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ECONOMICS AND ESOTERICA FOR A NEW PARADIGM

Posts Tagged ‘debt ceiling

America “makes the cut” – So what happens next?

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by Brandon Smith
Posted on Alt-Market, August 7, 2011

AROUND THE WORLD, STARTING MONDAY, ALL EYES ARE ON THE MARKETS. The tension is palpable. The uncertainty is ample. And anger is heavy in the air. As predicted, the debt ceiling deal was not only NOT enough to assuage economic fears, it actually exacerbated them, triggering a flight from the Dow, and creating a decisive opportunity for ratings agency S&P to cut the once perfect U.S. credit rating from AAA to AA+.

At Alt-Market, we often talk about points of balance, and how certain moments in history become highly visible indicators of balance lost. If we pay close attention, and know what we are looking for, these moments can be recognized, allowing us time to shield ourselves from the explosion and the resulting financial shrapnel. The past two weeks have culminated into one of these defining events that tell us the tide has fully turned, and something new and dangerous is just over the horizon. The question now is; what should we expect?

The nature of the credit downgrade situation is not necessarily “unprecedented” in history, but it is surely unprecedented on the scale we see currently in the U.S. It is difficult to predict how exactly the investment world will react. Some consequences, though, are probable, if not inevitable. Let’s examine the events we are likely to see in the coming weeks as well as the coming months, as nations attempt to adjust to America’s final plunge…

1) Ratings Agencies under attack

This has already begun. Italian authorities have raided the offices of S&P and Moody’s, apparently perturbed that their credit rating is not under their control. The U.S. is accusing S&P of making “accounting mistakes” and jumping the gun on the American downgrade. The battle between insolvent governments and the ratings agencies from here on will escalate quickly. More offices will be investigated and raided. The mainstream media will try to assert that the downgrades are “not that important”, and that the U.S. will recover quite nicely without a perfect score. Eventually, as the collapse becomes more evident, ratings agencies will fill the role as the go to scapegoat / economic hitman at which all governments will point accusing fingers.

“S&P is gonna’ cut you man! S&P’s a blade-man, man!”

In my view, it’s all theater. First, let’s set aside the recent ratings cuts altogether and look at the facts. The U.S. should have been downgraded years ago, especially after the Federal Reserve decided to begin purchasing U.S. Treasury Bonds in place of dwindling foreign interest and turned to monetizing our debt to the point of rampant inflation. Italy and numerous other EU members should have been downgraded to junk status a long time ago as well. If anything, the ratings agencies over the past few years have been PROTECTING the credit reputations of many countries which in no way deserve it. The recent downgrades are long overdue…

Second, suddenly governments and MSM pundits feel it necessary to point out the large part ratings agencies played in the derivatives bubble and subsequent credit crisis? Please! They were perfectly content with S&P or Moody’s giving fraudulent top ratings for toxic garbage securities, and even defended agency actions after the bubble burst! Now, after they finally start doing their jobs by downgrading bad debt, governments want an investigation?

Third, ratings agencies were not alone in the creation of the derivatives bubble. The private Federal Reserve artificially lowered interest rates and flooded the markets with cheap fiat. International banks used this fast money to create the easy mortgage groundswell and the derivatives poison that was fed it into the system. Ratings agencies went along with the scam and graded the worthless securities as AAA. The federal government and the SEC allowed all of this to take place by purposely ignoring the crime and refusing to apply existing regulations in investigating the fraud.

The Bottom line? You CANNOT create an economic crisis like the one we face today without collusion between big business, government, regulatory bodies, and ratings agencies. The Obama Administration is well aware of this, and the attacks on S&P are nothing more than a show. S&P is not to blame for the downgrade this past weekend. They are ALL to blame.

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Austerity top priority as economy sputters, Americans suffer

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from The Huffington Post
Posted: August 3, 2011

WASHINGTON – This week’s big debt deal has left progressives despairing over a disconnect between Washington and the rest of the country that they say has possibly never been wider. Their concern arises from the fact that while the country suffers from a sputtering economy and a grinding jobs crisis, elected officials are celebrating the passage of a massive deficit-reduction bill almost guaranteed to even further slow the economy and cost jobs.

For the weeks leading up to the agreement, Democratic and Republican leaders were essentially trying to out-austere each other. It’s that bipartisan enthusiasm for reducing the government’s budget – and the speed with which both parties abandoned a job-creating agenda – that left-leaning analysts say demonstrate how beholden elected officials from both parties have become to the rich, and how out of touch they are with the problems of the poor and the middle class.

“If these people were rational policymakers, they would not focus on deficit reduction right now,” said Neera Tanden, chief operating officer at the Center for American Progress. “They would focus on stimulus right now.”

“What’s crazy about Washington is that the only thing we talk about is deficit reduction; that nobody talks about jobs,” Tanden said. “It’s borderline insane.”

To liberal economists like University of Texas professor James Galbraith, the explanation lies in what he calls the Washington elite’s “deficit hysteria.” From this perspective, the spending cuts signed into law Tuesday were the culmination of the investment of hundreds of millions of dollars by moneyed interests into the development and inculcation of a specific Washington consensus that anyone who doesn’t believe the government is dangerously overextended — and who doesn’t consider the danger of deficits as very, very serious — is a wild-eyed radical.

“The rich have drawn a political box around what can be done here,” said Damon Silvers, policy director for the big umbrella union AFL-CIO. “They are gutting the modern state in order to avoid a real conversation about taxes.” While Washington lauds its cuts, the traditional arguments in favor of deficit reduction probably have never been weaker than they are right now.

THE ARGUMENT AGAINST AUSTERITY

None of the economic signs that augur for deficit reduction are remotely visible. Quite to the contrary: A high unemployment rate, enormous unused capacity, inadequate market demand, cheap capital and record-low interest payments, incipient deflation, crumbling infrastructure and underwater homeowners all point to this being an ideal time to increase government borrowing – to invest in infrastructure, provide debt relief to homeowners and generally increase demand and create jobs.

With American banks and other businesses sitting on trillions of dollars they refuse to lend or invest, one can hardly accuse deficit-spawned borrowing of “crowding out” private loans. And with people lining up to lend money to the U.S. government for long periods of time at near record-low rates, one can hardly argue that the deficit is driving up interest rates.

Thomas Palley, an economist at the New America Foundation, says Republicans’ focus on the deficit regardless of economic conditions is logically consistent because their core interest is limiting government.

But Democrats have been brought in, too. The fully bipartisan nature of Washington’s deficit obsession was brought home in early 2010, when President Barack Obama created a commission to reduce the deficit and chose a pair of deficit hawks to be its leaders.

“What is going on now I think has everything to do with the fact that you have almost a second generation of deficit obsessives who occupy all the strategic positions in public policy discourse,” said Galbraith. And over time, Democratic leaders haven’t just embraced deficit reduction as a goal, they have explicitly bought into government austerity as the primary solution.

There is, of course, another way to reduce the deficit: Stimulate economic growth and grow out of it. “We have a huge deficit because we have a huge recession,” said Larry Mishel, head of the left-leaning Economic Policy Institute. Democrats could have, as an anti-deficit strategy, decided to put all their energy into pushing for a pro-growth agenda. But they chose not to. Last November, when Obama decided to make a statement about the deficit, he did so by freezing pay for federal workers.

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The Debt Deal con: Is it fooling anyone?

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by Brandon Smith of Alt Market
Posted August 4, 2011

ALTERNATIVE ECONOMIC ANALYSIS BRINGS WITH IT A CERTAIN NUMBER of advantages and insights, but also many uncomfortable burdens. Honest financial research is a discipline. It requires us to not only understand the fundamentals, but to question the fundamentals. It requires us to look beyond what we would LIKE to see in the economy, and accept the reality of what is actually there. With this methodology comes the difficulty of knowing the dangers ahead while the mainstream stumbles about well behind the curve. It means constantly having to qualify one’s conclusions, no matter how factual, because the skeptics and opposition base their views on an entirely different set of rules; farcical rules that no longer (or never did) apply to the true state of our country’s fiscal health.

After a while, you begin to expect that a majority of the public will buy into any number of government or Federal Reserve con games and swindles as the process of full spectrum collapse rolls onward. However, this expectation is not always accurate…

A majority of Americans were against the bailouts, TARP, quantitative easing, the “too big to fail” concept, etc. Sometimes a government action is so fraudulent that even those who aren’t educated on the specifics can smell the grift in play. The recent debt ceiling debate and resulting debt deal are fuming with the hot stench of predigested disinformation, so much so that no one seems to be happy with it, even people who a month ago were begging for it. When you have to parade around a hobbled shooting victim in order to get any applause for your legislation, then you may be in trouble…

Though their reasons and motivations vary, everyone, whether on the so called “Left”, or the so called “Right”, is asking “Was anything really accomplished here?” The question is a valid one. To discern the exact nature of the debt deal, we must first cut through the web of misconceptions that surround it. While no American is satisfied with the final plan, many are disenchanted for the wrong reasons. Let’s clear the fog (or light a match), as it were…

Where are the spending cuts?

Were any cuts actually made in this debt plan that has been painted by the MSM as a “historic landmark” in spending reform? If you think yes, then you have been hornswaggled. Only yesterday I came across perhaps the most profoundly inept New York Times Op-Ed piece I have ever seen (and that’s saying something):

http://www.nytimes.com/2011/08/02/opinion/the-tea-partys-war-on-america.html?_r=1

In it, Joe Nocera, a typically impotent mainstream financial hack, proceeds to outline the debt deal snafu in grade school fashion, claiming not only that cuts in spending attributed to the bill will destroy our fragile economy, but that all the blame for this destruction rests squarely on the shoulders of Tea Party Republicans, who are apparently no better than “terrorists”. Yes, that’s right, fiscal conservatives are now terrorists hell bent on our nation’s demise. Gee…we didn’t see that one coming. While I am not particularly happy with the direction the Tea Party has taken since 2010, especially the constant attempts by Neo Conservatives (fake conservatives) to co-opt the movement, the Tea Party is hardly to blame for any destabilization of the economy, if for no other reason than they accomplished nothing in the deal. Nocera’s idiocy is made embarrassingly apparent in his outcries against spending cuts, because NO cuts were actually made.

First, the $2 trillion plus compromise we hear about so often is slated to take place not over the next ten months, but the next ten years! Only $917 billion in cuts are officially mandated by the bill. The final $1.5 trillion will be voted upon at a later date. Only $21 billion in cuts will be applied to discretionary spending in 2012, $42 billion in 2013, and the remaining cuts after 2014. This strategy, by itself, is wholly inadequate in making even the slightest dent in our national debt, being that our government’s spending has grown exponentially with each passing year.

In June of 2009, our national debt stood at $11.5 Trillion. Today, it climbs past $14.5 trillion. That’s an increase of $3 trillion in the span of two years. Now, I don’t know where men like Boehner, Reid, or Obama, learned simple math, but I can tell you their numbers don’t add up. Even if current spending levels stay static (which they won’t), by 2013, we will have to increase the national debt to at least $17.5 trillion, while only cutting $63 billion from the budget. Wow….sounds like progress to me.

Even worse (yes, it gets worse), the spending cuts that were finalized are based not on current spending, but on PROJECTED spending, or what is often called “the baseline”. That means, essentially, that no existing programs or subsidies are specifically facing cuts, only programs and subsidies that have yet to be created! So, Obama could ostensibly forgo an extra $2 million taxpayer subsidized vacation to Hawaii or Manila, and then claim this as a “spending cut”. Imagine it! We could save so much money as a country by not buying all the things we could have bought beyond what we already buy! Huh?

So, no official spending cuts until after elections. No specific programs identified for cutting. No cuts to current deficit spending. Debt ceiling elevated yet again. All that debate and noise, and nothing has changed…

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Important Debt Ceiling Update

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From The National Inflation Association
Posted July 30, 2011

PRESIDENT OBAMA JUST ANNOUNCED LATE THIS EVENING THAT A DEAL has been reached to cut government spending and raise the debt ceiling in order to avoid a debt default. If the deal is approved on Monday, it will raise the debt ceiling by between $2.1 and $2.4 trillion in three installments: $400 billion immediately, $500 billion this fall subject to a disapproval vote by Congress, and $1.2 to $1.5 trillion more after a special committee agrees on a matching amount of spending cuts that will be in addition to $900 billion in spending cuts proposed in the bill. With no tax increases included in this plan, all of this additional debt will eventually be monetized and paid for through monetary inflation.

Although the deal is supposed to cut as much as $2.4 trillion in spending over the next decade, Obama said that none of the spending cuts will occur anytime soon so that not to derail the phony economic recovery. That’s right, none of the cuts will come until early 2013 and by then we will need to once again raise the debt ceiling to north of $20 trillion. If our elected representatives were serious about cutting spending, they would have the bulk of the spending cuts now and not in the future when many of them will be out of office.

This deal is a complete and total sham, and will do nothing to prevent hyperinflation. In no way will these spending cuts be mandated and nothing will force future Congresses to abide by them. Even with these cuts, government spending is going to increase every single year for the next decade. As price inflation spirals out of control in the years ahead causing the purchasing power of the dollar to plummet, all government employees will demand higher salaries and it will cost more to run all parts of the government. Future Congresses will raise spending and make the spending cuts proposed in this deal meaningless.

NIA believes that all of the events that took place in Washington this weekend were scripted in advance. It is likely that both parties knew from the beginning what deal they would ultimately agree to, but came out with these other proposed bills in order to satisfy tea party supporters and make them think that their efforts are making a difference. The reality is, although the tea party movement helped Republicans take over the House of Representatives so that Democrats didn’t have free rein in Washington, most of the new Republicans elected to Congress haven’t followed through with their promises and have failed to make any kind of a positive difference.

Everybody in Washington assumes that interest rates will remain at artificially low levels for the rest of this decade. The interest rate that the U.S. paid on its total marketable debt in the month of June was only 2.38%. Exactly one decade earlier, in June of 2001, we paid 6.162% interest on our total marketable debt or 159% higher than current average interest rates. On August 15th we owe our next interest payment of approximately $30 billion. Imagine if that payment rises 159% higher to $77.7 billion or $932.4 billion annualized. Later this decade, interest rates will not only rise back to normal levels like we had in 2001, but will likely rise to artificially high levels to balance out the damage being created today from artificially low interest rates.

If this bill is approved by Congress and the President on Monday, it will avoid a short-term honest debt default but just about guarantee a default by inflation later this decade. There is about a 1 in 1,000 chance that future Congresses will stick with the spending cuts in this bill, but even if they do, rising interest payments will not only wipe out the $2.4 trillion in spending cuts, but they will add trillions more to future deficits and the national debt. A new Gallup Poll shows that 53% of Americans oppose raising the debt ceiling compared to only 37% who favor an increase. We pray that millions of Americans march to Washington tomorrow in protest of this bill and that millions more call, email, and fax their elected representatives in the morning demanding that they vote no.

It is important to spread the word about NIA to as many people as possible, as quickly as possible, if you want America to survive hyperinflation. Please tell everybody you know to become members of NIA for free immediately at: http://inflation.us

Gold and silver: We were right – they were wrong

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by Brandon Smith of Alt Market
Posted July 25, 2011

ONLY NOW, AFTER THREE YEARS OF ROLLER COASTER MARKETS, EPIC DEBATES, and gnashing of teeth, are mainstream financial pundits finally starting to get it. At least some of them, anyway.

Precious metals have continued to perform relentlessly since 2008, crushing all naysayer predictions and defying all the musings of so called “experts”, while at the same time maintaining and protecting the investment savings of those people smart enough to jump on the train while prices were at historic lows (historic as in ‘the past 5000 years’).

Alternative analysts have pleaded with the public to take measures to secure their hard earned wealth by apportioning at least a small amount into physical gold and silver. Some economists, though, were silly enough to overlook this obvious strategy. Who can forget, for instance, Paul Krugman’s hilarious assertion back in 2009 that gold values reflect nothing of the overall market, and that rising gold prices were caused in large part by the devious plans of Glen Beck, and not legitimate demand resulting from oncoming economic collapse.

To this day, with gold at $1600 an ounce, Krugman refuses to apologize for his nonsense. To be fair to Krugman, though, his lack of insight on precious metals markets is most likely deliberate, and not due to stupidity, being that he has long been a lapdog of central banks and a rabid supporter of the great Keynesian con. [And he a Nobel Prize winner!] Some MSM economists are simply ignorant, while others are quite aware of the battle between fiat and gold, and have chosen to support the banking elites in their endeavors to dissuade the masses from ever seeking out an alternative to their fraudulent paper. The establishment controlled Washington Post made this clear with its vapid insinuation in 2010 that Ron Paul’s support of a new gold standard is purely motivated by his desire to increase the value of his personal gold holdings, and not because of his concern over the Federal Reserve’s destructive devaluing of the dollar!

So, if a public figure owns gold and supports the adaptation of precious metals to stave off dollar implosion, he is just trying to “artificially drive up his own profits”. If he supports precious metals but doesn’t own any, then he is “afraid to put his money where his mouth is”. The argument is an erroneous trap, not to mention, completely illogical.

Numerous MSM pundits have continued to call a top for gold and silver markets only to be jolted over and over by further rapid spikes. Frankly, it’s getting a little embarrassing for them. All analysts are wrong sometimes, but these analysts are wrong ALL the time. And, Americans are starting to notice. Who beyond a thin readership of mindless yuppies actually takes Krugman seriously anymore? It’s getting harder and harder to find fans of his brand of snake oil.

Those who instead listened to the alternative media from 2007 on have now tripled the value of their investments, and are likely to double them yet again in the coming months as PM’s and other commodities continue to outperform paper securities and stocks. After enduring so much hardship, criticism, and grief over our positions on gold and silver, it’s about time for us to say “we told you so”. Not to gloat (ok, maybe a little), but to solidify the necessity of metals investment for every American today. Yes, we were right, the skeptics were wrong, and they continue to be wrong. Even now, with gold surpassing the $1600 an ounce mark, and silver edging back towards its $50 per ounce highs, there is still time for those who missed the boat to shield their nest eggs from expanding economic insanity. The fact is, precious metals values are nowhere near their peak. Here are some reasons why…

Debt ceiling debate a final warning sign

If average Americans weren’t feeling the heat at the beginning of this year in terms of the economy, they certainly are now. Not long ago, the very idea of a U.S. debt default or credit downgrade was considered by many to be absurd. Today, every financial radio and television show in the country is obsessed with the possibility. Not surprisingly, unprepared subsections of the public (even conservatives) are crying out for a debt ceiling increase, while simultaneously turning up their noses at tax increases, hoping that we can kick the can just a little further down the road of fiscal Armageddon. The delusion that we can coast through this crisis unscathed is still pervasive.

Some common phrases I’ve heard lately: “I just don’t get it! They’re crazy for not compromising! Their political games are going to ruin the country! Why not just raise the ceiling?!”

What these people are lacking is a basic understanding of the bigger picture. Ultimately, this debate is not about raising or freezing the debt ceiling. This debate is not about saving our economy or our global credit standing. This debate is about choosing our method of poison, and nothing more. That is to say, the outcome of the current “political clash” is irrelevant. Our economy was set on the final leg of total destabilization back in 2008, and no amount of spending reform, higher taxes, or austerity measures, are going to change that eventuality.

We have two paths left as far as the mainstream economy is concerned; default leading to dollar devaluation, or, dollar devaluation leading to default. That’s it folks! Smoke em’ if you got em’! This train went careening off a cliff a long time ago.

If the U.S. defaults after August 2, a couple of things will happen. First, our Treasury Bonds will immediately come into question. We may, like Greece, drag out the situation and fool some international investors into thinking the risk will lead to a considerable payout when “everything goes back to normal”. However, those who continued to hold Greek bonds up until that country’s official announcement of default know that holding the debt of a country with disintegrating credit standing is for suckers. Private creditors in Greek debt stand to lose at minimum 21% of their original holdings because of default. What some of us call a “21% haircut”.

With the pervasiveness of U.S. bonds around the globe, a similar default deal could lead to trillions of dollars in losses for holders. This threat will result in the immediate push towards an international treasury dump.

Next, austerity measures WILL be instituted, while taxes WILL be raised considerably, and quickly. The federal government is not going to shut down. They will instead bleed the American people dry of all remaining savings in order to continue functioning, whether through higher charges on licensing and other government controlled paperwork, or through confiscation of pension funds, or by cutting entitlement programs like social security completely.

Finally, the dollar’s world reserve status is most assuredly going to be placed in jeopardy. If a country is unable to sustain its own liabilities, then its currency is going to lose favor. Period. The loss of reserve status carries with it a plethora of very disturbing consequences, foremost being devaluation leading to extreme inflation.

If the debt ceiling is raised yet again, we may prolong the above mentioned problems for a short time, but, there are no guarantees. Ratings agency S&P in a recent statement warned of a U.S. credit downgrade REGARDLESS of whether the ceiling was raised or not, if America’s overall economic situation did not soon improve. The Obama Administration has resorted to harassing (or pretending to harass) S&P over its accurate assessment of the situation, rather than working to solve the dilemma. Ratings company Egan-Jones has already cut America’s credit rating from AAA to AA+.

Many countries are moving to distance themselves from the U.S. dollar. China’s bilateral trade agreement with Russia last year completely cuts out the use of the greenback, and China is also exploring a “barter deal” with Iran, completely removing the need for dollars in the purchase of Iranian oil (which also helps in bypassing U.S. sanctions).

So, even with increased spending room, we will still see effects similar to default, not to mention, even more fiat printing by the Fed, higher probability of another QE announcement, and higher inflation all around.

This period of debate over the debt ceiling is liable to be the last clear warning we will receive from government before the collapse moves towards endgame. All of the sordid conundrums listed above are triggers for skyrocketing gold and silver prices, and anyone not holding precious metals now should make changes over the course of the next month.

What has been the reaction of markets to the threat of default? Increased purchasing of precious metals! What has been the reaction of markets to greater spending and Fed inflation? Increased purchasing of precious metals! The advantages of gold and silver are clear…

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Ron Paul appeals to America: “Default now, or suffer a more expensive crisis later”

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by Ron Paul, op-ed first posted in Bloomberg
Posted July 22, 2011

Default now, or suffer a more expensive crisis later

DEBATE OVER THE DEBT CEILING HAS REACHED A FEVER PITCH in recent weeks, with each side trying to outdo the other in a game of political chicken. If you believe some of the things that are being written, the world will come to an end if the U.S. defaults on even the tiniest portion of its debt.

In strict terms, the default being discussed will occur if the U.S. fails to meet its debt obligations, through failure to pay either interest or principal due a bondholder. Proponents of raising the debt ceiling claim that a default on Aug. 2 is unprecedented and will result in calamity (never mind that this is simply an arbitrary date, easily changed, marking a congressional recess). My expectations of such a scenario are more sanguine.

The U.S. government defaulted at least three times on its obligations during the 20th century:

• In 1934, the government banned ownership of gold and eliminated the right to exchange gold certificates for gold coins. It then immediately revalued gold from $20.67 per troy ounce to $35, thus devaluing the dollar holdings of all Americans by 40 percent.

• From 1934 to 1968, the federal government continued to issue and redeem silver certificates, notes that circulated as legal tender that could be redeemed for silver coins or silver bars. In 1968, Congress unilaterally reneged on this obligation, too.

• From 1934 to 1971, foreign governments were permitted by the U.S. government to exchange their dollars for gold through the gold window. In 1971, President Richard Nixon severed this final link between the dollar and gold by closing the gold window, thus in effect defaulting once again on a debt obligation of the U.S. government.

Unlimited spending

No longer constrained by any sort of commodity backing, the federal government was now free to engage in almost unlimited fiscal profligacy, the only check on its spending being the market’s appetite for Treasury debt. Despite the defaults in 1934, 1968 and 1971, world markets have been only too willing to purchase Treasury debt and thereby fund the government’s deficit spending. If these major defaults didn’t result in decreased investor appetite for U.S. obligations, I see no reason why defaulting on a small amount of debt this August would cause any major changes.

The national debt now stands at just over $14 trillion, while net total liabilities are estimated at over $200 trillion. The government is insolvent, as there is no way that this massive sum of liabilities can ever be paid off. Successive Congresses and administrations have shown absolutely no restraint when it comes to the budget process, and the idea that either of the two parties is serious about getting our fiscal house in order is laughable.

Boom and bust

The Austrian School’s theory of the business cycle describes how loose central bank monetary policy causes booms and busts: It drives down interest rates below the market rate, lowering the cost of borrowing; encourages malinvestment; and causes economic miscalculation as resources are diverted from the highest value use as reflected in true consumer preferences. Loose monetary policy caused the dot-com bubble and the housing bubble, and now is causing the government debt bubble.

For far too long, the Federal Reserve’s monetary policy and quantitative easing have kept interest rates artificially low, enabling the government to drastically increase its spending by funding its profligacy through new debt whose service costs were lower than they otherwise would have been.

Neither Republicans nor Democrats sought to end this gravy train, with one party prioritizing war spending and the other prioritizing welfare spending, and with both supporting both types of spending. But now, with the end of the second round of quantitative easing, the federal funds rate at the zero bound, and the debt limit maxed out, Congress finds itself in a real quandary.

Hard decisions

It isn’t too late to return to fiscal sanity. We could start by canceling out the debt held by the Federal Reserve, which would clear $1.6 trillion under the debt ceiling. Or we could cut trillions of dollars in spending by bringing our troops home from overseas, making gradual reforms to Social Security and Medicare, and bringing the federal government back within the limits envisioned by the Constitution. Yet no one is willing to step up to the plate and make the hard decisions that are necessary. Everyone wants to kick the can down the road and believe that deficit spending can continue unabated.

Unless major changes are made today, the U.S. will default on its debt sooner or later, and it is certainly preferable that it be sooner rather than later.

If the government defaults on its debt now, the consequences undoubtedly will be painful in the short term. The loss of its AAA rating will raise the cost of issuing new debt, but this is not altogether a bad thing. Higher borrowing costs will ensure that the government cannot continue the same old spending policies. Budgets will have to be brought into balance (as the cost of servicing debt will be so expensive as to preclude future debt financing of government operations), so hopefully, in the long term, the government will return to sound financial footing.

Raising the ceiling

The alternative to defaulting now is to keep increasing the debt ceiling, keep spending like a drunken sailor, and hope that the default comes after we die. A future default won’t take the form of a missed payment, but rather will come through hyperinflation. The already incestuous relationship between the Federal Reserve and the Treasury will grow even closer as the Fed begins to purchase debt directly from the Treasury and monetizes debt on a scale that makes QE2 look like a drop in the bucket. Imagine the societal breakdown of Weimar Germany, but in a country five times as large. That is what we face if we do not come to terms with our debt problem immediately.

Default will be painful, but it is all but inevitable for a country as heavily indebted as the U.S. Just as pumping money into the system to combat a recession only ensures an unsustainable economic boom and a future recession worse than the first, so too does continuously raising the debt ceiling only forestall the day of reckoning and ensure that, when it comes, it will be cataclysmic.

We have a choice: default now and take our medicine, or put it off as long as possible, when the effects will be much worse.

Debt Ceiling Drama

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by Dr. Ron Paul
Posted July 19, 2011

THE DEBT CEILING DEBATE IS PROVIDING PLENTY OF OPPORTUNITY for political theater in Washington. Proponents of raising the debt ceiling are throwing around the usual scare tactics and misinformation in order to intimidate opponents into accepting more debt and taxes. It is important to distinguish the truth from the propaganda.

First of all, politicians need to understand that without real change default is inevitable. In fact, default happens every day through monetary policy tricks. Every time the Federal Reserve engages in more quantitative easing and devalues the dollar, it is defaulting on the American people by eroding their purchasing power and inflating their savings away. The dollar has lost nearly 50% of its value against gold since 2008. The Fed claims inflation is 2% or less over the past few years; however economists who compile alternate data show a 9% inflation rate if calculated more traditionally. Alarmingly, the administration is talking about changing the methodology of the CPI calculation yet again to hide the damage of the government’s policies. Changing the CPI will also enable the government to avoid giving seniors a COLA (cost of living adjustment) on their social security checks, and raise taxes via the hidden means of “bracket creep.” This is a default. Just because it is a default on the people and not the banks and foreign holders of our debt does not mean it doesn’t count.

Politicians also need to acknowledge that our debt is unsustainable. For decades our government has been spending and promising far more than it collects in taxes. But the problem is not that the people are not taxed enough. The government has managed to run up $61.6 trillion in unfunded liabilities, which works out to $528,000 per household. A tax policy that would aim to extract even half that amount of money from American families would be unimaginably draconian, and not unlike attempting to squeeze blood from a turnip. This is, unequivocally, a spending problem brought about by a dramatically inflated view of the proper role of government in a free society.

Perhaps the most abhorrent bit of chicanery has been the threat that if a deal is not reached to increase the debt by August 2nd, social security checks may not go out. In reality, the Chief Actuary of Social Security confirmed last week that current Social Security tax receipts are more than enough to cover current outlays. The only reason those checks would not go out would be if the administration decided to spend those designated funds elsewhere. It is very telling that the administration would rather frighten seniors dependent on social security checks than alarm their big banking friends, who have already received $5.3 trillion in bailouts, stimulus and quantitative easing. This instance of trying to blackmail Congress into tax increases by threatening social security demonstrates how scary it is to be completely dependent on government promises and why many young people today would jump at the chance to opt out of Social Security altogether.

We are headed for rough economic times either way, but the longer we put it off, the greater the pain will be when the system implodes. We need to stop adding more programs and entitlements to the problem. We need to stop expensive bombing campaigns against people on the other side of the globe and bring our troops home. We need to stop allowing secretive banking cartels to endlessly enslave us through monetary policy trickery. And we need to drastically rethink government’s role in our lives so we can get it out of the way and get back to work.