Friday, August 26, 2011


In the week of August 8th to the 12th, the world saw the equity markets swing very wildly from up to down and around again. It was, I am sure, very disconcerting, probably frightening. And people are confused because after a lot of reforms, laws, regulations, planning, stimulation, and quantitative easing, which was suppose to make things better, we are having big, dangerous, damaging swings.

In recent days I have seen several suggestions in the media that volatility would continue, at least for a while, because of the uncertainty as to what direction the stock market would take. These comments have a very narrow focus and fail to recognize wider causes and implications. They do not recognize that it is not just the stock market that has volatility. Currently, well, in fact I am not aware of any international market that isn’t suffering higher levels of volatility. Currency markets, commodity markets, bond markets (except very short term, which are basically pegged by Fed policy), you name it, are all experiencing significant volatility.

The biggest reason is “uncertainty”. What is meant by uncertainty is much more than an understanding that the future is not known. The future is unknowable, but, in many circumstances, it is predictable and can be expected to behave in a comprehensible manner when unexpected changes do occur. If you are a competent investor or businessman, you have confidence in your ability to respond to change. No, this uncertainty goes way beyond the basic unknowable future.

Nor is it just that the international community faces problems. There are always problems, issues that need to be addressed and dealt with. Again, competence leads to confidence.

What is causing the foundation of today’s uncertainty is the lack, one could say the nonexistence, of ideas, solutions, intelligence, willingness, leadership of governments around the world. It is as if there was a contagious disease that has afflicted every ranking member of most of the major governments of the world. They fight, they seek their own political advantage, they evade, they do nearly anything except face the reality of the problems facing them. For months we have been waiting for the leaders of the governments of the eurozone to solve the sovereign debt problem facing several of their members. Several times they have announced triumphantly that they had solved the problem only to see that the market regarded those steps as insufficient. Now a few countries are in extreme recessions. As their economies shrink, their bond problems become worse. No one in Europe (or in most countries) seems to understand how an economy grows, with or without heavy debt. The stimulus steps are not working (as they aren’t in the US, as we shall see shortly). Data released this last week showed that the German economy was not growing as fast as thought. Germany is generally regarded as the backbone, best source, the money source of last resort of the euro system. If it isn’t strong, the eurozone will have much more difficulty in solving the problem of sovereign debt, let alone actually experiencing growth.

It also appears that the US has not grown much at all in the first half of 2011. Nearly everyone was expecting that because of QE2 the economy would be on its way to a normal recovery with growth powering along toward 6%. Now many people are talking about a recession this year. The government policy has failed. People don’t know what to make of that. They are confused, and uncertain.

It is being recognized, slowly, that the Fed has run out of options. In the last couple weeks in announced that it would not raise interest rates above effectively zero for at least two years. Obviously, the charge of uncertainty was heard. But this is recognized as a dumb move. The stock market tried to rally, went up wildly, and then continued downward, just as wildly. There are some at the Fed who understand some of the problems facing banks and businesses in America. For example, read this speech (not saying it is perfect, but he recognizes some important points.)

In addition, and as important, in most of the developed world, laws passed over the last few years have unleashed massive new regulations and restrictions on banks and businesses. Most of these new regulations have yet to be formulated and announced. Bankers and businessmen have little idea as to what to expect, except that it will not be supportive of normal, intelligent, profitable banking and business practices. Everyone is waiting for the shoe to drop – on their heads.

So we have uncertainty hounding us from two angles, the failure of the government policies that were suppose to save us and the impact of new, arbitrary regulatons.

With the Fed’s hands tied from all but the most crazy ideas (The Fed is run by helicopter Ben, after all.) and the Administration and Congress tied up over the astonishingly large deficit already on the books, one wonders what the government could think that it could do if we go into another recession. Will they try to enforce wage and price controls? Will they try to force a command economy? Will they watch in wonder?

Let’s say that they find that they can do nothing. Let’s say that Geither in the Treasury doesn’t go off into nether-nether land as he did in 2007-9 and write lots of checks he can’t pay. Let’s say the economy is on its own (I expect that even the Republicans will try to do something.). Is the economy strong enough and free enough to recover? If it doesn’t, will that give the anti-capitalism crowd more leverage? Is our time to fight shorter than any of us figured?

Many are thinking that foreign currencies and businesses are safe havens from the problems in the US. Actually, these safe havens are more in Asia or the BRICs. But, this is the era of globalism, of international markets and money movement. When the US and Europe are in recession Asia and the BRICs do not have markets to sell to and their economies also decline. Some of the stronger currencies may still be relatively stronger (Japan is a disaster waiting to happen.), but you need to be very careful. If and when recession comes to China, for example, and the real estate market crumbles, it will be interesting to see what the Communist government does, that is unless you live there, they it could be frightening. Remember too, that the government leaders and central bankers all went to the same schools, read the same books, heard the same speakers, and hold the same ideas as those in Washington. There is no country that is a financial and intellectual island. Differences are relative, in degrees, not fundamentals.

So the volatility we see is the result of the confusion and dismay. People see the failure of the promises of the political, economic, and intellectual leaders and do not know what to think. Even the more experienced traders are suffering whiplash by news and promises. People rush from hope to fear, back and forth. They have no foundation for understanding what is happening. The mainstream media is just as ignorant.

The hole that Keynesian policies have dug for us is very deep. The process of fighting over who will be heard and who will lead will cause constant turmoil. The inept attempts at solutions will add to the problems. Lost time in actually solving the problems will result in the problem becoming larger and exerting more strain on the international economy. Volatility will continue, sometimes becoming wilder, sometimes hitting a lull, but as the confusion and fear will not be reduced and the problems will reemerge, the volatility will return, probably in greater, wilder swings.

There will competitors offering answers and solutions. The Christian right, fascists of Christ, will offer answers. There could be an even more extreme, pro-government Democrat emerge who would rival BO in his willingness to use force to achieve the ends of destruction promised by altruism. Competition for the minds of Americans could become fierce.

People are looking for answers. This is an opportunity. Objectivism and capitalism have answers, good ones, ones based on reality. The books and ideas of Ayn Rand need to be spread further. People might be willing to listen.

Truth must be heard.

Friday, August 19, 2011

Inflation Watch: News!

There is in fact something to report. Get it here, few others are going to have this news. It might mean something, it might not, but it at least is a change.

In a recent blog about the money supply I talked about how to read the graphs we get from the Fed, that to understand the meaning of the information, you needed to keep the steepness of the curve and the relative amounts in mind. Now we have a example of what I meant. It is a nice example for illustration purposes; it is a bad example if it foreshadows things to come.

The US money supply, as controlled by the Fed, is generally fed by way of bank loans. Generally, the level of bank loans is the best place to look first to get a good idea of what is happening.

Surprise, a graph! Well, you can see that the recent activity, after several months of steep decline, there has been some rebound, but that seems to leveled off, at least briefly. I put no importance on such brief changes, even though it is a little unusual. But, here is the important part, while BO has been railing at banks to loan money (regardless of his criticism that the financial meltdown was because banks loaned money – to the poor), the regulatory agencies, The Comptroller of the Currency and the FDIC, for example, have been engaged in very heavy handed tactics to force banks to adhere to what the regulators consider, sound banking practices. They insist the banks have lots of collateral and keep minute, intrusive records about the borrowers. Further, banks are still trying to replace the capital and loan loss reserves that disappeared in the meltdown. Those who carry on about bank profits just are not taking the responsibility to find out what they are talking about.

After looking at bank loans, lets see what the money supply is doing. Ee have a choice where we look, since there are a few different indicators. What the hell, lets look a several.

First is M1, which is the basic money supply category and includes all physical money such as coins and currency; it also includes demand deposits, which are checking accounts, and Negotiable Order of Withdrawal (NOW) Accounts. So, this is the money you use to buy stuff with.

M2 is a little broader, it includes M1 plus all time-related deposits, savings deposits, and non-institutional money-market funds. This is money that is one small step from the availability to be spent.

Then we have the one I consider most useful, MZM, which is all money in M2 less the time deposits, plus all money market funds. It measures the supply of financial assets redeemable at par on demand, or all the money that can be realily spent.

Also available from private sources (because the government stopped publishing it) is M3, which is M2 as well as all large time deposits, institutional money-market funds, short-term repurchase agreements, along with other larger liquid assets. The “other larger liquid assets” includes Eurodollars, which means here we can see the overhang that could drop on us. Eurodollars are dollars held in foreign, private accounts. Thus, this measure does not include dollars held by foreign central banks as reserves (if the money has been invested somewhere, and not just held as cash, it will show up in one of the Ms).

I showed you M3 for the sake of completeness, but for our purposes, in this post, let’s use the other three, focusing on domestic dollars.

I am sure that you can readily see that each seems to currently be heading straight up. Up until now, the graphs had been moving more or less on a trend line that was fairly consistent from the 1980s. These are linear graphs, meaning that a change of $100B at the bottom of the graph was the same size on the vertical axis as a $100B at the top. That means, from a practical perspective, that a recent $100B change in the money supply was not as significant as one 30 years ago. Today, $1000B is small potatoes. So if the graph was sloping the same angle, the rise in the money supply was having less and less effect.

Now, the slope has definitely increased. If it continues, the impact of the growth in the money supply will be greater. The question is, will it continue to grow at that rate or faster?

You might ask, well if the banks are not loaning more money and that is how the Fed pumps money into the system, how is the money supply expanding?

The answer to the question is that there three other sources of growth in the money supply (that have played little or no role hitherto): 1) In QE2, the Fed was playing a little with its processes and managing to get some money directly into the hands of the Treasury (see the several comments under “Making Claims About the Money Supply), and that expanded the money supply. Whether that explains this jump is unclear, at least to me. 2) Money that was in other instruments, and not available for immediate spending may have been moved. It would take a large and noticeable move to result in this jump, but this change could explain part of it. 3) Dollars kept overseas could have been moved back to the US. This is my choice. In the recent turmoil in Europe people and businesses have been fleeing the euro and the eurozone. We could easily see billions of dollars moved, not just into dollars, which has made the dollar “stronger”, but move to be deposits within the US.

If the last of my three options is the reason for the rapid increase in the money supply, I don’t think that it is sustainable and then not a threat for our consumer prices. The reason being that there is only so many dollars that can be moved quickly. There are many financial and business obligations overseas that are paid in dollars. If too many dollars come here, they will just have to go back. It would take time for those obligations to be unwound and the dollars freed up so that they could remain here. If that begins to happen, then we will see a significant influx over time and a consequent increase in dollars for asset investment and spending. We will either have another asset boom, a general consumer price inflation, or both.

But, in order for the role of dollars to begin declining in international trade and finance, there would have to be a replacement. People overseas would have to find a currency that they were willing to trust as much as they trust dollars today. It would have to be a currency that is as available as dollars are (a large quantity). There isn’t one. Nor is there one on the horizon. (I mean in terms of the recognition of the people overseas, not as a potential.) Therefore, if I am correct in my suggestion as to the source of the increase in the money supply, we need not worry about that problem right now. But we do need to keep our eyes on it.

But, we have to keep an eye on what the money supply is doing anyway. It isn’t optional, because it foretells what we will have to face.

Wednesday, August 17, 2011

FOUR BOOKS: One Great, Two Good, One to Avoid

Objective Economics
By Dr. Northrup Buechner

Good to Great
By Jim Collins

Manias, Panics, and Crashes: A History of Financial Crises; 5th ed.
By Charles P. Kindleberger and Robert Aliber

This Time is Different
By Carman M. Reinhart & Kenneth S. Rogoff

Objective Economics is the triumphant entry of man, the rational, thinking man, into the study of economics. For the first time, man is the focus. This is in contrast to the “blind market forces”, “invisible hand” and disembodied supply and demand that has populated economics previously. Here, man makes choices by the use of his reasoning power based upon the facts of reality. Certainly, irrationality is recognized, but so are the consequences (i.e., failure). The book also presents a method of objective science, focusing on the facts of reality, and notes specifically where more information is needed. It does continue in the tradition of the best economists in that it is exhaustive, discussing the various important issues in detail and making note of the differences in this book vs. its predecessors. In this regard, Dr. Buechner’s consistent references to the three classifications of philosophy, i.e., the intrinsic, subjective, and objective, are important and helpful.

Good to Great has much to offer. It clearly presents what is actually a very objective (in the proper sense) look at the reasons why certain companies met a very high standard of greatness as businesses. The conclusions are very interesting and useful. The method and the clearness of the thinking are enjoyable and instructive. What is also interesting is that, clearly, the author and his research staff do not have the knowledge to understand and elucidate the character of the great businessmen they discuss (neither do the businessmen). People familiar with Objectivism will understand.

A facebook “friend”, someone who is considered an Objectivist by himself and others that I respect, referred to Charles Kindleberger as a good source to understand economics. I hadn’t really heard of Kindleberger, being as I left school before he began writing. So I looked around and the only book that I could easily access was Manias, Panics, and Crashes: A History of Financial Crises by Charles P. Kindleberger and Robert Aliber (Aliber does not seem to figure much in this, somehow). I was greatly surprised to see a glowing recommendation for the book on the cover by Paul Samuelson, the Keynesian author of one of the worst college texts ever forced on the innocent. Samuelson’s recommendation was well deserved. I haven’t discussed this book with the facebook friend, yet. But this indicates that he is sadly wrong. Kindleberger is strongly for government control of the economy, has no ability to distinguish between different economic events, is unable to understand the concept of causality in economics, and writes in a style designed to bore and obfuscate. I found one, accidental, modest idea in the book that might suggest some further thinking. One.

On the other hand, This Time is Different, although written by two economists who do not seem to have found anything in mainstream economic theory to question, do have some respect for facts, and wondrously, actually go and search for them. The detail and organization of the facts sometimes are a little difficult to get through, and much of what the two authors have to say is superficial. Yet, on some important points, they are very good and do provide some understanding that is important. The point of the book is that excesses in credit and money creation in every instance leads to disaster. This time is never different. I am not recommending this book to anyone who is not serious in their studying of economics and history. It certainly does have major significance to today, both here, in Europe, Japan, China, and most of the world.

Sunday, August 14, 2011

Self-Fulfilling Fantasies: US Treasury Bonds

Number one on my list of fantasies is the US Treasury Bond. (Just for the record, in this context I mean nightmares. I do have good fantasies!) People feel US Treasury Bonds are safe. Are they?

The usual reason given for the safety of US Treasurys is that they are backed by the ability of the US government to dip into the pocket of the most-wealthy nation on earth to meet interest payments and redeem the bond upon maturity. Well, yes, that is true, still true. But that proposition does have limits, limits that have not been stated or acknowledged before, but need to be seriously considered, soon. (Notice that the wakeup call of the S&P downgrade of US Treasury Bonds has not resulted in honest reconsideration of the path of the Obama administration, but has caused several loud calls for destroying the remaining limited independence of the credit rating companies.)

There is also another issue that isn’t addressed in the basic reasons for the safety of the US Treasury Bond, prices. You see (and I am sure that many of you do see) the price of the bond is related to the interest rate that it pays, which in turn is related to the interest rates paid on other bonds around the world. If interest rates begin to climb, and the secondary market for Treasury Bonds (where bonds purchased from the Treasury are resold), even the Treasury itself, need to compete for funds, the interest rates for the bonds will climb. The consequence will be that the price of the bonds will fall. So Treasury Bond prices do change. If interest rates move, say, a whole percentage point upward what happens to the price? The current benchmark 10 year Treasury Bond has a yield (interest rate) of about 2.4% (the date of my first draft being somewhat different from my publishing date). So I am suggesting that it went from 2.4% over time, however long you want, to 3.4%. The latter interest rate is still very low. Historically, this bond has been much closer to 5%. Even at 3.4%, with taxes at roughly 25% and inflation around 2%, the bond isn’t making you any money (at 2.4% you are taking a loss). (Of course, foreign governments aren’t paying taxes!) But, a bond purchased originally at 2.4% will not yield the new market rate and can’t be sold for the original purchase price (nominally $10,000). Instead it must be sold for the amount that will bring the current market rate of 3.4%. (or $240 – the actual dollars paid in interest – divided by the new interest rate) which is close to $7058 ( there are issues of time to maturity, when you receive back your $10,000 that will adjust the actual sell price). You have lost roughly 29% of your principal. You see, relatively small moves in interest rates will have significant effects on the market value of your bond.

This example demonstrates that bonds are no safer in terms of maintaining your principal than any other asset, unless you hold to maturity. How safe is that? Depends upon the inflation rate doesn’t it. When thinking of long-term monetary values, don’t think in terms of currency, that is, fiat currency. Think in terms of some real, basic thing that you use in daily life, like a loaf of bread, or a pound of ground beef, or a latte in Paris, whatever. You will connect the rate of inflation to your currency denominated assets and be able to better realize what is happening to your capital. The bottom line is that US Treasury Bonds are very risky. (I won’t even go into the fact that you have put your savings into the hands of people like Obama, Bernanke, and Geithner.)

Many, if not most investors know these facts, so why are they still running to US Treasuries? Context. Or, a perhaps better way of putting it, where else are they going to put their money? There are a couple currencies that are considered strong, i.e., the Yen and the Swiss Franc. Both of these have been bid up sky high (much to the dismay and panic of the authorities and business people in those countries). There isn’t any real room there for more money. Other currencies are not considered safe by the populations of those countries. The best current example of that is the eurozone. This group of “developed countries” have people making decisions who are more concerned about voters than solvency. People who wish to protect the value of their liquid assets are scared of what these politicians will do (not to mention the so-called economists who do not think stability or production as important to economic health). The person holding liquid assets wants to put his property somewhere that the whims of the politicians can’t destroy it.

The bond markets for stronger countries, such as German and Austrailia, are small, very small in comparison to that of the US, and can realistically take only a small portion of the available funds. So for anyone wanting to get out of their home market, out of their currency, out away from their authorities, the US is still a better place. It just gives you a good idea of how bad it is elsewhere that the US dollar and the US Treasury Bond are about as good as it gets.

The result is that Obama, Bernanke, and Geithner feel pretty strong and confident, in spite of the downgrade of US government bonds by S&P. Again, isn’t it amazing that the politicians in other countries scare their populations more than the US trio of idiots.

The above discussion also gives you some idea of what could be the future for the cost of gold in fiat currencies. The gold market is smaller than the market for the Yen or even the Swiss Franc.

At this point I should explain how the bid/asked market functions: it is the margin that moves a market, especially a auction market like stocks, bonds, currencies, commodities. It is not the total demand or ownership. It is the most recent orders, their size, their volume, and which side of the transaction they are on, buy or sell, that moves the market. The traders do what they can to meet the reqirements of the open orders, moving the price as required to elicit corresponding orders (a buy order to match the existing sell order) to clear the market. Higher volumes of demand for a item, like gold, will send the price up. The higher the volume, the faster and larger the price movement.

So if people really begin to consider gold as safe and a real alternative to fiat currencies, the current price will be considered very low. Any kind of movement into gold from these other markets will send the gold price to astounding heights and will really scare a lot of people.

What will be interesting to watch (but not to live through) will be the point at which people begin to doubt that US government assets are a good idea, including the dollar. We don’t even have to worry about China or Japan for things to get ugly. If just foreign banks, businesses, and individuals begin to sour on our debt, its yield will move strongly upward and its market price downward. The budget deal and all of the carefully crafted, make-believe scenarios will be revealed as so much fantasy. These scenarios (models) are also among my favorite nightmare fantasies.

Sunday, August 7, 2011

Debt, Ceiling, and The Issue

So many people are reacting to the recent bill to raise the debt ceiling as if it meant anything. It did mean something, but not what people are whining about and not what the Dems or the Republicans are suggesting.

You should have expected that the debt ceiling would be raised, and probably by the arbitrary date that had been set. If anyone in Congress had suggested that the US go into even partial default, they weren’t being taken seriously. When the government has been shut down before, the Republicans have taken the blame and felt the pain on election-day. They weren’t going to do that again. No, they were going to raise the debt ceiling.

I am a little surprised that they raised it as much as they did, although the actual number was rarely mentioned in the press. No wonder, since the increase was about the same amount as the announced reduction in spending – that is suppose to occur over ten years.

Add in the fact that actually less than a trillion dollars of spending reduction was identified in the bill that was passed and the remainder is suppose to be selected in a special legislative committee, we have a bill that doesn’t mean much. Nor are the effects to begin for the next two years, except to raise the debt ceiling by over $2T.

The “reasoning” behind not having any cuts in the next two years is strictly Keynesian economics. It is accepted by both sides that government spending is a good thing for an economy that is not growing sufficiently (if at all). No one questioned this claim. The Republicans went right along with it. If you think about it, it makes even less sense in this case. I mean they are accepting the idea that not reducing the spending that BO wants in 2012 means that the economy then will do better than if his budget was reduced. This is just amazing. It this thinking is correct, the correct thing for Republicans to do would be to push for more spending, regardless of the deficit, to have even better economic performance. Well, of course, we are now talking Ben Bernanke’s language.

Many people are claiming that the loser was BO. They say that he didn’t get the increased taxes on the wealthy that he insisted upon. Maybe. There is always tomorrow, of course, or after the next election. The way the Republicans are going, BO will look great. I am sure that he hasn’t given up on raising taxes on the most productive members of our nation, he will find another time to push this through.

The bill hasn’t made our immediate situation any worse. If you understand that the debt limit was going to be increased and the whole thing was a game (a game that was taken very seriously by all participants), then you just hoped they didn’t do anything more stupid than normal. There are no new immediate taxes, no new spending, no explicit attacks on our freedom.

There is one bright spot, I think. It is that the very issue of the debt was brought forward and made a big deal. It gained the attention of the media and many people in the country for a couple weeks. It also seems that the Republicans did latch on to this issue and maybe they will try to keep it in the forefront of their public comments. That is a good thing.

Yet, as I say that I also remind myself that they did not make clear to the American public that Social Security and Medicare are doomed, no matter what the Dems do about it. Those programs have a cost that no nation could pay, and certainly not one as encumbered and regulated as this one.

The Republicans also undercut their case when they fought for such small potatoes. Cuts of $2.7T (or whatever the final advertised number was) spread over ten years do very little to impact annual deficits of over $1T a year. It was such a big fight over so little.

But actually, it is even worse because what they were fighting over weren’t cuts at all. The Congress uses terms differently than us common folk, and the “Tea Partiers” fell right into it. The budget projection process assumes that most programs will continue to expand over the years. What Congress fought over was the rate of increase of those programs. They weren’t cutting anything at all.

The expectation that reducing the increase will make a difference assumes that the income side of the budget would grow at a certain rate, meaning that if income continues to climb, and we reduce the increase in spending, we will see a reduction in the deficit and we will borrow less. But, where is this increase of revenue coming from? Well, two options: price inflation or actual growth. Along with price inflation often means increases in income as well and thus increases in tax revenue. Historically, however, income lags, meaning that our standard of living lags, and tax revenue lags. So, price inflation would only partially support a decrease in the growth of the debt.

Really, Congress is assuming that the economy will grow. I do not know what growth rate was used to figure out that their numbers would work and the deficit would not grow as fast as it has. I expect that it had some relation to our history since WW2. The growth rate over the last ten years has been much lower, however. We may not expect our growth rate to achieve the historical average any time soon, since we really haven’t recovered from the last recession. There are lots of reasons to think that the last recession is continuing and tending downward. You can be certain that the framework of this “Deal” didn’t assume a recession in the ten-year timeframe. The entire underpinning of the “Deal” is flawed.

The bottom line is that the “Deal” that was suppose to cut spending will have little effect on what will happen in the economy over the next ten years. It is a nothing. It has many fraudulent characteristics. Worse, it may make some people relax and think that things are in better shape.

That is one reason why I don’t understand the people who were so disappointed that the “Deal” was done. The bottom line was that the Republicans were fighting for show, not for real results, and not passing the debt ceiling was just too real for them (as a group, anyway).

And now (have to write more cuz stuff is happin’), S&P has actually shown up. I think that their explanation is pretty good, except that they should have mentioned that the politicians got us into this fix in the first place. I have seen two different kinds of responses, well, three, but the third, “It’s about time!”, is a very small minority.

One response is surprise that the downgrade is occurring now since the US government can meet its obligations of paying interest and paying back bonds. This is as short-sighted a view as we see from the Congress. The issue isn’t about today’s payments, but the payments during the life of the bond, which is in doubt, really.

The other response is from the Administration and the Democratic members of Congress. They apparently believe that anyone who disagrees with their view, their very subjective view that whatever they want to do is good, is at best mistaken and probably evil. Don’t be surprised to see the FBI visit S&P headquarters. If Obama actually realizes what the meaning of the downgrade means, he will look for ways to use the power of the government to change the rating of his debt.

Many of the supposed financial experts interviewed that I have seen have been unwilling to predict what we will see tomorrow when trading restarts around the world. I certainly don’t know. We may see some pause as people try to come to grips with the revised situation. Many of the organizations that currently hold Treasuries as assets that must be AAA rated may be calling their attorneys to find out what they must do. Prudence would require that they change their assets in an orderly manner and not wildly sell. But then, we could see some panic selling. Either way, a lowering of the rating of US government bonds should see an increase in the interest rate being demanded in the market. How much is very much open to question. The Treasuries will still be a major holding by many different international and domestic organizations.

But think what the downgrade does for the “Deal”. The whole plan did assume a certain cost of borrowing. That is, paying the interest on the debt is a large portion of the federal budget. That portion has just gotten larger. I bet that the projection of future spending used in shaping the “Deal” assumed pretty much the same interest rate on bonds for the entire 10 years. It certainly assumed a continued AAA rating. Now that rating is gone at the very beginning of the 10 year timeframe, and it is unlikely that the Administration or the Democratic members of Congress will do anything that will provide reasons to change the downgrade. The supposed cuts will be off set by the higher cost of paying the interest on the debt. So much for the entire hoopla and the “Deal”.

We need to focus on the primary thing, which is the education of the American people. If a sufficient number (say 20%) understand the situation, their voice concern will cause Congress to move in the correct direction. As long as the American people believe that, for example, Social Security and Medicare can be viable over the long term, nothing will be done.

As we move into the forth year since the bust of 2008 and there is no real recovery, we do have an opportunity to point out the reality of the Keynesian policies of the government. The American people do not want to live this way. I think that even the ones receiving government payouts may be willing to listen more than their counterparts in other countries because they are still Americans. In any event, we have our opportunity. Let’s make the most of it.