Skip to comments.How To Keep A Damaged Financial And Economic System Afloat?
Posted on 05/15/2011 8:41:29 PM PDT by blam
How To Keep A Damaged Financial And Economic System Afloat?
Interest-Rates / Credit Crisis 2011
May 15, 2011 - 12:38 PM
By: Bob Chapman
The elitists who run America from behind the scenes have serious problems in trying to keep a badly damaged financial and economic system afloat. Ironically, these same characters are the ones responsible for the system and the condition that it is in today.
It is not only confined to the US, but it prevails in England, Europe and other countries as well. Central bankers are all in constant touch with each other to employ tactics that will extend the current system in the hope that something they are doing will turn into at least a temporary solution. The US maintains virtually zero interest rates and floods the economy with money and credit.
The European Central Bank, the ECB, raises interest rates, but continues injecting money and credit into the system. In Europe the higher interest rates are supposed to offset the inflation caused by the increase in money and credit.
On the short term it isnt going to work. On the long term much higher rates will work, if the increase in money and credit is lowered or stopped. The unpalatable problem with that is this medicine will collapse their economies.
All these parties should have purged the system in the early 1990s when they had the chance, or just three years ago, when they had another chance to do so. The result is the inflation we see today, 6% in Europe, 12% in Britain and 10% in the US. The path these bankers have laid out will lead to hyperinflation and ultimately to deflationary depression.
The approaches employed by both the US and Europe wont work and the elitists know they wont work. Historically these conditions are nothing new. We have seen them over and over again. More often the solution is to have another war, which can take the blame for the monetary, fiscal and economic profligacy and at the same time relieve the world of copious useless eaters.
Real inflation is now at about 10% based on earlier formulas, as opposed to present official government doctored figures. These are close to the numbers of the 1980s. Officially those numbers were 10%, but we were there and the numbers were 14%. We expect real inflation of 14% or more by the end of the year as QE1 and stimulus 1 effects play havoc with consumer purchasing power.
Presently the PPI, the Producer Price Index, is 10% and that same figure applies to the cost of imported goods as well. As long as interest rates remain at zero and the creation of money and credit continues, inflation will climb ever higher. The Fed tells us that there will be no change in rates until after September. The Fed just observed the ECB raising rates.
The next rise was set for June and we have already been told that wont happen. Except for Germany all of the EU, not just the euro zone, is faltering. Europe and the US may not see higher rates until inflation exceeds 25% next year. As long as interest rates remain below the real rate of inflation little will be accomplished to bring inflation under control.
These numbers are all within the confines of QE1 and QE2 and stimulus 1 & 2. We see no way to avoid QE3. Who will buy the Treasurys debt? That being the case inflation three to four years out could reach 50%.
Needless to say, rates would have to exceed 50% to slow down the economy and that would eventually entail a deflationary depression.
During such a process as rates reached a peak, commodity prices would falter and begin to reverse. Gold and silver would lose their assisting inflationary impetus, and their course would depend on the strength of currencies. Both could strongly represent the only real money as they have in the past.
We wont know the final outcome until we get there, because many other factors could enter the equation, such as world war.
Higher oil and food prices cannot go on indefinitely nor can the creation of money and credit. Much higher prices would collapse demand and higher rates might not be needed. We are sure of one thing world trade will diminish as all this goes forward and we believe it is only a matter of time before the un-level playing field of trade prompts congressional action to institute tariffs on goods and services.
China is a major exporter to the US, but they have tariffs. As an example, they have a 30% to 50% advantage in the sale of luxury boats. That is certainly deliberate and such action can only invite retaliation eventually. China has had it all their way for 15 years due to US debt problems. Now that China is reducing its US dollar-denominated position they have lost a great deal of leverage. If they indiscriminately dump dollars they will shoot themselves in the foot.
China already has very strong inflation. Raising bank reserves and interest rates have yet to arrest inflation, but at the same time such actions strengthen the yuan, Chinas external currency. China also has its problems. They have made many of the same mistakes that the US and Europe have made. China, even though they are deeply involved in the use of commodities, will become victims of their higher prices that will be passed on in the form of inflation and higher export prices.
China will as well become a major exporter of inflation. The question then arises, will commodities rise too quickly and will they collapse, which would stem inflation? The answer is we dont know. If prices rise at a moderate pace that might not happen. We wont know until we get there. As you should know economics is not an exact science, it is an art form.
The US then has the issue of 22% unemployment, much of which consists of permanently unemployable and discouraged workers who are existing on welfare of one kind or another. We have lost nine million jobs over the past 11 years to free trade, globalization, offshoring and outsourcing. Many of those companies and jobs would return to America.
It is not a cure-all, but it would certainly help. In many instances time has raced ahead of many of the unemployed and their skills are no longer in demand, or technology has left them behind.
The evolutionary process has been interrupted deliberately by shipping some of the best jobs overseas for profit for transnational conglomerates, who pay no taxes on those profits and destroy the structure of manufacturing and services.
Wages are increasing in baby steps as price inflation rages at 10%. Except in certain areas in certain countries inflation is high in most countries and very high in some, like the UK and the US. The Fed says such inflation is temporary. Three years ago it was 14%. Inflation fell to 6% and now at 10% it is climbing to 14% by yearend and that is only the effect of QE1 and stimulus 1.
Next year well see the inflation of QE2 and stimulus 2 taking it to 25% to 30%. A QE3 could take inflation to 50%. What do workers do then - starve while Wall Street and banking scoop up billion dollar bonuses?
Purchasing power will not expand to augment these conditions. The government and banking will not be unhappy as debt will be repaid with deeply depreciated dollars as those dollars plunge in value not only versus other currencies, but more importantly versus gold and silver. Keynesians live in cloud coo-coo land.
Purchasing power will not expand and commodities have not and will not increase in cost at a moderate rate, but at an exponential rate. We could very well be looking at another Weimar experience, only time will tell. To think that official inflation will peak at 10% is totally irresponsible. We are already at 10% via the 1980 formula.
As a result of massive debt there is a weak dollar. A reflection of that is the threat that over the next two years the US could lose its AAA rating. S&P says there is a 1/3 chance that theyll lower the rating after the next election.
The collusion between S&P, Washington, banking and Wall Street is simply criminal. This is the same S&P that was never indicted for bond fraud regarding the false ratings they put on mortgage securities.
The answer from Treasurys Mr. Geithner as he spoke at the Council on Foreign Relation, CFR, was that there was no risk of downgrading. He has instructed congressional leaders to bring down the budget deficit and set it on a declining path. The problem is that wont happen until 2015, three and a half years from now. Most Americans and most investors worldwide didnt read or hear about what Mr. Geithner had to say because little is reported to the outside world of what goes on in the inner sanctum of the nefarious CFR.
Mr. Geithner, Our policy has been and will always be for a strong dollar that is in the best interest of America. He said, we will never weaken our currency to gain economic advantage at the expense of our trading partners. Of course that is not true, but on the other hand other nations, since WWII have all deliberately depreciated their currencies to gain economic and export advantage.
The US never said much regarding such cheating until recently regarding China. The cheaters bought the USs massive debt so it tended to be an even swap. In recent years it has been secret policy to force the dollar lower. This is the Orwellian world we live in.
All nations are equal, but some are more equal than others. This is the stamp of realization that government has become dictatorial socialism. The Fed is supposed to have a policy of stability and maximum employment. All the Fed does is save the financial sector from insolvency and purchase government debt with money created out of thin air, unemployment is still 22% and inflation is 10%. That doesnt sound like a successful policy to us.
Stability has proved elusive with oil up 23% and the CRB commodity index up almost 9%. A good part of higher prices for petroleum products has been a lower dollar, which has fallen more than 7% as of late.
This is a reflection of the corporate fascist model, which unfortunately is practiced in most every nation today. Government is married to corporations and all policy serves those corporate interests. The crumbs are thrown to the people. All in that realm are too big to fail.
Thus, the tightening noose of totalitarianism engulfs the people as you are now seeing in the US. This control planning gives Wall Street and banking a big advantage in competing with the public. They do not use inside information; they create it. That is how brokers can go three months without losing money in trading. They know what is going on inside, others do not.
These interests own 95% of Congress, so corporations have stimulus programs on demand. Then there are the sweetheart loans from the Fed to the banks, and the purchase of toxic waste mortgage bonds from these lending institutions. This process had led to instability and massive inflation and will continue to do so.
Many think Wall Street and banking depend upon government. The truth is that they control government. They own the Fed and the Treasury and policy is what they say it will be. The victims are small and medium sized businesses and the public.
The public generally knows what is going on, but doesnt know what to do about it. Politicians believe government spending is their entitlement and part of their reelection process along with bribes - that is campaign contributions, to return them to Congress where they believe is where they belong. Thus, in America there will be little austerity and light tax increases, as we close in on the next presidential election.
The short-term government debt extension has to be at least $2.2 trillion to fund basic necessities by debt government. The Republicans want $300 billion cut from the Budget. Those decisions are to be made in July.
The Federal Reserve continues to strive to gain or to keep the confidence of the average American. That is not easy to do when Mr. Bernanke has to tell consumers that the official government inflation is 1.9%, when they know it is really 10%. Everyone shops so they know what is going on. This is far from price stability. This past month U6 unemployment rose back to 15.9% from 15.7%. That puts real unemployment at 22.2% if you eliminate the birth/death ratio. These both are Fed mandates and the fed has failed miserably in supplying the American public with policies that will bring about stability and growing employment.
Faith in the system has tenuously been maintained by creating a colossal amount of money and credit. First they were injected into the financial sector and then used to support the Treasury market. Such usage may have kept the financial system from failure, but it has done little to help Americans.
As a result perhaps 60% of the people are hoping the Fed can hold it all together. The other 40% are far more skeptical and most believe the system is in serious trouble. The public is tired of the subterfuge and wants much better performance. Little do they realize the Fed is trapped. Perpetual creation of money and credit is the only avenue left open to them.
That is why they have to support the financial sector, fund the Treasury and keep the stock market afloat, while suppressing commodity, gold and silver prices.
We dont see higher official interest rates for at least a year and probably much longer. As a result of QE3, or whatever it will be called, we see an increase in money and credit of at least $1.5 trillion and by perhaps as much as $2.5 trillion by June 2012. Not only will 80% of Treasuries and Agencies have to be funded, but so will the economy. We see no help coming from Congress, which hopes to cut costs. The last two sets of stimulus coming from Congress were $850 billion and $862 billion.
As a result of such programs the USDX shows an 8% fall in the dollar this year. We believe that is somewhat misleading because we believe that the US dollar was deliberately allowed or forced to go lower to provide a higher euro, as a buffer for the possible default of Greece.
That doesnt mean the dollar is not headed lower, it is. All that monetized money and credit is coming home to roost in the form of monetization and much higher inflation. Most say they dont know what will happen next, we do. The Fed will print until it cannot anymore. We will go to hyperinflation and then to the worst deflationary depression in the last 300 years.
I have no interest in keeping anything afloat. The current system is bad, immoral, and it has failed. I’d like it to crash — hard, so that we can begin to rebuild. I see deaths in the hundreds of millions in the next decade or so, and I see any effort to delay the inevitable as simply stupid. It’s coming, so let it come.
It is possible to get an economy back to good fundamentals in slo-no pain. However, it takes longer and costs more to do it.
It’s like paying minimal balances on your credit cards.
But what is the plan of action? In my humble opinion, we need to do the following:
1. Every government agency on the Federal, state and local level should be aggressively audited to look for bureaucratic overlap and agency size bloat and use the audit results to cut the size of government 30% now, with a goal of possibly as high at 70% within 4-5 years. For example, we should merge Social Security, Medicare and other national social programs into a singular Department of Social Services, which means a single-point access for all social services and eliminating a HUGE amount of bureaucracy, saving potentially up to US$500 BILLION per year in governmental costs at the Federal level.
2. Our income tax system needs to head towards the dustbin of history. We need to implement the Steve Forbes flat income tax NOW, and start a transition process that four years from now will repeal the 16th Amendment and phase out the income tax in favor of a national 28% consumption tax on new production goods and services, where 21% goes to the Federal government and 7% goes to the state at the point of purchase--essentially a modified version of the FairTax proposal that replaces income taxation at both Federal and state levels. This means it would encourage American residents to save and invest in the USA completely tax-free.
3. Our financial sector needs to be severely reigned in, given that it was the shenanigans of Wall Street that caused the 1929 and 2008 stock market crashes. The financial sector should operate like this:
a. Require real liquidity backing to trade in hedge funds, derivatives, credit default swaps, etc. or ban them outright as financially too risky.
b. Increase the minimum margin requirements for trading in commodities and stock futures to 20%, with 30% for strategically important items like crude oil, certain petroleum products (unleaded gasoline, diesel fuel and natural gas), certain foodstuffs (corn, oats, rice, soybeans and wheat), certain industrial metals (aluminum, copper, iron, nickel and titanium especially) and precious metals (gold, silver, platinum and palladium). Also, require that the buyer on margin must take delivery on 40% of the product.
c. Re-impose the 1933 Glass-Steagall Act to protect bank assets from the ups and downs of the equities market.
d. Revise the Sarbanes-Oxley Act to make it easier to do corporate initial public offerings (IPO's).
4. We need to start a decade-long process to phase out the Federal Reserve Note fiat currency and replace it with a new asset-backed US dollar, one that has the backing of gold, silver, platinum, palladium, copper and nickel (the most common metals used for coins and bullion blocks used in monetary transactions). An asset-based currency will far less likely lose value, as history has shown.
5. As part of the tax reform I mentioned earlier, this will allow private citizens to create their own financial "nest eggs" for retirement and/or medical bills. This will allow American residents to be weaned off dependence on Social Security and Medicare, which will allow both programs to be downsized in future years, dramatically cutting the cost of government.
6. Create a single national standard for environmental regulation, especially in terms of motor fuel mixes. For example, this will allow oil refineries anywhere in the USA to ship refined motor fuels anywhere in the country, saving many billions in production costs.
7. Repeal Obamacare and replace it with a new, privately-based medical insurance system where insurance companies can sell medical insurance policies over state lines on a regional basis, which will guarantee real price competition for medical plans in essentially every state. Also, impose tort reform for the medical industry, especially requiring the loser of the malpractice case to pay for all court costs; this would immediately cull all the frivolous lawsuits and keep lawsuits that have real merit like proven defective medications.
Implement this seven-point plan and our economy will be essentially booming within one year after the passage of these reforms.
My solution? Make Congress pay for it. Personally.
And if they can't...?
Debtor's prison! (Still Constitutional according to the 13th Amendment)
Those are brilliant ideas and solutions!
If the US dollar was not the world reserve currency, hyperinflation would have occur like Argentina, Zimbawe and Serbia. Problem is 70 percent of the world transactions is done in US dollars and there is no alternative. Euro is unstable, Yen is moribund and Chinese Yuan is not ready for international role. Instead I see the Feds do QE2 off, then wait and see how the US economy fare. Despite high unemployment, US corporations have made profits and will it be sufficient to take up the slack as the QE2 funds get used up and its policy affects wear off by fall 2011. Feds may embark on a QE on and off policy as the economy goes from gliding to faltering and rising cycle. It essentially is a slower tempo to inflate the US out of its huge debts.
In the meantime will the US gov make the necessary spending cuts to reduce the national deficit? I don’t think so.
In the meantime other countries may be making local arrangements to use alternative currency in lieu of the dollar because they know that the US is trying to inflate their way out of debt. The world will shed the dollar slowly or take up to five years studying and planning for an alternative. Either way the American middle class will see their buying power shrink as the dollar become less and less valuable.
Lurking in the background that can cause hyperinflation and collapse of the US dollar is a Black Swan event.
IMHO average Americans should maintain at least six months (more the better) worth of food and definitely 10 percent of their asset in precious metals in case hyperinflation hits. Historically it takes up to six months before the gov is forced to reset the currency. People with precious metals can exchange it for more new paper currency and their food supply will feed their families during the six months of shortages and price rises.
In addition, have a backup plan that is based on the 3 G’s, guns, gold and a getaway plan.
What we need to do is this:
1. Cut the deficit. It needs to be under $500B next year, and running surpluses within 4 years.
2. Complete regulatory reform. Especially in environmental law, but generally across the board. Business interests might be on equal footing with regulatory goals, and the courts and regulatory agencies limited as well as greatly reducing the RICO type activities our special interest groups in shaping regulation.
3. The tax code must be simplified and flattened, and also weighted in favor of new business startups, expansion, and small business. I think some type of national sales tax should be enacted.
4. The fed needs to quit printing money and giving it to banks and brokerages. Severely tighten Fannie and Freddie rules so we don’t restart the junk mortgage conduit.
5. Radical reform of all welfare programs to get rid of fraud and waste.
6. Ensure secure and reliable energy supplies with domestic drilling and exploration with favor given to extraction, refining and selling our oil in the U.S.
There is no magic here. All it takes is political will.
In fact I have no doubt we'll decline to pay the interest on that debt one day and outright default.
There is no will for it. Anywhere.
Great minds. :-D There was only one post when I started, it took me awhile to think thru so I didn’t cheat. You picked up some details I missed though.
Americans are spending massive amounts of borrowed money.
The money is supporting a significant percentage of Americans; perhaps 25%.
ANYTHING which reverses the borrowings will SIGNIFICANTLY impact the standards of living of all Americans, especially the 24% which are most directly being supported.
The economy overall would be severely impacted by the sudden decline in the prospects of 25% of our population if the borrowing ended. The stock market would plummet.
Based on the above reasoning, our borrowings CANNOT be significantly curtailed. The alternative is exactly what we see happening; the government is printing money to loan to itself and inflation, which is at 10%, is climbing rapidly. Hyperinflation is virtually a certainty with the purchasing power of savings, investments, and wages due for dramatic declines.
There will be those who maintain their wealth by purchasing assets with lasting value. It will be deemed "unfair" for them to have profited and their assets will be taxed to insure that they bear a share of the burden.
The rapid decline of the standard of living in the U.S. is not a pretty picture but it is exactly what happens to individuals who live beyond their means.
I think you are going to get your wish because this train is too far down the tracks to stop now. I hate to say it but I’m also thinking we just need to face the collapse and get it over with. I hope everyone is getting a year’s worth of food stored up and the means to protect it. Its going to be a very rough ride.
Yeah....and the "Trivia Quizz Game" for Economics has 400 questions....
and 1,000 answers.
Didn't I read that 41% of the money the government is spending today is borried?
"Based on the above reasoning, our borrowings CANNOT be significantly curtailed. The alternative is exactly what we see happening; the government is printing money to loan to itself and inflation, which is at 10%, is climbing rapidly. Hyperinflation is virtually a certainty with the purchasing power of savings, investments, and wages due for dramatic declines."
Someone else called this a 'liquidity trap.'
"There will be those who maintain their wealth by purchasing assets with lasting value. It will be deemed "unfair" for them to have profited and their assets will be taxed to insure that they bear a share of the burden."
My son and others that I know have invested heavily in real estate and I worry that these 'visible' assets will be confisticated and re-distributed....I also worry that at that point many Americans will be suffering so much that they will agree with punishing the 'greedy' and support the confistications.
That's how I used to think, but eventually came to realize that it is more appropriate for the American people to feel this pain. After all, it's the American people who elected these buffoons. :(