Saturday, July 23, 2011

Freeze The Debt Ceiling

Why raise the national debt level? Congress is not going to tax everyone more to make up the difference. It just gets put on bar tab, to be paid at a later date, someday (200 years from now). The phrase “Kicking the can down the road,” is the new euphemism in town. Reality is not about raising the debt ceiling; it’s about keeping the punch bowl full and the party going.

If Congress doesn’t increase the debt ceiling, our government has to face reality. You can wish, but if you don’t have the cash, it is only a dream. Our dreaming is over, reality is a necessary event. Below is a pic from from my blog dated 4/6/08 about bubbles, the big one is still there.

Of course, there is one item that needs to be considered. The Federal Reserve could be sitting on a giant Ponzi scheme that is invisible. Technically they give cash to banks and companies like AIG for collateral. So it is a zero sum game if the Fed sells the collateral (in theory)(but it could be worthless).The US government owns all of Fannie and Freddie’s real estate. The underwater home owners now hand the keys back to the tax payer. An extra 6 trillion hidden here would be a surprise that could change the color of an IRA fund manager’s underwear.

Obama the other day was pontifying “Raise taxes on the rich and rewrite the tax code to lower everyone’s taxes.” ---Sounds like a religious miracle in progress. How can you do both? The phrase “Used Car Salesman” comes to mind. Obama reminds me of the guy pimping his wife for drinking money. He comes home after partying and gets mad when his wife offers him the same rates everyone else paid.

What is happening in Greece is a little different. If they issued 3 percent long term bonds, these are probably trading for about 15 cents on the dollar. So if the IMF went in and bought 100 billion of them, it might cost them 15 billion face amount. But they could turn around and gift them back to Greece at 30 billion when they mature. It’s a little like your home going up for auction for nonpayment and your brother-in-law buys the place for peanuts and lets you live in it with the agreement that you pay him back. It keeps his sister happy and the jerk she married, on a leash.

The Congressional mentality, is to borrow until we can’t afford to pay the interest on the debt. That concept reminds of the two boys that were warned of the evils of masturbation, they were told it caused blindness. The one kid turned to the other and said, "Lets do it until we need to wear glasses." The real discussion right now revolves around serious cuts during the rest of Obama’s Presidency and it doesn't look like there are any. These proposed 10 year plans,are an euphemism for "Not on my watch."

The debt limit should be frozen where it is. Let’s stop this madness now. The Geithner claim that our debt rating will be hurt is pure hog wash. Our government debt is the benchmark for the rest of the world’s securities. Raising the Debt Limit allows the Treasury to be able to sell to the Federal Reserve that extra trillion the government doesn't need yet. Bernanke (the Fed) will buy Treasuries in order to keep interest rate artificially low. The neat thing about the transaction, the Federal Reserve returns back to the Treasury the dividends paid by the Treasury on the bonds held by the Federal Reserve. These purchases keep rates artificially low. Thus the bills purchased and held by the Fed cost the Treasury nothing.

Refusing to raise the debt limit, doesn’t change the final outcome. It’s just going to happen sooner, rather than two years from now. Our government is broke. Without the "New Money," the Fed cannot keep interest rates low by buying Treasuries, rates will have to rise. Greenspan and Bernanke will take the blame for this when the history books are written. They offered a flawed painless solution to a very painful problem. Unfortunately economists are more like coroners; they are better at diagnosing what went wrong and why, after the fact.

To a majority of Americans "The Economy" is just a concept, little understood. The "Group Think" is that Congress can fix what is broken. Congressional solutions are a little like trying to use your clothes dryer to dry the kitchen dishes and glassware. When the buzzer goes off, you can rest assured that everything is dry! You end up getting what you were promised, but it's not quite what you had in mind.


Tyrone said...

Gold 4PM Pacific: $1620/oz
tick, tick, tick,...

AIM said...

You tell it like it is Jim. Good analogues too.

We had serious debt after WWII. I think it was 116% of GDP. We managed to almost cut it in half but that was done by inflation... the debt didn't go away... the price factor just went up. The nominal prices for all of the goods went up.

They'll do the same thing again this time. We'll have artifically low interest rates and inflation will go to 4% then 5% then 6% and up and up.

The bond vigilantes won't put up with it for much longer.

Savers and retirees are going to get creamed. Anyone retiring now and putting their nest egg into long term bonds is going to crash and burn when the interest rates start climbing.

We are going to have a lot of elderly retired that need to go back to work... or will be at a total loss and headed for the "poor house" (wherever that is) unless some family member or friend can take them in. Some retirees may try and move to "less expensive" or income tax free states, but that won't help matters. Food, gas, energy, etc. will continue up up up and they won't be able to hang on.

Everybody's purchasing power is lessening by 3.5 to 4% annually right now. But wait until that inflation percentage starts picking up. It will have claws and teeth.

The time is coming when you'll need to get out of cash into something tangible that will expand with inflation. If you don't... you'll lose all.


AIM said...

One other point...

The Dems and Repubs have failed us miserably. They've made a mess over the last 30 years or so. Having the Federal Reserve for the last 100 years has also gotten out of hand and taken its toll on our country as well.

I hope the majority of Americans soon realize that the people in Congress and the White House are either corrupt or incompetent and need to go.

We need a new third party. We need leaders in the truest sense of the word.

Jim in San Marcos said...


You mentioned a third party, I think that is Obama's plan to re election, split the Republican party.

I don't think we can take much more inflation. Our hundred dollar bill has the buying power of the old time twenty. The trouble now, is that the hundred dollar bill is our largest bill. If the government started printing $500 dollar bills, it could spook the nation. It wouldn't be rocket science to connect the dots.

Anonymous said...

Learn about inflation. Learn how to live in it. Learn how to survive in it. If you are really savvy you'll learn how to thrive in it.

If you aren't prepared for inflation you will be toast. Your food, energy and everything else will have prices that you never imagined could ever happen.

It will be coming big time without a doubt. Bernanke, Congress and the White House in this administration and future ones have no choice but to inflate their way out of this mess (default) because, at this amount, it is impossible to ever pay our gross debt off.

I'm embarking on a study of inflation and how to survive it.

Unknown said...

I'm curious how you think our credit rating won't be hurt if we stop paying our bills. Wouldn't yours?

I fully agree that there need to be cuts made across the board, but this idea that the wealthy should escape this completely unharmed while granny is down to buying cans of cat food is untenable. The Bush tax cuts need to expire immediately.

Don't give me the bull pucky about how lowering taxes raises revenue... it doesn't. Revenue is down 29% per capita since the Bush tax cuts went into effect.

Don't give me the bull pucky about how lowering taxes creates jobs. If that were the case, we'd have a 1% unemployment rate from all the tax cuts going back to Reagan.

We've had a 30 year lesson on how trickle down economics doesn't work. Set the tax rates back to where they were when we had a semi-balanced budget. Cut the wars and cut a bunch of other spending that was added under Bush II.

frakrak said...

Hi Jim like your post! Heard a U.S. senator on our news yesterday saying the only way forward is to slash entitlement programmes!I was left to wonder if the man meant your social security or the 16 trill (estimated by another U.S. senator) that has gone to foreign and your domestic banks! It seems like a debate you need to have.
Our state economy (since january this year) has been enjoying -3.6 contraction! Our debate isn't too far off either. Good luck to America, if you can work it out, we will be following your lead :)

Jim in San Marcos said...

Hi Drewbert

Not sure how I got in the middle of this. I wasn't making any statement on raising taxes or the effect of it on employment.

In response though, raising taxes when the economy is in the dumps, doesn't sound very smart. Raising taxes doesn't necessarily generate more tax receipts, and that was proven during the Great Depression. The average politician has no economics background. It is assumed that if you raise taxes 20% you get 20% more money in taxes. And it doesn't work that way in the least. For example, double the price of admission to a race track, and you'll find the Hoi Poloi is gone, as is half of your book betting.

The concept of lowering taxes, is to get gamblers to play here instead of somewhere else.

As for the tax cuts being renewed, ask yourself one question, why do they always have to be renewed? Why don't they make them permanent? If they did that, what would Congressmen have to brag about come election time. So come next election, figure that they will be labeled Obama tax cuts. In order to skip rope, you have to be able to jump; Congress just tell the voters when.

Our credit rating is top of the line compared to other countries. But if you look deeper, most people that want credit card loans in the US pay 20 to 30 percent. Why does our government deserve 1% interest rates loans on the national debt. Do you get the feeling that you are playing 3 card Monte with a pro?

Jim in San Marcos said...

Hi Frakrak

Thanks for the Ata-boy

I think you hit the nail on the head, it is a world wide problem.

I hope that Congress doesn't raise the debt limit. Not everything gets paid, but they won't be able to print their way out of it, like they have in the past by raising the bar.

It's not like a rich uncle died and gave us the means to pay off our debts. We are just as broke as before when they last raised the debt limit.

AIM said...

FDR introduced communism/socialism into the USA (social security, medicare, etc.). Then he took us off the gold standard domestically. It's been downhill ever since. Unintended consequences and complications galore. Then Nixon took us off the gold standard globally in '71. That really sped our demise up.

Crash and burn time.

Anonymous said...

Raise taxes? I can see the brain drain now. All those new college grads with large non-defaultable loans are going to be running for the exits. One TSA patdown later, they can restart in a new country.

Anonymous said...


I understand what you mean. Government spending is mostly just a re-distribution of wealth program now. According to the Composition chart below, it is over 60% and climbing.

raptor said...

Always have good laugh with the comparisons you make... thank you

Jim in San Marcos said...


You're right, FDR started it, but in his time it was a carrot on a very long stick. Congress got rid of the stick and began throwing the carrots ahead of the donkey. The trouble now, the donkey is severely overweight and moves very slowly, too many carrots out in front to eat.

FDR took us off of the gold standard, it was illegal for US citizens to own gold from 1933 to 1974. Nixon closed the gold window for foreigners redemption. Once the currency was separated from gold backing, Congress has had their way with us.

The next week or two could prove very interesting. It's all about debt. Repaying it, isn't even a topic of discussion. Kind of makes you wonder?

Jim in San Marcos said...

Hi Raptor

Thanks for the compliment. You made my day.

Jim in San Marcos said...

Hi Anon 2:12

Its tragic, but understandable. College graduates aren't stupid, Congressmen are.

Suzi Orman said that there is a movement in Congress that would allow students to file bankruptcy on student loans. I hope they get it done!

raptor said...


you are welcome... just don't forget to keep them coming :)

farmerbobb said...

Great Read again Jim! What will they do? What will they do? Kind of like Dorthy in the Wizard of OZ, but we don't have Ruby shoes to click. Will bare feet work?

I work in the Aereospace industy for a sub contractor and things are booming. Boeing sales are doing great with a large backlog of orders to customers whom I assume have deep pockets. When will they pull their money and head to China for their planes?

My union is mad at Boeing for building planes in North Carolina without union workers (very good for our plant). Gee maybe they should be happy that the 787 line didn't go to China and that maybe they can try organize that plant again.

Oh sorry about that. I'm tired, I've worked the last several weekends of overtime to pay off bills before this bubble bursts. (Got to get while I can says my wife.)

Thanks again!

I wonder, should I buy new work boots?

Jim in San Marcos said...

Hi FarmerBobb

This definitely has all the trappings of an OZ movie. They just announced that the Congress has come to a deal.

Looks like they found a way to kick the can down the road for another 2 years.

I read that bit about Boeing kind of surprising. I know California is driving business else where with all of the taxes.

We both have jobs, so I guess we are the lucky ones.

Instead of buying yourself some boots, buy the wife a lawn mower;>)

Thank you for the compliment

Take care.

raptor said...

I heard that recently Boing lost a very big deal to Airbus ?