2008.
- “Confidence Games,” Civil Defense Perspectives, September 2008.
- “Massive Pork Bill Passed by Unconstitutional Process to ‘Rescue’ Economy,” AAPS News of the Day 10/5/08.
- “About the Power,” AAPS News, September 2008.
- “About the Money,” AAPS News, August 2008.