The amazing thing about government is that they can solve all of our problems and give us all what we need. Step back one step and think about that. If it was true, all of our problems would have been solved hundreds of years ago.
The government is about to spend one and one half trillion dollars to stimulate the economy. Nobody has offered up the question of “Where is this money coming from?” The government is borrowing this money from somebody so we can consume what the savers denied themselves by saving it. The government is going to consume without producing new product for consumption.
Government taxation is a method whereby the government gets to spend a share of what the taxpayer produced. This spending is for defense, commerce, laws, education and other things that have become too numerous to mention let alone irritating to think about!
OK they want to spend 1.5 trillion dollars. Who’s going to be willing to loan to the government money at ½ percent interest (present 3 month T-Bill rate)? The Banks are getting free loans from the government and are declaring record profits. 25% interest on credit card loans from the bank’s ledger book are real “Money in the bank.”
Is something out of whack here? Banks get zero interest loans from the Fed, homeowner’s get 4.5% interest rates and the T-Bill rate is under ½% for 3 month T-Bills. If you figure the population of the US at 300 million and divide that into 1.5 trillion of proposed spending, we end up with $5,000 per person. So a family of 4 is about to spend 20 thousand dollars that they are never going to have to pay back? In other words, they are going to consume 20K that will never pass through their hands. Let’s add in free health care. Do you get the idea that we are dealing with someone with an addiction problem?
My question is this, where does the government get one and one half trillions dollars from, at these interest rates? If interest rates don’t rise dramatically, then it just might be time to buy gold. There is no reason to loan the government money at these low rates. It’s a little like pimping your sister, and you are her only customer. It kind of works, for all the wrong reasons.
31 comments:
Jim,
The inmates have taken over the insane asylum. Under a very thin veneer of law, order and sanity we see that out leaders and government agencies are... well, bonkers.
AIM
Altho I speak of the USA, this applies to all developed nations.
Incompetent and corrupt government operating off of false fiscal and monetary principles.
A complete lack of leadership: no one who understands how to truly govern a populace and create an environment conducive to innovation, creativity, productivity and wealth building (not to mention personal freedom and liberties).
A population that many many decades ago became spectators, lulled by bread and circuses, and dropped their vigilance and ultimately their knowledge, responsibility and control for their nation.
Impending energy, food and water crises.
This is what we've got. We are in the midst of a "crash and burn". In essence a new society will have to arise to meet the challenge of survival and rebuilding.
Joseph
The core problem is we have too much debt created by fractional reserve system for the economy to sustain. That money isn't created out of thin air as you seem to think. It has to come from somewhere. So Joseph if you were secretary of Treasury what would you do? I'm going to make it easy and give you only four choices.
1)Tax the hell out of everyone. Problem with this is politicians and rich people with money don't like this.
2)Issue Treasury bonds. Problem with this right now is interest rates suck.
3)Threaten and/or invade foreign countries and steal the money from their treasuries. Tried and true method practiced for thousands of years. Only problem with this is alot of people end up dead.
4)Start printing money and don't bother with bonds. Problem with this is we end up paying for this mess by way of inflation.
I'm not crazy about the term Economic ignoramuses that you use. I do hope your not talking about people here posting on this blog. As I have said before I never went to London School of Economics. That said I have been self employed and do know how to operate a business. Banks including Federal Reserve need to live by same rules as all the rest.
Rob
Sorry All
I just deleted 3 comments that attacked readers and a specific poster on a personal level.
Joseph's comments were deleted because of referring to the readers of this column as Economic ignoramuses. Two others were deleted not because I disagreed with them, they were also personal jabs--I do have to be fair.
Jim
The pimping analogy is pure gold. It made me laugh and cripes we need laugh these days. Keep up the good work.
Cheers
rob
Hi Rob
I agree the issue is raising the money. 1.5 trillion comes out about 30 billion extra a week for 52 weeks. Interest rates have to rise.
If they do decide to print, then we have the ultimate in taxation. Only it's "painless."
I can't quite figure out how this stimulus will fix things on a permanent basis. The government can screw up anything, I can't envision them running GM, I wouldn't by a government car.
God help us if they go after health care.
Glad you like the humor.
Take care
I can't envision them running GM, I wouldn't by a government car.C'mon, Government Motors--GM! Perfect!
Hi ATP
Your observations were the same as mine. I was just trying to regain control of the discussion.
Your post was a reasonable reply to Anon 9:02. Deleting the other two left you out to hang and confuse anyone else reading. So I deleted yours also. Sorry about that.
Take care
Hi Tyrone
You make me laugh and cry at the same time. Government Motors fits!
The thing that is worrying me lately are government statements that we have the worst health care plan in the world. To me it is the best in the world, cash on the barrel head.
I don't mind our government building cars, who will buy them? But health care, they need to be stopped. I am afraid that GM is their foot in the door.
It is so matter of fact, one trillion here and we need this and that and everyone in charge says OK. I can't quite figure out the logic.
Basically we are all on a sinking ship here in the USA. We're all apathetic... we'll all sit here being armchair economists and critics of Congress and our leaders... but we won't ever take any effective action.
We are getting exactly what we deserve.
We should stop whining and take our medicine (socialist slavery and becoming a 2nd rate nation) because we set the stage for it.
Revolt, evolve or... shut up.
Hi Anon 8:52
I just got my latest issue of Business Week and their big rant was "How come the economists didn't see this coming. So don't cite being an economist as some sort of position of knowledge.
I think that a lot of us are taking effective action against this mess. I am not offering investment advice, but it doesn't take much to read between the lines.
I don't think that what we are getting is what we deserve, but it is what we have earned. We trusted fools to invest our retirement funds.
I don't see "socialist slavery," I see massive unemployment. "Revolt or evolve" is kind of a South American approach to the failure of Democracy to take root.
It's really up to the reader to figure things out for themselves. There are many different options to pursue.
Thank you for your comments.
Well, Rob, since you asked me a question, I'll try to answer it.
Yes, I agree debt is the main reason we are in this mess, and it is the major risk for bad inflation down the road. However, of your four choices, the one I prefer is issuing Treasury bonds, because we do have a window of opportunity, where there is a big demand for them, and heck, it would be a great time to float 30 year or so bonds at 3.5% or so. It would give us plenty of time to restructure Medicare, SS, etc and restructure and invest in our economy - energy, mass transit, education, and for needed short-term stimuli. I really didn't like that the Fed decided to buy Treasuries, thereby monetizing some debt. However, I think it was an OK choice as an end around to the obstructionists in Congress who watered down the stimullus package. It really needed to be larger, in my opinion. We are in a tricky situation, we need to flood the economy with money because so much has been destroyed (asset values aren't in M1, M2, etc, but they are still money/potential money.) The real risk now is deflation. But, the tricky thing is that if the economy begins a solid recovery, inflation will then be the real risk, then. But, in my opinion, we can handle that as long as we have a concrete plan to get our budget, debts in order.
That is why I was so critical with my comment about people who think that banks using the bailout money to earn profits, is a negative thing. Taxes on that will help our budget. So, my use of the term I used was a very thought-out term for what I think of the economic understanding of whoever ascribes to that kind of thinking. I stand by the comment. However, I don't mind at all when people want to attack me, because I learn from that, maybe even more from those who attack me without trying to dispute the facts I used to back up my opinion. Mine wasn't a personal attack, per se, it was an attack on an economic mindset. But, I do appreciate your criticism, because it was well thought out, and I admit popular with a lot of people.
By the way, someone criticized me, asking where I was three years ago, so I checked my blog which I use to track my thinking (Someone wants me to write a book - so I'm collecting my thoughts on a lot of things), and back in 2005 I turned out to pretty accurate about housing and its potential affect on the economy. Note that I am not a fortune teller, I try to hedge for various possiblities. I think it was Bertrand Russell who once wrote something like "'the problem with the world is that fools are certain and the intelligent are full of doubt".
...Joseph
Joseph
You should be a politician because you can dissemble the english language with the best of them. Just a quick comment, the reason why fed and treasury have had to monetize some of the new debt is because interest rates are too low for the monied classes to be interested in buying. If you were Sec of Treasury you would be kidding yourself if you could issue bonds with 3.5% return and raise the extra money required to continue to run government. As Jim pointed out it is an extra 30 billion a week for just this year. You have to realize that money is being sucked out of private sector. This reduces the remaining available funds to borrowers. One of the fundamental rules of capitalism is supply and demand. If supply of money goes down for business then rates go up. I will stop you right here as I am anticipating how you are going to answer this. Yes the government can continue to let banks borrow money from Fed at practically zero interest but the banks will in turn lend the money at market rates. This only distorts the capital markets so please don't dissemble an argument telling me that this is how capitalism works as the only ones coming out on losing end is the government and ultimately us taxpayers. If you don't believe me then check out how the Yen Carry trade helped the Japanese economy get out of it's funk. The United States is trying the same thing as Japan and will have same resulting 20 year recession unless things change. Economists, politicians and Lawyers use the same language to obscure simple problems under thick layer of complex solutions. We need to let the market do what it's supposed to do and let all, and when I say all mean all, banks, car companies etc go out of business if they are insolvent. This should have been done nine years ago when Tech bubble burst. You can issue all the bonds at 3.5%you want but it will only prolong the agony.
One final note it has been my experience when trying to conduct a rational discourse on any topic that when cornered and person realizes that he might be wrong they will blow things up real good by saying something inflammatory. You earlier post falls into that category for me. As a courtesy to Jim as it is his blog I have in past and will also in future try and stay on topic as to what he has posted. So please when you respond please keep this in mind.
Rob
Don't pay your debts off. They'll begin to be inflated away over the next few years when hyper-inflation takes hold. You'll be able to pay your big debts off much sooner than you think (mortgage, house, school).
Just get your money into real estate or a business and some sort of hard assets when the deflation stops and the inflation begins to really run, or you'll lose your net worth.
Prepare for the economic climate that is coming. What else can one do?
If you are a W2 wage slave and all you have is a 401k in stocks and bonds and a devaluing home, you've lost a lot and will lose a lot more. I'd do whatever was needed to get out of that category and prevent any further loss. Pull out and head for the hills.
You know that Obama's team, Congress and The Fed will live up to our expectations and make this mess even worse.
PREPARE FOR THE INEVITABLE.
That is my motto.
Joseph
Every word you type proves my point. I sometimes feel like Captain Kirk from Star Trek when I talk to you. I don't know the episode but Kirk realizes at end of show that once curtain is pulled back it turns out to be a machine he was arguing with. I hope it is not the case with you. As I said before keep this discussion on track with what Jim posited in orginal post. Please.
I should start a Blog myself.
I'll call it
Some Dissemblely Required.
I'll happily let you to post there as at least you will be staying on topic when posting.
Rob
Hi Rob
I don't see the carry trade working for us like it worked for Japan, because we were paying the interest. We have no sugar daddy to carry trade with.
The Japanese put their money in the bank at zero interest and their banks bought T-Bills. Once the T-bill rate dropped below 2% currency fluctuations were more of a risk than the profit from the carry trade. In essence, the Japanese were loaning us cheap money so we could keep spending.
Right now the Fed is giving the banks loans at zero interest and they are making money on the deal. It's kind of like have two feet stuck in the mud and instead of freeing one foot a a time, you try to pull them both out at once. The net result is you now have knee pads that oddly resemble the missing tops to your boots.
This whole government financial scheme resembles a perpetual motion machine. It isn't going to cost us anything.
I think your suggestion to let it hit the fan will be the ultimate solution. Of course doing nothing would have gotten us there quicker.
Joseph. If you like to take both sides of an issue and you like to argue, you don't need us. Why not just stay off this blog and argue with yourself?
The mathmatic translation for this is:
3445/1222> 237/4555<9+.677-.0009 = .01
Yes, everything is mathematics. Our government knows this well. To Congress, 0 dollars minus 3 trillion dollars equals 3 dollars. This means we have a growth rate of 3% and all is well in Camelot.
AIM
Jim
Thanks for the explanation about carry trade it does help me understand it a little better. Your analogy is a good one. Deep down I knew that carry trade is not directly applicable to current malaise we seem to be stuck in. The economy here in North America needs to get back to producing things the rest of world needs to buy besides debt. Otherwise we are all doomed to decrease in standard of living.
rob
Hi Rob
I think you have touched on the real solution. We have to produce things that we need to buy. Imports have to get very expensive for that to happen. Looks like Smoot Hawley all over again. It could come down to "Buy American or else!"
Plus the rest of the world that has supplied our cheap labor are now unemployed and starving. Civil unrest in the third world countries could make for a real mess. We are going to be blamed for this Brouhaha.
Looks like solving one problem creates another.
I agree wholeheartedly. We must become producers again. We should really ramp up our farming back to high levels and start exporting more food to more of the world. We need to invest heavily into alternative, renewable energy sources and water purification (salinization also) and then begin exporting these to the rest of the world. In the process of R&D in alternative energy we could very possibly come up with the next technological breakthrough that could bring us up and out of our economic malaise (we need another revolutionary invention like the internet, telephone, radio, auto, etc.).
We've got to get our government out of the borrowing, spending, consuming paradigm and into the saving, streamlining, production, exporting paradigm. We need to allow the correction to occur so that all assets fall to true value and all weak businesses and sectors fail and get reabsorbed into the economy.
Hi Aim
We are in agreement, but I see two problems. We have to be careful about growing too much food just as we did with producing too many houses and autos. Mis allocation of resources is the real source of all bubbles.
The second problem is government taxes on employers. Businesses move off shore for profit reasons. American employees cannot compete on the world labor market because of the hidden costs of doing business here: unemployment insurance, Social Security, health care, Vacation, sick leave, retirement (the list is endless).
Today on the radio they were complaining about firefighters getting 40K a year in overtime. What they weren't figuring in, is that it's a lot cheaper than hiring another live body--less benefits to pay out.
We can see where we want to go, but there are obstacles and big government seems to be one of them.
But Jim, we can feed the world and make money doing it. What is wrong with producing food to capacity and exporting our excess?
We need to get rid of prohibatory taxes on employers and the minimum wage to allow production to begin and remain in this country (income tax and govt interference in business is what caused the Great Depression). If we don't stop taxing production (income tax) and start taxing consumption we will drive ourselves out the tubes again.
New formulas and paradigms are in order.
Aim
With food production, if too much is produced, price drops and it becomes unprofitable to grow it. There are always starving people willing to consume it (for free), but only governments give it away in food surplus programs. The Government food programs are labeled farm subsidies.
A VAT (value added tax) tax might be what the doctor ordered. But I get the feeling,if we went that route, while in transition between the two, government might like having them both permanently.
I agree with you about what should be implemented, but I don't see any mad rush to make it happen. Congress wants to get reelected. Responsibility is only an issue if you lose an election. IMHO, its pretty obvious that the winners don't need to entertain the responsibility issue--just yet.
Jim
Is it possible long term for governments to raise all money the money they require at these interest rates?
Rob
It sure looks very doubtful if not downright impossible.
Yesterday, Mr Geitner, the Head Treasury Orifice, said the banks are in great shape. That has a pretty hollow ring to it. I think our government has pretty much lost any credibility that it had.
What's to stop the banks from paying back the Tarp money, then paying everyone their bonus and then mail the banks keys to the Federal Reserve. Let the Feds figure the mess out. They've convinced everyone else that they know what they are doing!
Lets face it, any banker knows that loaning money at 4.5% long term when most of your deposits are short term, is what killed the saving and loan industry in the 1990's when interest rates took off.
We could be setting ourselves up for a very big fall.
Too bad about Kellermann. Now if Bernanke, Geithner, Summers and all their close pals would just follow suit we'd be on our way to having a real economy.
Notice that I didn't say recovery. Because who would want to recover into what we had?!
This is a recent quote from Sec of the Treasury, Tim Geithner:
"Instead, it is an abrupt correction of financial successes that has overwhelmed economies' and markets' self-correcting mechanisms, and so can only be ended by extraordinary policy responses."
This is our problem right here...
Can you believe this mindset? A correction of financial successes? Bubbles, falsely inflated assets (thanks to Greenspan), cheap credit, excessive borrowing, excessive leverage, damaging deregulation, corruption on Wall St. in our government sponsored entities and in our Congress, destruction of manufacturing and production, etc. etc. Geitner considers these successes and intends to create a recovery and get us back to this.
YIKES! Is there any country that I can move to and gain citizenship in so as to avoid the shit storm that will descend upon us due to our lame leadership?
Jim either passed away (if so, at least he won't have to worry about his retirement now) or he's working on a new article to post.
Hi Anon 8:17
Well, I haven't passed away, but I am rather at wits end on how to comment further on what Gietner, Bernanke and the CEO of BA said or the tragic suicide at Freddie Mac.
There are times when I just don't have much to add.
We have Obama everyday saying things are just fine, and everyone else agrees.
When you have a president addressing the general population on a daily basis, there has to be a crisis of gigantic proportions.
The only problem is, the levity of the situation has yet to be felt by Congress. Joe Six pack has to panhandle to get drunk--he knows times are tough. I guess the reality of the situation is, things filter down not up.
Go figure
Hi Anon 1:35
I don't think that you need to move to a foreign country, just stop the newspaper and the Cable TV---out of sight, out of mind.
Geitner has lost all credibility. Once the general public sees who got the TARP money, Congress won't have a leg to stand on.
Things are in meltdown mode, we don't have months to come up with a solution. Once you realize that there is no painless solution, the problem becomes real.
I agree completely with you that we are being lied to with a purpose. I very rarely accuse any one of lying, but I think in this case it is apropos.
Thank you for your comments.
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