Wednesday, July 27, 2011

US Structural Issues

Governments monetize debts through inflation. Instead of making banks realize the losses of bad loans or investments. The US government has allowed banks to give these loans up as collateral for good collateral via the US taxpayer. I give you ten thousand dollars and you give me a 1975 Ford Pinto that doesn't run. The sad reality is the Bank tells me the Ford Pinto is like new and worth ten thousand just like the day it rolled off the assembly line. If you keep subsidizing banks you will have a currency crisis and the cost of living will go through the roof. I haven't received a credit card application for over two years yet interest rates at the Federal Reserve have been zero for 17 months and we've had trillions of dollars of newly printed money. This solution is Keynesian in theory which tries to keep the boom going with cheap money. This theory is assinign because in reality it's sewing the seeds for the next bust and is basically trying to put out a fire by pouring gasoline on it. You can't cure an alcoholic by giving him more booze.

Cui bono, who benefits? Obviously not the common man. Actually the inflation bill will be sent to your doorstep. The person who benefited least and is least equiped to pay the bill will receive the bill. You'll see the price increases in food, energy, and services. In 2010, 39,400,000 people are on food stamps. The US Census bureau has the current domestic population at roughly 309,300,000. Roughly 12.7% of the total US population is on food stamps! This is up 22.4% from last year. In 2009, 2.1 trillion in transfer payments were made and 2.1 million in taxes were collected. In 2010 the US will pay out more in benefits than will be taken in for taxes. The current 2010 budget deficit is projected to be 1.6 trillion and even if you had taxes of 100% of income this still wouldn't be able to balance the budget!

In 1966 Medicare's initial cost was 3 billion and the House Ways and Means Committee estimated the projected cost to be 12 billion by 1990. The actual cost by 1990 was 107 billion dollars or a 792% variance to the initial forcast. Today in 2010 Medicare costs 408 billion annually. It is interesting when you think back to August 15th, 1971 when President Nixon closed the closed the gold window. Before this date foriegn holders of US dollars could redeem those dollars for gold. After this date the money supply started its exponential rise higher over the next 4 decades. The great Austrian Economist Ludwig Von Mises stated "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved." Another example of our government estimating costs badly is the Iraq war where initial projections were 50-60 billion dollars. Through 2009 the actual costs for the Iraq war are 713 billion more than 1000% off the projection. Sell it on the extreme low end and then profiteer until it's over

Another example of this is the new healthcare bill which is projected to cost 940 billion over the next ten years. First off what is wrong with Medicare other than it can't possibly be funded? Healthcare will bankrupt the United States."A government able to give you everything you want will take everything you have" Thomas Jefferson.

We can only make this fantasy land real if we print money or borrow from countries like China who have excess savings. If China reevaluates the Yuan the US can't pick up the export market. With China's Yuan worth more they will buy more gold and everything else that has real intrinsic value. In 1910 70% of women's textiles were made in New York and 40% of mens'. Currently we have 34.5% imported from China. We spend over 700 billion in military which is almost half of the world's spend. We have 700 bases in over 140 countries. If war breaks out prices will go through the roof.

Currently the savings rate in the US is 3.1% and 43% of Americans have leass than $10,000 saved for retirement. Also, when you look at Federal government employees versus private sector employees the salaries are $59,909 versus $45,772 and with benefits it's $119,982 versus $76,181. Also the compensation increased in 2009 3.9% and in 2010 is projected to increase 2%.

Furthermore the national debt is 14.4 trillion with another 6.3 trillion in Fannie Mae and 60 trillion in unfunded liabilities for a grand total of 79.1 trillion. This should be rather alarming considering the world GDP is 60 trillion and the United States GDP is 14.2 trillion. When the Department of Energy was founded in the late 1970's we imported 50% of our oil now it's 70's and the department has a budget of 30 billion. In 2009 the Department of Education had a budget of 63.5 Billion that's a 37% increase from the budget in 2002 of 46.3 billion. In 2002 private 4 year college cost $18,516 in 2009 that cost increases 41% to $26,273. China has no food stamps and no unemployment benefits most people still farm in rural areas.

On August 15th 1971 Nixon closed the gold window. You would have to increase the price of gold to one million dollars an ounce to get back on a gold standard. During the depression in the 1930's 27% worked on farms, now only 2%. Farming is less than 1% of GDP. Debt payments are currently $20,800,000,000 billion or 23% of tax receipts. A 2.5% increase in interst rates is a drastic increase to this number. In 1980 909 billion in debt 33% of GDP, today it's 91% of GDP not including unfunded liabilities.

During the early part of the century Greenspan kept interest rates at 1% for a year and you must increase interest rates above the rate of inflation to stop hyper-inflation. Budget freezes have excluded Defense, Medicare, Medicaid, Social Security, and Education. Failure itself is the best regulator. Inflation doesn't create jobs or wealth it just leads to uncontrolled government spending and kills small business and family values. It also leads to dangerous moral ideologies.

No comments: