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Wednesday, January 2, 2013

I told you so -- The Fiscal Farce

It is time folks. It is time to decide. Do you want to look in the mirror and see a tool and a fool or are you going to say No More... No More.

Folks, the charades that we have seen have destroyed the Republic. I told you they were going to make a deal and I told you that it was going to be bad. I am not arguing for arguments sake. I understand in negotiations that you have to compromise. I am not an idiot.

What we see is that at a time when we have grown the National Debt by over $6 trillion in 4 years, we are ready to further expand that. Like I pointed to a few weeks ago, you could actually see the National debt balloon to $22 trillion to $32 Trillion in the next 4 years. That is just by extrapolating the exponential numbers that we have seen over the last 8 years.

All it takes to break the dollar is a little blip up in interest rates. If interest rates go back to where they were in 2000, then our economy will be fully decimated. Bear with me.

The Federal Funds Rate
Wikipedia - In the United States, the federal funds rate is the interest rate at which depository institutions actively trade balances held at the Federal Reserve, called federal funds, with each other, usually overnight, on an uncollateralized basis. Institutions with surplus balances in their accounts lend those balances to institutions in need of larger balances. The federal funds rate is an important benchmark in financial markets.[1][2]

In other words the Fed Funds rate is the Interest Rate at which Intrabank Lending takes place at the shortest term basis (Daily). How much interest you earn or pay on a loan is based upon this rate. How much interest the Government earns or pays is based upon the Fed Funds Rate. It always costs more to take a loan out than you will earn in interest, because of the inherent risk associated with payback.

Today, because of Federal Reserve System manipulation, the Ded Funds interest rate is .1%. If you look back to 2007, that rate was 5.5% and back in 2000 it was 6.24%. Right now we are servicing the National Debt at an interest rate that floats somewhere near this rate through the sale of Treasury notes. When they tell you that they are going to raise the National Debt, that means that they are going to auction off more of these notes to the public Market. Other sovereign governments have been buying these notes (China, Japan, Russia, Saudi Arabia). Your Social Security is invested in these instruments. All of your financial institutions (Banks, Insurance Companies, Mutual Funds, and Pension Funds) are invested heavily in these instruments. And the Federal Reserve is even purchasing these funds from themselves, while this money already essentially has no backing.

All it takes is for one of these big institutions to start selling their holdings and/or demand a higher interest rate to invest and our problems will grow exponentially.

Last year the interest on the National debt was nearly $360 Billion ($359,796,008,919.49). If you round off that our average debt for 2011-12 was $15.5 trillion, then we paid an average interest rate of around 2.3% on the National Debt. What if interest rates were to go back closer to their historical average of around 4, 5, or 6%?

That would mean that we would easily see a doubling of the interest paid annually on the National Debt. That could easily take interest payments up to $700 Billion a year or higher. We are already running annual deficits of over $1 trillion over the past 4 years. If you start adding another $300 billion in interest, then you will never get that number down.

The biggest effect of all of this is that it is debasing the currency. Think of dollars as shares in a Corporation called the United States of America. The more of those dollars that are issued, the less the value of each share, especially when the value of the company isn't increasing.

I can go on and on about this, but what I presented is a lot to ponder. You might think everything is alright, because you have hitched your wagonj to the news media and the politicos. Oh they will tell you how the Gross Domestic Product grew at 3.1% last quarter, but they aren't factoring in inflation (resulting from the debasement of the currency) or the fact that much of that growth is accounted for through government spending paid for by increased debt.

And all the while, they continue on with their games, while kicking the can down the road. There is a reckoning steaming towards us. We're already over the cliff. I believe we are days (if not hours) away from the markets reacting very negatively.

Message to Congressman McHenry -- Get Rid of Boehner! It is time for him to go. He doesn't get it.


wandaarnold1716 said...

This year Patrick McHenry was no longer my representative because of the recent redistricting, yet I was never sent any type of notification. I learned this fact for the first time when I looked at the ballot in November. Have you any information about this?

Harry Hipps said...

Boehner does need to go. The GOP agreed to this stupid deal when they couldn't come to an agreement about deficit spending when the last debt ceiling fight occurred. The mistake was made then.

The GOP needs to change strategies. As long as people put a lifetime tax contribution of $150000 into Medicare and get $450000 in services before they die, they will want this gravy deal. When we get a dollar of government services for 58 cents (and borrow the rest) we don't mind the buck's stuff for 58 cents. Maybe we should still advocate for smaller government and more freedom, but agree to as much spending as people want as long as there is no more borrowing.

If we have to see everyone's taxes double to pay our bills maybe people will wake up and decide how much gov't we really want. To heck with the economic effects, it will be severe and temporary. But the unholy deal of keeping Republicans happy with low taxes, Democrats happy with spending on everything under the sun, and a public that believes in a free lunch and we just need to cut congressional salaries and foreign aid (not even close to balancing the budget)is lunacy and is killing us.
Despite cycle after cycle of "the most important election of our lifetimes" we still don't really have an honest debate about the size and role of gov't and what kind of society we want.