Why the Fiscal Cliff Doesn’t Really Matter
I wanted to take a moment to talk about this whole fiscal cliff hooey. I hear people and they are pretty ticked about the outcome. Why? I mean deep down in our soul we know this is wrong. People are mad at the GOP for caving on tax increases. Sure. But is that really it? Do you know something but can't quite verbalize why this thing stinks to high heaven? Let me try to help a little.
Before we can really dive into the 'deal' and more than likely the future 'deals' we need to understand some things that most have forgotten about the last deal.
1. The agreement reached that increases taxes on everyone for FICA and the marginal tax rates on the 400K and up crowd is actually a tax CUT from what was agreed to when they came up with the prior deal last go around. This is important to call out as it relates to rating agencies. So, last time we raised the debt ceiling we committed to the world (those that buy our treasuries) that we are going to stabilize our Debt to GDP ratios. By signing this deal we just broke that promise.
2. The rating agencies gigged us last time based on that deal (that we have now broken). This means that they still owe us a downgrade from last time they never gave us and now they will owe us a NEW downgrade for this monstrosity. More than likely they will wait until the Sequestration agreement (of which we will not do it) and the Debt Ceiling agreement (of which we will raise it).
3. To summarize, our elected officials CREATED this crisis with the last 'deal'. Then when the deal they agreed to came due they welched on every commitment and then went to us patting themselves on the back for saving us from the very deal they created.
4. Why is this important? Well it is important because this deal and the deals that are to come (and by deal I mean folding like a lawn chair) are the information that the world and rating agencies will use to determine if they will buy our debt and if so at what interest rate.
Okay, now that our housecleaning is done let's talk about what this really means. First off the CBO had a projected deficit in 2013 of $977 billion dollars. Over the course of 2012, new spending commitments came up and growth didn't materialize (gee who would have thought?) and now the prediction is somewhere around $1.1 trillion. BUT, that was based on the PRIOR deal. Of course, that's now off the table. It isn't for sure what that means to 2013 yet but it is safe to say that it will at the very least be 1.2 trillion if not more. In addition, their estimates are based on GDP growth that isn't occurring, unemployment that didn't improve and inflation that is outpacing estimates. Yikes.
So what we know for sure is that we will have 1 trillion plus deficits for as long as the eye can see. There is a high likelihood that we will see 2 trillion dollar deficits within 5 years based on the labor force participation rate, disability claims, food stamp claims, unemployment rates, and stagnant economic growth suppressing tax revenues.
This means that there is going to be a TON of new debt that needs to be issued and as a result find homes on balance sheets. Who's going to buy that debt? Who is going to give money to a government at a very low interest rate with expectations about financial reliability when each time they make those commitments they break them? Would you give someone like us a loan? Would you do it for 1.8% interest? (10 year rate on 1/2/13) Why not? Probably because you know that the government would pay you back with printed money right? Why does that matter? There it is. That's the $64,000 question.
Because earning 1.8% over a 10 year period and paying taxes on it doesn't even come close to breaking even with INFLATION.
That's the word we don't talk about at cocktail parties isn't it? INFLATION. So why do we have inflation? Well, let's look at the debt that we just talked about. When the federal government issues 1.2 trillion in new debt next year do they float the rate? Technically Geithner would say they do through the auction window and the FOMC (Federal Open Market Committee). It's the Open Market Committee, how could they not be priced at market rates right? (sarcasm) Currently, the Federal Reserve is the single largest purchaser of US Government debt. How much? It’s not always easy to tell with things happening like 'Twist' as well as the shell games they play with agency bonds and the current account balances with countries we have trade deficits with like China. But most estimates have that number between 70% and 75%.
Let that soak in a minute. The Federal Reserve buys 75% of the debt of the government. Now, the Federal Reserve isn't federal at all. It is a collection of private banks. If you want to know the dark, twisted origins of this terrible entity I highly recommend that you read the Creature From Jekyll Island. It will scare you to death. But we digress. Where does the Federal Reserve get the money to buy that much debt? If you said they create it then you are correct. Another side note, but this seems in direct conflict with Article 1 Section 8 of the US Constitution. When they create this money it means that there are now more dollars in existence. That means for say, a gallon of milk there are now more dollars chasing the same gallon of milk. When that happens, what happens to the price of that gallon of milk? It goes up. The dollars in your wallet buy less tomorrow than they do today. This is inflation. This is the result of the Federal Reserve inflating its balance sheet with debt that has been paid for with money created (unconstitutionally). Let's look at the changes occurring on the balance sheet at the fed.
Why do they buy so much debt? Let's look at that a little more closely. If they Fed decided to not buy all of that debt then someone else would have to buy it. Do you think the rest of the world is interested in 10 year loans to the US at 1.8%? Heck no they aren't. Sure, they'll loan us the money, but not at that rate. They would demand a much higher rate. Some have suggested that the real gap in the 10 year based on market metrics is that it should be selling around 3.70%. That is a BIG gap. Why doesn't the Fed let the government just sell its debt at 3.70%? The answer? At the current rate of debt growth and even with modest interest rates by 2020 we will be looking at 1 trillion in interest expense a year. You let the interest rate unhinge and float and that number could grow significantly. The point being, that in order to run massive debt you must be able to service it at extremely low interest rates. Enter the Fed. At this point I think it is important to point out that in no way are financial markets in the US a free market. The free market is simply a figment of our imagination at this point.
These statements were made during hearings of the House Committee on Banking and Currency, September 30, 1941. US banker and economist, Marriner Eccles, was Chairman of the Federal Reserve Board (1934-48):
Congressman Patman: "How did you get the money to buy those two billion dollars worth of Government securities in 1933?"
Governor Eccles: "Out of the right to issue credit money."
Patman: "And there is nothing behind it, is there, except our Government's credit?"
Eccles: "That is what our money system is. If there were no debts in our money system, there wouldn't be any money."
Congressman Fletcher: "Chairman Eccles, when do you think there is a possibility of returning to a free and open market, instead of this pegged and artificially controlled financial market we now have?"
Governor Eccles: "Never, not in your lifetime or mine.
Now all of the money in existence is increasing and the interest rates are low. So what is happening? Inflation. Now, the BEA (Bureau of Economic Analysis) and the BLS (Bureau of Labor Statistics) will tell us all that there is no inflation. That's simply soma for the uninformed. What you should know about inflation is that it has been restated three times since 1980. Each time the result has been a more palatable and consumable metric for the sheeple. In the current incarnation, the levers they use to manipulate are the exclusion of energy and food and medical costs as well as an 'owner occupied rent' calculation that mutes housing impacts. It's a convoluted model to try and convince you that things really don't cost more when you know that they do. Here is a graphical depiction of the reported CPI's compared to the alternate methods and compared to what a real all-in CPI actually looks like. Do your annual pay increases keep pace?
The result is that we are being taxed. It is a massively regressive tax. It is a hidden tax. It is unspoken in economic circles because the politicians are petrified that the sheep might actually figure out that the joke has been on the little guy for some time now. Let's look at some simple price comparisons in a recent window to illustrate the impact of inflation and the monetization of debt.
On 9/11/2001 an ounce of silver was 4.18. On 9/11/12 it was 33.52. Change of 702%.
On 9/11/2001 an ounce of gold was 271.40. On 9/11/12 it was 1731.00. Change of 538%.
On 9/11/2001 a barrel of crude was 25.03. On 9/11/12 it was 105.28. Change of 321%.
On 9/11/2001 a metric ton of corn was 89.74. On 9/11/12 it was 332.17. Change of 270%.
On 9/11/2001 a metric ton of rice was 173.00. On 9/11/12 it was 577.56. Change of 234%.
On 9/11/2001 US Debt was 5.77tr. On 9/11/12 it was 16.05tr. Change of 178%.
On 9/11/2001 those on food stamps was 17.85M. On 9/11/12 it was 46.7M. Change of 162%.
On 9/11/2001 a gallon of gas was 1.51. On 9/11/12 it was 3.85. Change of 155%.
On 9/11/2001 a pound of cotton was 41.26. On 9/11/12 it was 84.40. Change of 105%.
On 9/11/2001 total unemployed was 6.88M. On 9/11/12 it was 12.5M. Change of 82%.
On 9/11/2001 avg. hourly wage (private) was 14.70. On 9/11/12 it was 19.61. Change of 33%.
On 9/11/2001 the S&P 500 was 1092.54. On 9/11/12 it was 1429.08. Change of 31%.
On 9/11/2001 US dollar index exchange was 115. On 9/11/12 it was 80.39. Change of (30%).
On 9/11/2001 the 10 year note was 4.84. On 9/11/12 it was 1.59. Change of (67%.)
On 9/11/2001 Govt spending as % of GDP was 33.05%. On 9/11/12 it was 40.27%. Change of 22%.
On 9/11/2001 All In Cumulative Inflation Calculation to 9/11/12 up 158%
On 9/11/2001 BLS/BEA Calculation Reported to Public to 9/11/12 up 29%
This is just in the last decade. It is certainly shocking, but not nearly as much as how shocking the erosion of the purchasing power of the dollar by the Fed has been since it was created in 1913. This chart below shows you that a dollar today will buy what 4 cents would by in 1913; a 96% devaluation of the dollar over 100 years.
"Inflation can be pursued only so long as the public still does not believe it will continue. Once the people generally realize that the inflation will be continued on and on and that the value of the monetary unit will decline more and more, then the fate of the money is sealed. Only the belief, that the inflation will come to a stop, maintains the value of the notes." - Ludwig von Mises
So there it is. The reason they made this ‘deal’ and the reason they will fold on every single other deal to ever come down the pike is that they can simply print money. They will NEVER miss a payment on social security or Medicare or Medicaid or on a bond or to a contractor. NEVER. They simply can’t run out of money. They won’t even raise taxes. Not really anyway. They'll never do it in a meaningful way if only to keep the sheep arguing among themselves. How entertaining it must be to them to see us all fighting amongst ourselves over who is going to 'pay for things'. Ha! They put on this Kabuki Theater and the whole while it is each and every one of us that pays. And boy do we pay. We will never really retire due to the fact that the value of what we save is pillaged to pay for the handouts and votes of the now generation. We can never get ahead in a meaningful way because the specter of inflation is relentlessly pursuing us. We will work out our days as wage slaves to the state. So too, will our children. If we are lucky, we'll never realize it. We'll go about our lives in bliss thinking that we have some sort of economic self determination and that the right group of politicians can set things straight. For the rest of us, we will go through life wondering how to remove the shackles while the government closes every exit. (See the international banking laws, you can't even expatriate any longer). More than likely we'll realize that we can't escape the tentacles of the beast and will look for moments the rest of our lives to spite it if only in tiny ways.
This topic is certainly a very complicated topic. In order to create a digestible though, I had to exclude some other concepts that allow this mechanism to work. Most notably are the 'Dollar Hegemony' and the 'Petro-Dollar'. I'm sure many may read this article and think that the rest of the world can certainly see the game we are playing, why don't they react? This is a great question, and one that needs exploration in a dollar hegemony discussion. For the purpose of this story, let's just say that anyone who threatens this mechanism (say by challenging the reserve status of the dollar) ends up dead. The military might of the US is almost exclusively used to preserve and protect the dollar hegemony. The oath you take? It’s merely symbolic. Again this is a much deeper conversation to be had, but I felt that not bringing this up at some point would imply that the mechanisms discussed in this article were more vulnerable to change than they actually are and thus the tenor of my summary.