The Fate of U.S. Banks Is Our Fate

One wonders what politicians and current government-oriented economists think banks are. Ask them to define the concept, banks, and what could come out? Ask them what function they perform in the economy, the private economy, and what would they say? Then, there could be a difference between what they said and what they thought to themselves.

I expect that politicians and the Fed sees them as big piles of money, you know, something like bank robbers view them. Piles of money to loot or to use as influence for their political gain. They don’t view banks as having a particular identity that is necessary for the economy because they believe that they can force the banks into any shape they want and nothing particularly important will happen. Banks are toys, to be played with. Or, banks are whipping boys and every stroke makes the politician look good to the electorate, you know, the mob. The mob hates banks, and has for centuries.

It is my understanding that for a while, primarily in the 19C, some bankers in the U.S. were respected by many people. The name that comes to mind is J.P. Morgan, and his family. Today there is only an echo of that respect left. A PBS program I saw recently ascribed to Morgan a through going desire for power (undefined). That is bad for a banker apparently (but good for Obama).

Before the residential real estate mortgage crisis, banks were very heavily regulated and influenced. Now, the level of government control has gone up dramatically in the Western World. The worst step is Dodds-Frank. Even there I think that few of us, including myself, have but a superficial understanding of how destructive that law will be. It is probably the equivalent of what ObamaCare is for medicine.

But banks are vital for our economy, for an advanced, industrial, integrated economy. Finance, credit, routing of capital, are vital functions in our economy and banks are the number one tool used in those markets. There are a few others, e.g., venture capital funds, hedge funds perhaps, but they are small potatoes compared to the size and range of activities that are banks. To cripple our banks is to cripple our economy.

For the purpose of saving our economy and avoiding disaster, healthy banking is far more important than the size of government spending.

Again, as we have learned from Ayn Rand, and as I have said before on this blog, our first priority for our survival as individuals is freedom, which is the removal of controls and regulations.

Overspending, i.e., the creation of government debt, can kill us, yes. But the only way we win out and survive as men is through freedom. Learn about what is happening. Attack regulation.

My Predictions

Although I originally began this blog with the idea of keeping track of inflation and potential results for prices and prosperity in general, I haven’t engaged in prediction. My focus has been on commentary. We are, however, at a point that offers some interesting prospects for the future and I though it might be interesting and possibly helpful to suggest a possible set of outcomes.

Specifically, at this point in late 2012 the governments in the major economies have either implemented or are poised to implement some massive monetary flooding, which they call “easing.” The U.S. Federal Reserve officials have announced an open ended $40B a month scheme that will continue until either employment begins increasing or the end of time, whichever comes first. In Europe, the European Central Bank is ready to create unlimited amounts of money, claiming that it has to reduce the spread in government bond prices (between Spain and Italy, who have had to pay high interest rates, and Germany’s very low rates). China is expected to begin more “easing” in that it is currently seeing a much deeper and more significant drop in economic activity than the government seemed to expect. Apparently they thought that they were a separate, insulated entity. In response, just as any Western mixed economy government would do, the Chinese are moving toward spending newly made-up money. Japan has just begun its own easing program and England began theirs a few months ago. There is a great orgy of money creation in progress.

Those countries with “strong” currencies are also involved. They really don’t want to see their competitive position undercut by having other currencies diving in comparative cost, making their own products much more expensive on the world market. One example is that Switzerland’s central bank been buying euros for several months to keep their currency in line. As has been said by others, there is something akin to the arms race growing where every country inflates their currency in competition with the others. This process could also lead to protectionism, with higher tariffs and import controls.

As long as our economic problems are seen as the consequences of low consumption or low demand (and demand is seen as just money and not production related), we can always expect that the government response will be to create more money. There is some fear of the new money increasing consumer prices beyond a certain level (generally at an annual rate of 2% - some poison is good for you apparently). This concern is an interesting hold over from a point where government economists had a closer contact with reality. But there is little concern about the prospects for unacceptable levels of price inflation. It is the case that the upward pressure on prices from constant increases in the money supply tends to be less when production levels are low.

Consequently, we can expect that we will soon see a lot more money being created and put into the larger, more industrialized economies and interest rate will remain extremely low.

The amount of money that actually comes into the U.S. economy is a question for which I have no good answer. There is certainly some, but not as much as you might think when you hear the Fed brag about its easing. The money created by the Fed for QE1 and QE2 is mostly still sitting at the Fed in the deposit accounts for member banks receiving 0.25% a year.

 

The money supply has continued to grow, but the pace is not as fast as one might expect.

 

You can see in the graph that the average dollar amount of growth every year has been somewhat consistent. That means that the percentage rate of growth is falling. To just keep the constant percentage rate, this graph would need to show a much larger constantly increasing dollar amount, as the total grew each year.

As a result, consumer prices have moved upward modestly in the last few years (by comparison) and asset prices are mixed (housing downward and equities upward, but less than the CPI). Only bond prices have moved upward, as the Fed has moved to force down long-term interest rates as well as short-term. Long-term rates are very low, especially considering the need for capital in our economy. There is no connection today between savings, investment, interest rates, and the capital markets.

In these conditions, I wonder what the Fed believes that more “quantitative easing” or lower interest rates, could achieve. They talk about lowering unemployment as if the problem is that jobs are not being created for of financial reasons. Here we have an excellent example of theoretical, rationalist thinking that doesn’t consider even the possibility of looking at the real world. At present, there is no connection between the interest rate (including the supply of money) and investment/growth decisions. For a business, the difference between 3% and 2.5% on a long-term, profitable investment is insignificant. The real question for businesses is whether the project could be profitable. Some companies have invested when they have cash on hand. Many are considering a merger or acquisition, which doesn’t add to our productive capacity (although it might improve efficiency). But U.S. companies see no justification in future profitability to make the investment needed to put over two million people to work. The Fed and the Government, and Romney and the Republicans just don’t see that.

Another upcoming set of events in the U.S that could have a negative impact on our economy is the end of the Bush tax cuts and the spending cuts required by law. These events, both scheduled for January 1, 2013, won’t improve the capital and investment situation, although the rate of growth of government debt will slow some. At least in the short-term, if the tax cuts do end and the rate of spending slows, the immediate result will be a drag on the U.S. economy.

I am not convinced that the supposed mandatory cuts in spending are particularly important economically. Some people try to make this situation seem cataclysmic by quoting a cut of over a trillion dollars. That is fraud, since that is a ten-year number. As is always the case with government cuts, they are loaded mostly into the latter years. I think that the 2013 number is closer to $69B, which is for the full year. When you are talking about a multi-trillion budget and a deficit of over a trillion dollars, sixty-nine billion is an accounting error.

But saying “cuts” is intended to be misleading. The Congress didn’t pass a cut in spending. They authorized a reduction in the expected growth of spending. It was a cut from what they thought current laws would require the government would spend. There is not going to be a cut in spending. Let me repeat: These are not cuts in spending but small reductions in the growth of spending. Even so, there may be some companies that will feel an impact in their expected revenue from government contracts. But, economically, compared to the total level of spending and the prospect of more “easing”, big deal.

Combined, the tax cut, possible cuts in the growth of spending, and the Fed’s money flood, mean that there will be less money in people’s pocketbooks, but more, potentially, in the banking system. Remember that the way the Fed’s money gets into the economy is via bank loans. If the banks continue to maintain their stricter standards there is not going to be a significant increase in bank loans. In fact, the current trend is for lower corporate profits, meaning that businesses will be less credit worthy than before (and stock prices should decline, instead of booming). In addition, ever since the beginning of the “Great Recession,” bank regulators have been constantly checking on the “quality” of bank loans. Unless regulators are willing to loosen the strings, banks aren’t taking any riskier loans. I don’t see much of the Fed’s new money getting into the economy. That is not to say that there won’t be an effect. As in the past, there is a tendency to some money to find its way into assets.

In addition, the final Dodd-Frank regulations have yet to appear and the costly ObamaCare provisions are coming into effect. All businesses, but especially banks, are legitimately confident that their costs will increase significantly and their range of action considerably curtailed. Startup businesses have declined. dramatically. For the economic/cultural pessimist, there is much support in the U.S.

In Europe, the central bank is being pushed into acting because the market for Spanish and Italian government bonds demands much higher returns to compensate for higher risk. Personally, I think that there is no uncertainty. Neither Spain nor Italy will be able to repay their bonds in the coming years. (I equate being given worthless money with not being paid.). So the higher rates are certainly justified. But enough of the euro country governments don’t like that. The higher rates mean that Spain and Italy would have to face their insolvency soon, which would be a big problem for the other euro government countries. So the euro block is pushing the central bank to create money to avoid reality. In this case the money will go directly into government spending and will have very negative consequences. Not the least consequence will be a lessening of the pressure on Spain and Italy to solve their problems. (Spain is expected to need the euro bank bailout. No one is currently talking about Italy, but its economy is heading the same direction.) By creating money to buy government bonds the European Central Bank is defaulting on the loans by directly creating inflation and thus reducing the purchasing power of the money that bought the bonds. Everyone in Europe is ignoring that fact. In addition, there will be a lot of upward pressure on prices and everyone will feel the cost. But, most of all, the importance of freeing their economies and being fiscally responsible can be evaded. The ultimate result will be greater disasters.

I expect that China’s new money will be similar to earlier efforts, which went primarily into government owned and controlled businesses, shrinking the portion of the economy that is private. It may also be more of a “consumption” orientation, which will mean less of a push in industrialization, and a move toward Western ideas of a consumer driven economy. That government decision would necessarily reduce the growth rate even without the normal consequences of asset booms and busts.

If more “easing” won’t help solve the unemployment problem (who cares about actual production?) and thus won’t help with economic activity, what will it do?

Well, the U.S. economy isn’t going to grow much, if at all. In fact, it could contract. If the new money just sits at the Fed as before, we needn’t worry about hyperinflation. The money supply will grow, but not significantly faster than before, although those numbers should be watched carefully.

I heard someone point out that since the first “easing” the Dow has risen 4000 points and since the second “easing” nearly 3000. I am sure that the Dow and other indexes will raise some more. The Dow has already gone up a few hundred points since the Fed announcement. What would a push by the Fed be without a serious increase in asset prices? Commodity prices could also rise. Some are saying that industrial commodities, such as copper, will not because industrial production is tending to fall. But the money being created will go somewhere. You just need to keep an eye out to see where that is.

So, if you want to put your money somewhere, based upon recent history, there you are! Just be careful about your timing and don’t lose perspective about the causes of the asset price rise and its duration. Be ready to short.

Of course, economic events are really harder to predict than that, especially in a controlled economy. Something will happen that we don’t foresee and things will happen differently than we expect. One thing we do know, whatever happens, it’s unlikely to be good.

Long-term, the consequence of all of this “easing” is to probably bring the day of reckoning closer, possibly by years. With unemployment staying down, Social Security and Medicare spending will continue to widen the gap between tax income and spending. The demands upon the Treasury will increase, meaning more debt. The low levels of production will mean that wealth is not being created and our personal wealth and standard of living will continue to fall.

I think that money can be made from the chaos and misallocation of resources. You just have to pick your method based upon the circumstances and pay attention to the situation.


P.S. I just listened to Yaron Brook on the Mike Slater show (via a notification from Lassiez-Faire). He says so much of what I just mentioned. I really did work it out before. But he says it well.

Europe Money Flood

As a follow up to my recent comments about the sovereign debt crisis in Europe, I want to comment briefly about the flood of money that has just been released by the European Central Bank (ECB). Today, February 29, 2012, the ECB allowed any bank that is in a Common Market country to borrow unlimited funds at nearly zero interest rates for three years (see http://finance.yahoo.com/news/second-cheap-money-round-hard-171320240.html). The total taken was 529B euros ($710B, @ 1 euro = $0.7450). This is the second such offering. Last November, the ECB loaned about 479B euros ($650B). The grand total is now 1.02T euros. Someone suggested that there was some shorter-term debt owed ECB that the banks paid back and that the net new made-up money amount was close to 600B euros ($805B).

Much of the money from last February was just put back into accounts with the ECB. That’s right, when the banks had billions sitting around doing nothing, they took billions more. What the hell, the money was nearly free.

The justification for this exercise in Disney finance was that the banks were no longer willing to make loans to. The banks were not sufficiently confident to risk making loans to nearly anyone. Interest rates for the debt of many European governments was going up, loans to businesses, especially small businesses were declining, and loans to other banks had essentially stopped, even the overnight loans. That’s right. Overnight loans to other banks were deemed to be too risky.

So now, European banks have lots of money. Lots.

What have we seen since November?

Interest rates and the availability of money to governments, even to countries with severe problems like Italy, Spain, and Portugal, has vastly improved.

Commodity prices have begun moving up again. The spot price for copper has climbed over 15% in the last couple months (when it looks like the Greek bailout would go through the copper price would go up, when not, down).

The euro has fallen against the dollar. (The euro would fall against the yen, but the Japanese are doing all they can to make the yen fall. This is the called world competition.) We can count on prices in the euro zone to begin climbing.

These are the more obvious consequences of this flood of money. I am sure that more will surface as time go by.

One interesting thing to look forward to is the time when these loans need to be paid back. Some of the bonds that the banks are buying have a longer time to maturity than three years. How are they going to get their money out? If all the banks are selling bonds at the same time what will that do to the markets and interest rates? Do the banks think that the European economy is going to be robust enough for the banks to be making money or to acquire capital? I did see that one governor of the ECB was concerned with the bank’s ability to pay back these loans. He suggested that the governments be ready to bail out the banks in three years. Which would mean more made-up money or higher government debt.

The banks also have to improve their balance sheet to meet the ECB’s new equity to loan requirements of ten percent. Where is that capital going to come from?

The ECB is prohibited by charter from buying government bonds directly from the government auctions, i.e., financing the debt of the euro zone governments. But that is what they have done by giving the banks cash. In fact, before the first set of loans had been taken, the French President suggested that the banks should put the ECB money immediately into bad bonds. It is such a bad idea. Letting interest rates come down for the problem countries makes it seem as if there isn’t much urgency for them to spend less or engage in economic reforms that are necessary if people are going to find jobs and survive. This exercise is counter-productive. The Europeans have not learned anything.

There is such a fixation with the immediate short-terms that you wonder if people have been surgically altered. To solve problems that they created a little while ago (which they aren’t willing to admit to – except for the excessive government debt to a limited extent) they engage in actions that will create greater problems just a few months later. The process is a spiral, and it is becoming tighter.

It is amazing that they think that putting 600B euros into their economy will have only good consequences.

So, everyone:

Short the euro. Go long on commodities and European stocks, as there will most likely be an equity boom. But be careful. Who knows when that bubble will bust. And, if you plan to go to Europe, you can plan on not having to spend as much. The dollar will be able to buy lots of euros, at least as long as the money that the Fed tried to put into the economy, which is twice the amount the ECB created in Europe, still sits as deposits at the Fed.

Current Decline in the Availability of Pharmaceuticals

In the criticism directed at ObamaCare and socialized medicine in general, there were many consequences seen that would be detrimental to the health of men and women. One consequence that wasn’t predicted (as I recall) is occurring now. From what I have seen in various reports recently (listed below), when socialized medicine collides with high levels of government debt, which it must eventually, the results are decidedly unhealthy.

In Greece and Spain, and also in Italy, even in the United States, we are seeing disruptions in the supply of pharmaceuticals. The disruptions are being caused by two related government actions. Especially in Greece and Spain, the governments are not paying their bills. Surprisingly, the companies making the drugs are beginning to refuse to send additional supplies. I say surprisingly because I would bet that there has been some attempt to get the companies to ship regardless of the status of payment for past shipments.

The other cause of shortages, which is already happening in the U.S. and is probably happening in Europe, is that certain drugs aren’t being produced because the prevailing price, i.e., the price that the government is willing to pay, is too low to justify making the drugs. In the U.S., we are seeing pharmaceutical companies selectively choose to not make certain generic drugs because there is little or no profit in the price at which they can sell the drugs. These companies have limited production facilities and they choose to use them to produce the most profitable product. Duh!

There is another factor that is spreading the problem wider. In Europe, many countries have laws that require the government to pay the lowest price being paid by any European government. So, say Greece unilaterally decides, as it has, that to “save” money they will lower the price of some or all drugs. It doesn’t really matter what price they choose, the price is way below what the drug companies would charge if free to do so, so whatever price the Greek government chooses will be a disincentive. Then other countries’ low price law kicks in. If the drug is going to be available to patients, the drug company has to ship at the new, lower price. The moral and health consequences are very obvious. The drug companies no longer have any say in the revenue for which they are working. That is unadulterated authoritarianism. It isn’t that different from how doctors are treated by Medicare in the US.

As far as I know or have seen, there is no law saying that the drug companies have to ship, have to continue to make the medication. Slavery has not progressed to that point. If not today, then soon, the drug companies will not be able to continue shipping product on which they constantly loose money. Supplies will become smaller. Shortages rampant, not just in Europe, but worldwide. Companies may go bankrupt. Drug formula may be lost.

Some of the European drug companies are now saying that their ability to do research and create new drugs is being threatened. I expect that they are being a little timid in making known their concerns. I expect that the drug companies are not in a strong political position. Someone is probably keeping a close eye on drug company research numbers. Too bad the mainstream press isn’t interested in actually reporting news like that.

Since the widespread government debt and fiscal deficit problems is going to be a major problem for some time, one should expect the problems in Europe to get worse. The governments will have more difficulty in paying for medical care. The problem will be spreading beyond drugs and supplies to include doctors, support staff, and hospitals. I wonder if someone is paying the electric bills? A private company would be constrained from cutting off power to a hospital. A government electricity monopoly may not be so constrained.

No doubt the problem of non-payment extends to other sectors of the economy as well. Someone said that Spain in particular had determined that keeping cash and not paying bills made the government look much closer to solvency.

What bill is or is not paid is a function of the decisions by bureaucrats. These people have not learned the lesson that 70 years of Soviet economics taught: there is no substitute for a market. What drug or service is available or not will depend upon accidents, pull, and ignorance. Actual health issues and medical need will not be ignored so much as it will be unknown and unimportant. I mean the mere fact that there could be medical need will be unknown. It is government money and it will be paid to the concerns the bureaucrats choose. The fact that there is a reality is overlooked in the regulations. Good luck to us all.

Keep your eyes open. This news, that has come to us in a trickle, leaking into the mainstream in little droplets. So far the press has not be recognized the debt issue as impacting people’s health. Even if they do, there isn’t anything that can be done about it, however. Many of the European governments do not have the money to pay those bills, even if they wanted to do so. How much longer will their citizens have drugs? How long until we are in the same situation? How much will the loss of several European markets affect drug availability in the U.S.? Who knows?

Having gone to the pharmacy regularly, it would seem almost unimaginable that the drugs we rely on could cease to be there when we need them. Those of us who do depend upon them daily, for example, the millions who keep their blood pressure low or those who survive diabetes with medication, could see those meds disappear in the next few years.

Sources:

Greek crisis takes heavy toll on health
http://www.reuters.com/article/healthNews/idUSTRE7982UN20111009

Spain health service chokes in crisis
http://www.reuters.com/article/healthNews/idUSTRE79A1S120111011

Drug shortage in US
http://www.reuters.com/article/healthNews/idUSTRE79D4GI20111014

BO to take executive action on drug shortages
http://www.reuters.com/article/healthNews/idUSTRE79U23D20111031

More pain for Euro drug makers (includes information about lowest price laws and the threat to research)
http://www.reuters.com/article/healthNews/idUSTRE7A93C220111110

UK pharmacists sound alarm about shortages
http://www.reuters.com/article/healthNews/idUSTRE7A901F20111110

HIV gains ground in Greek crisis
http://www.reuters.com/article/scienceNews/idUSTRE7AA37P20111111

US employer health insurance offerings reach new recent low
http://www.reuters.com/article/healthNews/idUSTRE7AA4AI20111111

R&D proposed in Europe over superbugs
http://www.reuters.com/article/healthNews/idUSTRE7AG0VA20111117

Cancer cost becoming unsustainable
http://www.reuters.com/article/healthNews/idUSTRE78P26B20110926

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.

The Continuing Story in Greece, Europe, and the World

I’m not giving you a blow-by-blow account of events in and around Greece. I am trying to give you some perspective on the situation, which seems hard to find. I am beginning by offering you some stuff that I have found here and there that adds to the picture. They show that the possibility of Greece growing out of its current difficulties is impossible, because real growth is impossible. Read this article from the BBC to get an idea of how the government and business get along. It makes many of our state governments look brilliant by comparison (but not Obama). I found another article about a village that had attracted major industrial investment, but is now dying and businesses that can are moving out of the country (sorry, I proceeded to lose the address of the article). There is also plenty of evidence that money is fleeing from the country. Bank deposits are declining relatively quickly. None of that is good for the survival of Greece without major disruption.

For you one note medical issue people, read this note form a recent weekly email that I receive from John Mauldin (6-24-11):

“But there are very sad things going on. It is not just banks that are losers here. Pharmaceutical companies are starting to refuse to deliver to Greek hospitals, as they are up to two years behind on their payments. It turns out that Greece owes some €6 billion to private businesses like hospitals and simply cannot pay. Those costs are rising, and much of it is to hospitals for medical care supported by the government. They are issuing bonds (shades of California) for the debt in some cases, which sell for a discount of 50%, if they can be sold. And we thought finding €12 billion was a hard thing.  This is not just a Greek problem, it is a concern in many countries that are having financial difficulties.”

The Greeks are being asked to make some very tough decisions. These decisions would be difficult for brilliant, well-trained, market oriented professionals to make, but what the Greeks are depending upon are politicians who claim to be socialists. Their entire operating mode is making promises, throwing around government money (they have no idea where the money comes from), and taking graft (It would be sort of interesting, in a pathological sort of way, to do a study on the number of “socialists” who have become rich and expect luxury since they became politicians, like the Frenchman arrested on rape charges in NYC, Straus-Khan). If the world press was able to look beyond the superficial, and report more on actual events besides government pronouncements and “protestor” activities, we would see that the Greek economy is barely functioning. To me, the problems in Greece bring into question much of the current plan. For example, the Greeks are required to raise E50B by selling off nationalized businesses. But these companies are most likely very badly managed and their assets may have been looted, many of their employees are protesting the entire program in the streets, and the prospect of profitability in the Greek economy is bleak. Who would bid on these companies? Would the Greek government get more than 10 cents on the dollar?

The entire program is based upon premises that have not been substantiated. There is very little connection with reality in the entire effort. Part of the reason is that none of the countries, including the supposed healthy countries like Germany, could comfortably face the same reality oriented scrutiny that Greece should be facing. I am sure, as a semi-reality oriented premise, i.e., the German reputation, that German nationalized companies and German government management is better than that in Greece. But I’ll also bet that it does not rise to the standard of German private enterprise, let alone American private enterprise. So the problems that the Greeks face very likely exist to some significant degree in every European country and at some point down the road, they will each face default and depression.

If Greece defaults, do not be surprised if other countries don’t follow suit. Iceland is expected to walk away from its debt at any time. As for Ireland, from all I have seen, it is a country plunging down the economic hole. Portugal is pretending that it is functioning and will not need another bailout, but it isn’t growing. Spain is seeing massive internal dissent aimed at its austerity programs. But, back to Greece.

So, in the last week the Greek parliament voted to further reduce spending and sell off government “businesses”. This is just the briefest of stop-gap measures (the popular phrase is that they are just “kicking the can down the road”) and it is not considered to be sufficient. More cutting and so on will be needed next year.

Some commentators wonder if the actual events will occur. All that has actually been passed are general bills. The legislation that will provide the details will be offered later, including the specifics of the asset sales. It is noted that the current government originally built its power base on the employees of the government and these government companies, promising them heaven on earth, regardless of the cost, productivity, or sanity of their programs or “businesses”. To sell off these enterprises would be a complete reversal, and it is wondered if these politicians can do it. Politicians of this stripe are great at making promises, but recognize the difference between policies that will get them reelected or appointed and those that no one will pay any attention to. Since these politicians are hardly connected to reality, they could easily declare that they will not act against the “interest of the Greek people”, and say to hell with the bankers, and not sell the assets. It would be a disaster and fairly soon those “businesses” would have to close down, since no money would be available to subsidize them, but the politicians would probably be reelected.

But, even if all of that goes fine, the Greeks will still need over E100B next year. I don’t know how they figured that, but if they are depending upon the Greek economy to assist in the government’s efforts to remain solvent, they will be very disappointed. I expect that the Greek economy will decline faster than they expect. Relatively speaking, it is an advanced economy, probably one of the top 20 or 25 in the world. It is more advanced than the US was in 1930. It is more corrupt and probably more productive, but in terms of interconnectedness and of business practices, it is more advanced. When even a relative small, advanced economy begins to fail, things will unravel rapidly. The politicians in charge will be like military leaders, who are said to always be ready to fight the last war. The politicians (and the economists) do not really know what is going to happen. They are basing their reasoning upon assumptions that most likely have little to do with present day economies. (Since the last depression occurred 80 years ago, we have little actual experience for rational economists to base their expectations. No one knows what will happen. But the irrational people in charge now won’t even realize things aren’t going right for some time.) So the needs of Greece next year will most likely be larger than presently expected. Larger than the current leaders in Germany and France are telling their people they are committed to cover. Politics in those countries will be rather interesting to watch.

But then, even before that point we have the French and German leaders coming up with another wrinkle, witch will cause great stress. They are saying that the “private sector” needs to participate in saving Greece. Now, considering that the “private sector” has already put itself out on a limb and bought a lot of Greek debt, it would seem the private sector has already engaged in significant participation. Why anyone in their right mind would do such a thing is beyond me. Then, much of that debt was purchased before the rating agencies really took the Greek government’s ineptitude into account and began lowering the credit rating of Greek debt, meaning that interest rates for Greek debt have gone up, a lot. Interest rates on the open market are now in the upper teens, say 16% or 18%. Say you bought Greek bonds at 8% and it is now 16%. You have lost half of your capital on the secondary market. Your only chance of getting your capital back is to keep the bond until maturity. It will probably still be a loss (due to the declining value of the currency), but perhaps not as much (figuring this out calls for some very complicated math). But now the French and Germans are telling the private sector that they will have to roll over their bonds, that is let the Greek government keep the money, with a new maturity date (I haven’t seen any indication of what duration.), but with interest rates probably lower than market. This is a clear loss for the bond-holder, and in any rational world, would be called a default, as the credit rating agencies have clearly stated.

Given a deserved black eye because of the goings on during the residential real estate boom, the credit rating agencies are trying to act like real credit raters. That is not what politicians want, actually. Welfare state politicians generally do not like letting people know the truth about things. Just in the last couple days, the leaders of Europe, especially that crazy lady in Germany, have attacked the credit rating agencies. It is an ad hominem argument, accusing the agencies of having a bias against Europe. Yes, if you don’t get your way, if someone calls your spade a spade, accuse him if bias. The best defense is a good offence. Offend every one you can.

Well, I can now get to one of my biggest reasons for writing this post. Greece is really small potatoes. I mean, Greece has a small economy, although if it does (which is to say that when it) defaults, the repercussions will be significant, because a lot of banks have significant amounts of Greek debt. But there are also two other small countries in the EU who might take the same opportunity to default on their loans, i.e., Ireland and Portugal. I’m not sure how seriously to take this, but Ireland is in dire straights and Portugal is not improving either. Then anyone who looks sees that Spain and Italy are both in situations not that much different than Greece. The “contagion” effect could go far, especially if these countries have major financial issues when Greece fails. I mean banks failing and soaring private bankruptcies will be dangerous in every country.

Then, hidden and ignored, is the plight of France and Germany (which is to actually say all of the European developed welfare states) that cannot sustain their own spending and borrowing as their populations age and shrink (and go Muslim). The problems in France and Germany are greater than that of the US in the long run, i.e., next few years.

That means that to the extent that France, Germany, and the other apparently healthier countries weaken themselves bailing out Greece, Ireland, Portugal, Spain, and Italy, they bring on their own problems that much sooner.

More broadly, the world is awash with debt. Every major economy that you can name that appears strong has got major debt, and rapidly growing debt. Japan, for example, with the reconstruction it now has to address, was beginning to feel overextended before the earthquake and tsunami. The Japanese economy is under great strain, yet the regional governments, businesses, and the population are all making new insistent demands on the national government to spend more money. The brics, Brazil, Russia, India, and China, that are growing fast depend upon the developed countries for markets, are themselves heavily controlled by their governments, are awash with government spending and debt (domestic and international), and at least three of the four (I don’t know enough about Brazil to say) are rife with corruption. In no way can we say that they are healthy economies, no matter how rapidly they are actually growing.

In spite of the international financial meltdown in 2008, there is little real difference in the way the international economy is functioning, except there is a lot more government debt worldwide and much more government interference. Consistently, they have all blamed the financial problems on the banks and, in fact, made the banks weaker.

The results from this will not be good. I am not predicting the end of the world nor utter catrosphie, I just don’t know enough to do so. But nothing good can come out of the current mix of debt, government controls, ignorance, and purposeful pursuit of policies that have never worked. It can not help but be worse than 2008.

We can avoid the meltdown here, but only by getting hold of things and making real change, to freedom, to capitalism. We will still suffer because there is no avoiding the problems of the rest of the world. But we can survive in fairly good order, if we do it.

Japan, Disasters Natural and Economic

Let’s start, not with economics, but with the scare of the century: nuclear energy.

Japan has now demonstrated that it is no more advanced or science savvy than any other country in the world. Its politicians are picking up on the irrational fears of a portion of the population and have begun pushing the country toward energy policies that will not only take them away from the safest and (if allowed to be) cheapest energy source, but will lead the country toward bankruptcy much faster than their current pace.

One thing that really astounds me, angers me, too, is that the media and popular frenzy over the problems at the Fukushima Daiichi power plant has apparently overshadowed the real, desperate plight of hundreds of thousands of their fellow citizens.

Further there is such a disparity between the real and, at best (worst?), potential danger. Where is the disaster? Think of it, all of the deaths and missing from the earthquake and tsunami versus all of the deaths and missing from the nuclear accident. Wait, what deaths? What missing. So the actually dead and missing from the actual disaster have been shuffled aside because of uneducated, poorly founded, hysterical fear of a potential. (At this time three employees of the electric company have died, two from the tsunami. I have not seen a report as to the cause of the third death.) Even the property damages are not comparable. The tsunami destroyed, obliterated, thousands of homes, businesses, and all of the infrastructure for over five hundred thousand people. Around the power plant, all of the homes and belongings are there, and, at this point, there has been no scientific suggestion that the contamination from radiation that there might be is anything but short lived. Some of the radioactive material that has been mentioned has a half-life of a few months and much of the material that has reached the ground around the plant will be washed away. Of course, we will not know the actual damage until the problems at the power plant have been solved. But that is what is missing here, knowledge. We have hysteria, not thought.

Granted, one has to recognize that Japan, alone among nations, has some reason to feel more concern about radiation. It has its own history. I do not want to belittle or underestimate the personal feeling many Japanese may and do feel. But I think that the Japanese who are voicing their fears and declaring nuclear energy to be evil have not given their personal connection to radiation proper respect, either. Rationally, you would expect someone to do research and learn about the reality that concerned them. Knowledge is the first and best way to deal with a subject, especially one that has such a scientific foundation. But, no, there is no evidence that the protestors or whimpering, crying “victims” have made any attempt to gain knowledge. They expend all of their energy beseeching the government to protect them and make Japan nuclear free. Instead of knowledge they went for dumb and are unquestioningly giving more power to the politicians, who go for dumb by definition (by choice).

Also ignored is the fact of the unprecedented size of the earthquake and tsunami. The earthquake is one of the largest man has experienced. There hasn’t been an earthquake to rival the recent one for over a thousand years in Japan. The tsunami was equally out of the ordinary. The preparations at the Fukushima Daiichi Power Plant protected it from a wave three houses high. What it got was one four houses high. One wonders that if the planners had proposed protection from such a massive tsunami, and insisted on funding the required cost, would the government regulators in Japan have allowed such an expense. The entire controlled planning process is ignored.

We see the same type of reaction from hysteria and ideology in California. People are shown on TV trooping down the beech near a nuclear power plant, claiming that if there were to be a big earthquake there, the power plant would suffer the same fate as the one in Japan. Yet, if you were to discover that the power plant has been built with a 8.5 magnitude earthquake and not a 9.0, you would still have to wonder about the protestors. If such a disastrous earthquake occurred along the California coast, the fatalities and missing from the earthquake and tsunami would be enormous. Where is their concern about the actual event? The fact that they are ignoring the obvious real, immediate consequences and worrying about what would be a mere potential, a maybe, indicates that they really aren’t concerned at all, but are engaging in thinly veiled ideological attacks on nuclear power, technology as part of the industrialized world, and capitalism.

At least those people in California can be ignored, since they would be swept out to sea by the tsunami never to be heard from again. They wouldn’t have to worry about potential radiation. But, in Japan, it is disheartening to see such ignorance paraded in a country that was so proud of their educational system and their recognition of technology as an important foundation to their prosperity and liberty. It indicates that the attack on the mind epitomized and lead ay Immanuel Kant has spread far and wide. His influence is not merely a Western phenomenon. When someone says that Western culture is spreading we know now that the spread includes the entire package. (I do realize that the historical culture in Japan isn’t particularly supportive of independent thought and learning. So the Japanese are being intellectually undercut by both influences.)

We can also see the spectacle of supposedly modern Western countries banning Japanese products without regard to the actual area of potential radiation. Apparently the Europeans do not have maps of Japan or have a clue as to its size. It is certain that there is little regard for science or reasoning in Europe, only the appearance of the authorities “protecting” the public. And by protecting, we mean stopping international trade and prohibiting free, voluntary exchange of goods and services. In the name of safety, we get lowering standards of living and a more rapid move toward poverty.

In the face of the reaction of Western Europe, one can hardly criticize a backwards country like Russia or even other Asian countries for similar hysteria.

Back to Japan, look at what is happening economically because of the earthquake and its consequences. Before the March 11 earthquake, the Japanese government was talking about finding new sources of revenue to cover the growing needs of the elderly and retired. They knew that the current arrangement, and the debt they expected to require would not be sustainable. They were headed for major difficulties. Now, with a small, but significant part of the country almost completely destroyed and over a hundred thousand evacuees living in shelters with their lives completely disrupted, not to mention the businesses of all kinds that no longer exist, plus the other consequences of the disaster, the Japanese government is being asked, demanded, to do much more. The government is being asked to backstop the damages that the utility company that owns the Fukushima Daiichi power plant in paying damages to the people and companies forced to evacuate from the area immediately around the power plant. (One hopes that there were actual dangers involved and not government hysteria.) The government is intent upon cleaning up the areas destroyed by the tsunami, building temporary housing, and, no doubt taking care of the survivors for some time. Communities across Japan are asking that their nuclear power plants be closed, and that the national government provide compensation for the resulting economic cost. The list of new demands on the Japanese government just keeps growing without any regard for reality.

The government is now asking for a supplemental budget from the Diet to cover their initial expenditures. At the same time, the current government is getting a lot of criticism. It appears that the governmental leaders haven’t spent enough or made sufficient promises.

The Japanese government just released figures that show their economy going into recession earlier this year (meaning output is falling). They expect the decline to continue throughout most of the year. So, the government is spending more, borrowing more, receiving less in taxes (or taking a greater percentage of the national and personal income in new, higher taxes) in a declining economy. They think that the governmental expenditure will help turn the economy around. They have not noticed that governmental expenditures haven’t help much over the last twenty years. No one there actually looks at the results of what the government does. They just make demands.

Japan is the world’s third largest economy. On a per capita basis, it is also a prosperous one (national figures don’t mean much, really). That it is in decline means a great deal internationally. It will hurt the Asian economy. It will hurt everyone. We are seeing again how the world economy, world production, is interconnected.

But one thing that you won’t see internationally from Japan is a government credit default. The problems we see in Europe won’t happen in Japan. Greece, Ireland, Spain, and the others have sold their debt, government debt, to a great extent to non-citizens, mostly foreign banking institutions. If Greece were to default on its debt, the problem would be felt in other countries, and we would have an international banking crisis, as we have had in the recent past.

Almost all of the Japanese debt is owned by its citizens, not by its banks (although I am sure that some is), but by individuals. Much is owned by the elderly. No wonder the elderly are dependent upon the government. They invested heavily in government bonds (the Japanese were, are, great savers) and the government has been repaying them by keeping the interest rate very low, about 1.25%! Japan doesn’t have a lot of price inflation, but it isn’t a cheap place to live. Getting 1.25% on your investment has got to make life very difficult.

When the Japanese government gets into trouble, because of all of the obligations it has, the people who will suffer will be its own citizens. The government will not be able to support them, pay their medical bills, or pay them the interest or principle on their savings. It is going to be a very great tragedy. The March 11 earthquake and tsunami will be relegated to secondary importance (Of course, a nuclear accident, with no deaths from radiation, will always be bigger than any other event. Just ask about Three Mile Island!)

When the U.S. gets to the point where its debt is so large that it can no longer support it, we will go more like Greece, and take the world with us.

The Fraud of Waste and Fraud

“There are widespread misperceptions about the state of the federal budget. A majority of voters incorrectly believes the federal government spends more on defense/foreign aid than it does on Medicare and Social Security (63%). Also, a similar majority (60%) incorrectly believes problems with the federal budget can be fixed by just eliminating waste, fraud and abuse.”

This quotation is from a recent poll.  Read the top of the second page.

There we are. People are believing the politicians, especially the liberals. People are not connecting any legitimate idea of waste to a $1.7T deficit. There is a disconnect. This disconnect is going to get us into bigger trouble than any of the other fears that we have considered. This disconnect means that when the meltdown into depression begins people will again be open to the claim that capitalism is at fault. Potentially, our only safeguard will be that the meltdown will be bigger than the last one and the authorities will not be any more prepared than they were last time. They will not have an organized, planned capability to meet the various challenges that a meltdown in a complex civilization like ours will create.

Please allow me to offer my small support to Yaron Brook. He is absolutely right that the immediate present is the best time we have ever seen to make our point, that capitalism, freedom, egoism, and reason are the correct path to take. We may not have another chance.

It is sometimes a bad sign when someone suggests that their own particular area of interest is the most important. I don’t wish to suggest that other areas, say, health care or the war on terror, are minor or less scary. I merely want to say that if we don’t focus on the debt and the deficit and get that turned around, we won’t have the time or energy to spend on other things. A depression in the U.S. will be very bad because we have so far to fall and we depend upon very complex and highly sophisticated economic interrelationships. Just look at the problems we begin to face when the price of gas goes up some. Think of the problems we might have if the supply of gas is greatly reduced. Just think of the process of getting food into our cities, not to mention medications.

Let me suggest another way of looking at your activities. It seems to me that there are several ways of deciding what to focus on. One, which I would normally think is the best, is to focus on what interests you the most. If your interest, for whatever reason, is running a business, for example, it would be appropriate for you to spend your time and energy to free up business practices.

But, consider this, if there is a tidal wave coming at your shoreline residence, you are risking you life by arguing about business regulation. The deficit and debt issues facing us today and the next few years are the economic equivalent of a tidal wave. It will sweep everything before it. We need to either stop the tidal wave or protect ourselves from it as best we can. Look at what is happening in economies much less developed than our own that are having to face up to their debt. What is bad for them will be worse for us.

On the “Front Page” on JPTV, Yaron Brook and his friends try to emphasize that what is happening with our debt is not just another big deficit, like we have seen in the past. The ObamaDeficit is larger by several orders of magnitude, and projected to become bigger. That is bad enough, until you remember that Obama’s predictions are based upon rosy estimates of the economy. It is a tidal wave.

So what do we need to do? There are two avenues to pursue to achieve a solution to this problem. As with any question of budgeting, there is income and there is spending. Most addressing this issue are focusing on spending, especially the entitlement programs. I don’t want to imply that cutting spending isn’t important, it is. Certainly, much of what Obama has added to the budget can be safely discarded (like his medical programs).

Attacking the entitlement programs is a problem. It isn’t that people, especially younger people, aren’t able to accept cuts in entitlement programs. But you do have to find a way to communicate that you don’t want to kill all the old folks. If we can get people to consider financial sanity, a way can be found to ramp down the entitlement programs with out creating a class of impoverished old people.

What I think would help the most is focusing on getting capitalism working, that is, remove the restrictions and regulations. Kill the mixed economy. A few years ago we went through a phase of semi, sort of, half-assed deregulation. There was actually significant results from just the minor changes we saw. If we can begin building on the importance of letting people have the freedom to act, we can “grow” our way out of our mess. I think that the central driving force of our efforts needs to be: make America capitalistic! In this case, focusing on business regulation will help divert the tidal wave.

Instead of going off in many directions, let’s focus our energy and thought on pushing capitalism and the truth about the nature and impact of the Federal debt.

The Debt and the Republicans

I saw an announcement from the Obama Administration that the Federal Deficit for 2011 would be $1.7T. This morning I see big headlines about a momentous fight in the House over cutting $60B from the next budget. The article called it a massacre and suggested that it was the biggest cut in history! This is absolutely part of the big lie, from all concerned. The Republicans, and everyone else, know that $60B in one years budget is a rounding error. It is meaningless. The American public is being sold another big lie.

Also, historically in these things, these really aren’t cuts, but a reduction in the new spending levels. In other words, making up an example, if the spending on these areas last year was, say, $600B, and the new level is $700B, the actual level, after the great cuts by the Republicans, would be $640B, or still an increase of 6.67%. In typical fashion, the news article does not make it clear what has been “cut”.

What are we to make of BO’s announcement that the deficit will be $1.7? HA! As I noted in my recent post on the debt, last years deficit was announced as $1.7, but in fact the increased debt on the Treasury’s balance sheet was $3.3T. So, two things: First, it is unlikely that the deficit will only be $1/7T. The government will overspend and under collect. Employment will not improve as predicted and Social Security and Medicare will require more cash from the budget. Interest rates will also probably be higher than predicted. The deficit will be much wider than his public statement. Second, the “off the budget” obligations will further balloon the actual debt, which, after all, in reality, is what will soak up any real savings the public accumulates. In spite of all the posturing and back patting, the Republicans will have done nothing to keep us out of a depression. Who will tell them?

Debt and Depression: Our Present and Future

In my last post I tried to be as clear as I could be regarding inflation in the U.S. To reprise: Inflation isn’t here now, even though some prices of important products in our economy are rising. We may get inflation, but don’t get excited about it until it happens (which doesn’t mean that we shouldn’t get excited and angry about actions taken by BO, the Treasury, the Congress, and the Fed that will lead to inflation).

My unhappiness with the inflation hawks is that their constant focus on inflation detracts from other issues. Inflation is not the only bad economic calamity that can afflict us. Right now the increasing level of debt being taken on by the Federal Government is a greater threat. As Yaron Brook has stated, the level of debt the U.S. Federal Government has taken on and will take on will likely result in an economic depression. The consequences will be no better than the results of the current recession or the 20C depression. Our economic and political leaders resist learning from experience. We will experience long-term suffering.

There are two recent bits of information that prompt me to write this post. First, I saw the news release that the Congressional Budget Office expects that Social Security, which is now running a deficit, will continue to do so. That is, Social Security will be a drain on the Federal Budget from now on. It was expected that Social Security would no longer produce a surplus for our Presidents and Congress to play with at some point but not for another few years. Because of the recession, and the very low levels of employment and consequently lower Social Security tax collections, deficits for that “entitlement” program began last year. Add to that the deficits in the Medicare system and you have reached the stage where the major entitlements are drawing on the general fund.

The other piece of information I learned was that the actual federal debt level is significantly higher than the figures that Washington bandies about. The figure they use is high enough, shamefully high, dangerously high. The reputed Treasury Debt, the amount authorized by law, which we will reach shortly, is $14.3T. When you add in bailouts, Fannie Mae, Freddie Mac, student loans and other “off-balance” sheet funding, it becomes $20.173T, which is 44.75% higher. Supposedly, the deficit for the last fiscal year was something like $1T, but when you look at the actual Treasury balance sheet, the obligations of the Treasury grew by $3.3T. In other words, our debt, which is threatening to put us into a severe depression, is growing faster than the politicians will admit. We look more like Greece than Germany.

Looking forward, we see that the spending programs that BO has pushed into law will continue to add piles of debt, that the growth of the numbers of Americans over 65 will require more and more spending (Medicare will be the biggest drain!), that the unfunded entitlement of retired federal workers pensions and medical benefits will add more demand on the federal budget, and there will be more disasters in the economy that the government will feel required to remedy by spending money it doesn’t have.

The damage that this debt exacts is two fold. First, it removes savings from the economy that could have gone to productive activities. We are being deprived of the possibility of improving our lives, or even maintaining our standard of living. When government officials admit that it could be years before employment reaches earlier levels, it is this drain on savings that is really the reason. Second, it will increase the amount of interest payments that the federal budget has to cover. Currently, and for the last few years, the Fed has done all it could to keep interest rates low, very low, often near zero. But the Fed is not omnipotent, although it seems to think that it is all knowing. As the U.S. Federal Government continues to need to sell more and more bonds to cover its obligations, the only way that it will be able to attract more savings will be to raise the interest rate it offers. Even the U.S. Government must compete for money on the market. Since the market is international, neither the Treasury nor the Fed can control the real interest rate that the market will demand. When interest rates go up, the drain and strain on the Federal Budget will be immense. The federal politicians and bureaucrats, who look no further than their own immediate whims and power, will be surprised, and will have no means of acting to counter (although some will want to push for higher levels of inflation, which will make things worse, of course). When interest rates go up, all of those who trusted the government and bought the Treasury Bonds that financed all of the spending, will see their beloved assets fall in (dollar) value. It will be a just reward.

Debt is the threat. Debt is the danger. And we are not focusing on it. We are allowing it to sneak up on us. Wake up and pay attention.

What to do? That is, what is the solution? First, what the politicians and bureaucrats propose isn’t a solution. We will be in worse shape with more laws, more regulations, more spending, and more made-up money by the Fed.

Many focus on the spending and suggest that we should stop spending on Social Security and Medicare, not to mention BO’s massive programs. While we will have to stop the spending, this battle is a very difficult one. Included in the resistance to this idea are all of those who are depending upon those programs. Part of the solution will have to be some way to avoid massive losses of older people.

I think that there are other things to do first. These steps aren’t easy either, in the political sense, but they don’t threaten to destroy people and the results will include the solution to our problems. What do we do? We free the economy. We get rid of regulations and government interference. We get rid of many government employees. I wrote about this before, so I won’t repeat myself. But the point is that with a productive economy, we can clean up the debt and find a way out of the obligations that the government has foolishly undertaken.

To achieve the goal of freeing up the economy to be productive we have to teach our fellow man the truth about capitalism, both its moral worth and its real success. That means we ourselves must know about it. Learn what capitalism is. Learn how it functions. Learn its history. Learn how the economy you live in works. We cannot teach what we do not know. I assume most of you have read and understood “Capitalism: The Unknown Ideal”. If you haven’t, read “The Capitalist Manifesto”. Read Hazlitt and Bastiat.  Read the great Austrian economists, von Mises and his predecessors.  Read “Meltdown” by Thomas Woods. Keep an eye on the debt, the money supply, and the prices you pay. Realize that there is no free market in the United States.  None.  Every market has elements of government controls and interference. Talk to your neighbor and the man in the street. Remind them that capitalism has been attacked and subverted for over a century in the U.S. Spread the word. Capitalism can save us. Only capitalism can save us. The others have tried and failed. Let’s return to our greatness.