The debt debacle and the destruction of U.S. dollar savings now underway
A near-worthless dollar is a real possibility -- unless drastic steps are taken
Martin Hutchinson comments:
Fiscally, it is now clear that the United States’ record has been uniquely profligate. According to IMF figures, the U.S. bank bailout has cost only 3.4% of GDP, compared with Germany’s 10.7% of GDP, yet the U.S. budget deficit for calendar 2011 is estimated at 10.9% of GDP compared to Germany’s 2.3%. (Given that the principal asset problem lay in U.S. housing, and that Germany had no comparable housing bubble, it can also be concluded that German banks were uniquely stupid!)
Outside the Civil War and World War II, the United States has never run deficits of anything like this size. The 1979-82 recession was comparable to this one in length and severity, yet the budget deficit peaked at 6.3% of GDP in 1983, by which time the U.S. economy was growing rapidly.
U.S. monetary policy has however been even more extreme than fiscal policy. The zero Federal Funds rate, prolonged now for 2½ years, is not as negative in real terms as short term rates became on a number of occasions in the 1970s. Yet the psychological effect of a zero nominal interest rate is incalculable. It prevents savers from receiving any return on their money, unlike in the 1970s when their nominal returns were quite substantial.
You can argue all you like that the more negative real returns of the 1970s represented easier money, yet the effect on savers of receiving no return on their savings, or on borrowers of having to pay almost nothing for their money is huge. Savings are depressed as simple folk give up altogether...
The effects of ultra-easy money are everywhere. Notoriously, it has reduced the U.S. savings rate close to zero, while shrinking capital cost differentials between the U.S. and emerging markets, thus effectively de-capitalizing the U.S. economy.
At this point, it is becoming clear that the period of “debt deflation” which Reinhart and Rogoff forecast would be needed before the U.S. and global economies could expand again on a healthy basis has been nothing of the kind.
Rather than deflation, we are currently experiencing a rapid increase in inflation. Each month’s statistics show an acceleration in the pace of inflation. Producer prices have been increasing at an annual rate of 10.9% over the last six months, which suggests pretty strongly that we shall soon see a similar rate of increase in consumer price statistics. However this time, unlike in the gentlemanly 1970s, the excessive expansionism of fiscal and monetary policy will prevent inflation from being halted at or just above the 10% level, but will instead produce inflation rates much higher than that.
In today’s world economy, the losers from an unexpected burst of inflation are not primarily the banks – fortunately for the world’s taxpayers, who would have to bail them out again. Instead the losers are the major investors in dollar debt – hedge funds, Middle Eastern potentates and Asian central banks. There could not be an economically less damaging collection of losers – except that Middle Eastern and Asian losers who have been scammed through wild dollar inflation and currency depreciation will find some doubtless unpleasant way of obtaining their revenge.
The blissful phase in which interest rates in the U.S. and elsewhere are far below the inflation rate will not however be long-lived, although doubtless a desperate Bernanke and his hangers-on will try and prolong it as far as possible. At some point, probably around the time reported inflation passes 20% per annum, the Treasury bond markets, the politicians and the public as a whole will panic, seeing the possibility of a Weimar-style collapse.
If this happens at an inconvenient point in the 2012 electoral cycle (or if the present incumbents are encouraged by unexpected electoral victory) little will be done and hyperinflation will set in. That would solve the debt problem, all right, but wipe out the U.S. capital base altogether.
Since the United States is, like Australia, a lucky country, it is however more probable than not that steps will be taken to avoid this ghastly fate. They will involve a Federal Funds rate that is far above the rapidly accelerating level of inflation – say 50% -- and long-term bond rates also above the inflation rate, at about 25% or so. Any benefit the U.S. government and individual borrowers had gained from the preceding inflation would be quickly wiped out, except for those thrifty souls who had prudently taken out fixed rate mortgages.
The U.S. government would be forced to cut back spending not by a third, as is currently necessary, but by more than half, financing the remaining deficit offshore in yen, renminbi and Singapore dollars, the currencies of the thrifty and provident Asians. The squeals of the electorate subjected to this usurious brutality would be deafening, but they would be drowned fairly quickly by the roar of job creation, as desperate companies scrambled to sell their cripplingly costly capital assets and reinvest in suddenly cheaper labor.
In the long run, the United States will probably arrive at the place predicted by Reinhart and Rogoff: a long-delayed recovery, with living standards depressed by the costs of eliminating debt. However it will have chosen a bizarre and excessively painful way of getting there.
Righteous Indignation: Andrew Breitbart is out to save the world (and he just might)
You won’t find too many people who are indifferent toward Andrew Breitbart. But love him or hate him, you can’t ignore him. With his ever-growing collection of “Big” websites (Big Government, Big Hollywood, Big Journalism and Big Peace so far), Andrew has redefined how the political right views and uses the Internet. He makes no apologies for his “in your face” style, nor should he. That style has won him many victories and many enemies. He seems to occupy the time of a disproportionate number of left-wingers, including many employees of the ultra-left-wing censorship factory called Media Matters. Those “senior fellows” are about to have their weekends ruined as Breitbart moves from the virtual world to the book world with today’s release of Righteous Indignation: Excuse Me While I Save the World (2011 Grand Central Publishing).
Righteous is three books in one, each self-contained. Together, they weave a narrative that will remind many readers of their own lives. Even if you don’t share all of Andrew’s political beliefs, you will find yourself identifying with at least some of his story and conclusions. The book is part biography, part history lesson, and part manifesto, and it flows with clarity of purpose from one page to the next. It subtly draws you into a narrative, strung through the whole book, where he meticulously makes the case against the media and pop culture, which, he argues, help spread and normalize the liberal agenda. He also explains how to combat that agenda.
The first third of the book reads like a biography, but with a purpose. He writes about his first foray into the Internet, a place that would eventually become his home, in a way most of us who were late adapters missed. He touches on his discovery of Matt Drudge and his working relationship with a then-conservative firebrand named Arianna Huffington. But “touches” is the right word — both of those relationships deserve a book of their own, but he has a different purpose in Righteous, and he doesn’t get distracted from it.
The second part of the book is a history lesson on the progressive/liberal movement in America. It’s not nearly as detailed as Jonah Goldberg’s amazing Liberal Fascism, but it doesn’t need to be, and doesn’t aspire to be. This isn’t a history book; it has a different mission.
Nevertheless, this section plainly and calmly lays out the basic facts of how the progressive left-wing agenda first came to these shores with the help of many establishment people such as the vaunted Edward R. Murrow. Breitbart tells the history of how the Frankfurt School spread their radical ideals throughout the country.
But Andrew’s real praise is reserved for radical Saul Alinsky. Breitbart loathes Alinsky’s ends, but the genius of his means is hard to dispute. The story of how this Chicago radical took the dry teachings of the Frankfurt School elites and sold it to the masses is often told as a cautionary tale, but Breitbart sees it as an opportunity, which leads perfectly to the final third of the book.
The last part of the book reads like a manifesto, a call to arms. So much of establishment Washington, and more specifically the conservative movement, is predicated on niceties. This “go along to get along” is perfect if all you want to do is get along. Andrew Breitbart does not want to get along, he wants to win.
The manifesto section stops short of inspiring the reader to pick up a pitchfork and a torch, but just barely. What it does do is inspire those of us who have been afraid to speak out about our deeply held beliefs for fear of rejection or attack. Breitbart lays it on the table. “It is not just a political war, it is a cultural war, and our audacious goal is to change the big narrative,” he writes.
Righteous isn’t meant to simply inform; it’s meant to inspire. Andrew tells the story of his first appearance on “Real Time with Bill Maher.” He thought he’d done well, until he started to hear from friends who wondered why he hadn’t stood up for his beliefs. He was much more assertive the next time he appeared on Maher’s show. Passivity only leads to appeasement. Sharp elbows are needed if victory is truly your goal.
Of all the things Righteous Indignation does, perhaps its most important function is to pull back the curtain on the unholy alliance between all the cultural and media institutions and the left-wing industrial complex and expose how they fit together like puzzle pieces to advance an agenda. If you trusted the media or the entertainment industry before reading this book, your eyes will be opened. If you didn’t, you will know you are not alone.
Sarah Palin rocks Madison
She was feisty. She was bold. And she was gutsy. At a Tea Party rally in Madison, Wis., on Saturday, Sarah Palin pulled no punches.
The former Alaska governor and 2008 vice-presidential candidate credited the Tea Party with winning “an electoral victory of historic proportions last November.” She praised Scott Walker’s efforts toward fiscal discipline. She stood up to the GOP establishment. And she had a strong message for Barack Obama as we approach 2012: “Mr. President, game on!”
Palin, who stems from “a family of schoolteachers,” reached out to Wisconsin’s union members: “I’m here today as a patriot, as a taxpayer, as a former union member, and as the wife of a union member … A pension is a promise that must be kept. Now your Governor, Scott Walker, understands this. He understands that states must be solvent in order to keep their promises. And that’s what he’s trying to do. He’s not trying to hurt union members. Hey, folks — he’s trying to save your jobs and your pensions.”
She talked tough with respect to the watered-down budget compromise reached by President Obama, John Boehner, and Harry Reid, affirming, “That is not courage. That’s capitulation.” She added, “Now there is a lesson here — in the Beltway politico, something that they need to understand — the lesson comes from here in Madison. So, our lesson is to the GOP establishment first … if you stand on the platform, if you stand by your pledges, we will stand with you. We will fight with you, GOP. We have your back. Together we will win because America will win.”
“We didn’t elect you just to re-arrange the deck chairs on a sinking Titanic,” Palin continued. “We didn’t elect you just to stand back and watch Obama redistribute those deck chairs. What we need is for you to stand up, GOP, and fight.” She added, “Maybe I should ask some of the Badger women’s hockey team — those champions — maybe I should ask them if we should be suggesting to GOP leaders, they need to learn how to fight like a girl!”
Palin called out President Obama on his unsuccessful stimulus, big-government promoting SOTU address, and proclivity toward ignoring the will of the people via Obamacare, reckless spending, and proposals for tax increases on the middle class and job creators. She challenged his tendency to “apologize for America while you bow and kowtow to our enemies and you snub our allies like Israel,” as well as the manner in which “you [Barack Obama] cut off oil development here and then you hypocritically praise foreign countries for their drilling.”
“We the people, we rose up, and we decisively rejected the Left’s big-government agenda,” Palin asserted. “We don’t want it. We can’t afford it. And we are unwilling to pay for it.”
Palin’s distinctive humor emerged through such statements as “We’re flat broke, but he [Barack Obama] thinks these solar shingles and really fast trains will magically save us” and “Win the Future? WTF is about right.”
Debt agency cuts US outlook to “negative”: "The Standard & Poor’s credit rating service Monday downgraded the U.S. sovereign long-term national debt from 'stable' to 'negative,' citing the failure of Congress to agree on a plan to 'reverse recent fiscal deterioration or address longer-term fiscal pressures.'"
NATO short on bombs, planes for Libya war: "Less than a month into the Libyan conflict, NATO is running short of precision bombs, highlighting the limitations of Britain, France and other European countries in sustaining even a relatively small military action over an extended period of time, according to senior NATO and U.S. officials. The shortage of European munitions, along with the limited number of aircraft available, has raised doubts among some officials about whether the United States can continue to avoid returning to the air campaign if Libyan leader Moammar Gadhafi hangs onto power for several more months."
Finland: Election could derail bailouts in Europe: "A huge surge in support for a Finnish nationalist party that opposes eurozone bailouts is complicating Europe’s plans to rescue Portugal and other debt-ridden economies. The sharp rise of the True Finns in Sunday’s nation election represents a watershed moment in Finnish politics, which have traditionally been dominated by the Social Democrats, the Center Party and the conservative National Coalition party."
TSA security looks at people who complain about … TSA security: "Arrogant complaining about airport security is one indicator TSA officers consider when looking for possible criminals and terrorists,when combined with other behavioral indicators, it could result in a traveler facing additional scrutiny."
Ryan’s way is the better way: "Medicare cannot simply continue to promise paying for everything for everyone when it doesn't have the money to do so. The question isn't whether future seniors will have to pay more or get less. It is whether those choices will be imposed on them from above or whether they will be empowered to make those decisions for themselves."
Public safety hypocrisy: "South Carolina is up against an $800 million budget shortage these days. State lawmakers there need to raise more cash. So they cooked up a bright idea to get it from small time speeders, caught driving less than 10 mph over the limits, who want to avoid DMV points on their drivers’ licenses. Here’s how it works: A low-level speeder would be pulled over by the cops and given the option of paying a normal $15 to $25 fine, to be reported to DMV for the assessment of points; or a $150 fine, which is 10 times the current minimum, but no report to the DMV, and no assessment of points."
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