Tuesday, August 2, 2011

Not a victory -- just a momentary blip delay on the way to a catastrophe...

So today the U.S. Senate will vote on the bill sent over from the House of Representatives that will raise the debt limit -- supposedly just in the nick of time.  Then it will be on the way to our illustrious President (who would be incapable of managing a Dairy Queen at a profit) for his signature.
Many are hailing this as a victory for the American people.  It supposedly is bipartisan.  It saves the day for America.  Bills will be paid.  Life will go on as normal.  And the Republicans are happy because there are provisions in the bill that mandate much-needed spending cuts.  If they don't get the cuts, automatic spending cuts kick in that cut government programs across the board. 

Now all that sounds good, but there are some reasons that I'm not enthused.  I think we are still losing a great deal.
  1. There is confusion over the subject of tax increases.  The Republicans are saying there aren't any tax increases in the deal.  Obama declares that there are -- in phase 2.  So there is some confusion about that.  Even if there is no increase in estate taxes, corporate taxes, or the individual income tax increase, there is definitely a tax increase.  Let me explain something.  Our representatives are authorizing the immediate printing of $2,400,000,000,000.  Now this is just paper currency.  That means there will be that many more paper dollars in circulation backed by nothing.  That means that many more paper dollars will be out there in the market with about the same amount of Gross Domestic Product (GDP).  For that matter, the rate of growth in Gross Domestic Product needs to be at 3% annually for us to have a healthy economy.  It is currently at 0.4%.  That now officially qualifies us for a recession.  The economy has taken a turn for the worse and we're on the downslide. So our economy is looking like it is going to contract, and now we put more dollars in circulation.  That means only ONE thing -- INFLATION.  Your dollars are now worth less (or "worthless") because all these new fiat currency dollars are being added.  When the government prints a dollar (that it didn't earn), then they get the full value of the dollar.  If they owe a bill for $10 billion, they print $10 billion in new funny money and then pay the bill and the debt is satisfied.  They paid with play money and it worked!   But when they did that, our currency -- which we earned -- becomes worth less.  Their newly printed currency steals its value from our currency.  So the greatest tax we each pay every year is not the income tax.  It is the lost value from our dollars because we continue to let the government live beyond its means.
  2. This deal represents a lack of creativity or even nominal intelligence among our leaders.  Leaders need to be resourceful.  Yet no one thought or suggested an alternative to raising the debt limit.  So let's bring this home.  Pretend you had $2400 worth of bills due next month that you already knew you couldn't pay.  What are your alternatives?  Well, you could borrow money.  But wouldn't that make a bad problem worse?  Wouldn't you just be further in debt with even more bills to pay?  Now assume that you have common sense.  What would you do instead?  You could start with a garage sale.  You could get rid of stuff you don't need or should not have.  You could sell one of the cars.  You could come up with $2400 -- particularly if you felt your life depended on it.  You would not have worsened your situation by borrowing.  And with all the clutter gone, life would have been easier to manage.  Even if you didn't, wouldn't you be a lot closer after you'd exercised resourcefulness and you wouldn't have to borrow as much.  Now let's extrapolate this to the US government.  When we had the huge mortgage crisis several years ago, our insolvent government decided to bail out the bankers.  (Government is actually controlled by bankers so they are the last group to suffer loss.)  The government bought the bad debt of failed mortgages and so the government now holds the real estate title to more than $1,000,000,000,000 of foreclosed real estate.  If there was a thinking, sentient, creative brain in Washington, DC, they could have a monthly auction and auction off $100 billion of this real estate each month.  What would this have done?  This would provide a lot of people some affordable housing.  It would have given Congress time to hammer out a deal that included and implemented real budget cuts before giving any increase in the debt limit.  We would have had from 9-12 months longer to deal with this issue (and then it would have been an election year issue where our representatives knew we could actually remember what they did in November).
  3. The math is bad.  Basically this deal gives Obama $2,400,000,000,000 ($2.4 trillion) NOW.  It requires him to make $2.1 trillion in budget cuts OVER THE NEXT 10 YEARS.  There are numerous problems with this.  (1) Every Congress gets to vote on a budget.  So what this Congress does is irrelevant to future sessions of Congress.  Remember the Gramm-Ruddman act that required the government to live on a balanced budget?  It passed overwhelmingly.  It had the full force of law but was negated by a subsequent Congress.  (2) Obama won't be president in 10 years (thank God).  (I think he may be running for dictator by then.)  So he can just push cuts he doesn't want to make (and he doesn't want nay) off onto a future administration.  (3) In order for automatic budget cuts to not kick in under this present legislation, the government has to come up with $25 billion in cuts in the next 9-12 months.  Think that sounds good?  Then you are bad at math.  Let me break that into number we can actually understand (I've never actually had billions or trillions of dollars, have you?).   Do you remember our last fictional scenario, where you owed $2400 next month and didn't have the money to pay for it?  Let's say I decide to loan you the $2400 (at interest of course).  But I'm worried about your fiscal responsibility so I ask you to produce a monthly budget.  I tell you that I will loan you the $2400 only on the condition that you can lower your monthly budget by $2.50 within the next year.  If you can't do that, then I will be forced to make automatic budget cuts for you.  Do you see how ridiculous that is?  You give up one small mocha frappucino each month and you've done it.  This bill doesn't have real financial teeth in it!.
  4. It was a bad deal because our elected representatives made sure they would not have to deal with this during an election year.  But they needed to have to deal with it during an election year.  Then Americans -- who typically have short-lived memories -- could see what an empty suit Obama is and could put pressure on all those guys for a REAL deal with real cuts.
Bottom line:  This was political posturing and grandstanding at its best.  They will all proclaim themselves heroes and push the problem to the next Congress.  Our credit rating as a nation has already been downgraded by Standard & Poors.  The U.S. will have to pay more interest on bonds in the future to get anyone to buy them.  And $2.4 trillion in new money isn't going to cut it since the government needs $10 trillion over the next 4-6 years just to pay back existing treasury obligations that are coming due.  So here's my advice.  Get rid of your currency.  Empty your bank accounts as much as possible.  Keep only enough to pay bills.  Turn everything else into real money -- something that has intrinsic value -- gold and silver (even if you can only buy one or two coins / month).  Why?  Because inflation is on the way.  The producer price index (more reliable than the consumer price index) already says we have 9.2% inflation.  You may not see it because manufacturers are making packages smaller instead of raising prices.  My wife now pays the same amount for 3 lbs. of frozen tilapia that she used to pay for 4 lbs.  We will have double digit inflation before you know it.  Keep your value in something that will rise with inflation.   Stock up on supplies now.  The train is headed for the chasm and the bridge is out.  The next Great Depression should make the last one look like a cake walk.

Think I'm an alarmist.  Well there is time for an alarm to be sounded when the house is on fire.  Look for another Euro nation to declare bankruptcy.  The problems there should precede our problems here by only a short amount of time.

Remember that you must make God your security instead of making security your God.  May He help us all.

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