Monday, December 17, 2012

QE 1,2,3 and now #4. $85 billion deficit per month.

Quantitative Easing, chapter 4. The Fed is now printing 85 billion dollars a month to buy mortgage backed securities and direct Treasury debt. Yes, those same mortgage backed securities that caused the 2008 economic collapse. The same ones that Chase lost trillions of dollars on. By doing this they are inflating the GDP artificially with money that doesn't exist. What could possibly go wrong? Oh, don't worry about that whole deficit thing. It's just numbers on a debt clock. It has no affect on you, yet. It soon will though, very soon.

Lets look at this with some common sense. The dollar is a Fiat currency. This means it has no intrinsic value past it's replacement cost. You can't melt it down or sell it for scrap. It's value is based totally on the governments willingness to pay it's debts and support the currency. Should the government default or lose it's caste system of balances, the currency could be damaged to the point that the paper becomes cheaper than wall paper, as is what happened in a few places in modern history.

Why is this important to us? Well, as fate would have it, we are doing EXACTLY the same things they did before their entire economy collapsed. The Weimar Republic printed money instead of fixing the economy. It was easier to delay the crash instead of facing it. They destroyed any and all wealth that was tied to or valued in their currency by doing exactly what the current and past administrations have done for years. It's criminal. They are stealing from you every day as they devalue your assets by devaluing our currency. It's the worst form of tax on the planet because there is no gain to be had for anyone. At least when they tax us the money actually goes somewhere.

The damage is two fold you see. The current wealth is wiped out, as well as future wealth. The devaluation kills any wealth increases seen and the debt portion causes the government to require higher taxes on devalued currency to manage the debt. But stocks have gone higher you say?

No, not at all. The devaluation of the dollar is pushing the prices higher, not the value of the stocks. Gold is the ultimate equalizer. It's value is known around the world every minute of every day. According to that same dollar to gold to stock index, the dollar is the thing dropping, not the value of the stocks increasing. In fact, the true gold value of the stocks are falling as well, to some of the lowest single digit levels in history. As this process continues, it will further debase the currency to the point it will lose it's standing as the go to currency to hold. When that happens, we are at the whim of the largest foreign currency holders. China and Japan.

Let's look at that scenario a minute. China, the largest foreign holder of US securities has 1.73 trillion in us debt and around 1.3 trillion in currency reserves. A foreign government that is hostile to us controls 3 trillion dollars of our money. They have the technology and infrastructure to beat us in manufacturing ability as well as destroy us on productivity with very little money spent on social programs. They can destroy us in a head to head manufacturing production duel. They will be able to produce more, cheaper and faster than we can. There is no way for our economy to out pace their manufacturing ability. Our only saving grace is that we have the buying power and wealth to keep them interested in us. Should that ever change and we become a cold war adversary, things change rapidly.

It would be much cheaper for a superpower china to bankrupt the us by dropping billions upon billions of dollars into the international markets and devaluing the dollar. This would be done after a sell off of securities that would prompt the US to print the money required to buy back the Treasury notes before the price fell sharply. If the price falls, all that hard work printing money is lost and the debt is worthless, like the dollar itself. Now if, after they sell off the treasury notes, they decide to dump the 1.3 trillion in currency, there would be no looking back. We can't print Euro's, Yuan or Yen to buy back the currency. We're on the bench watching the dollar in free fall as the markets sell off any US treasuries trying to save themselves from the destruction of the dollar.

I'm not saying that will happen, but there is the possibility. We have hedged ourselves into such a tight corner that the option is on the table for a foreign government to devalue the dollar any time they wish. They would lose hundreds of billions of dollars, but the affect on us would be insurmountable. Fiat currency has no intrinsic value.Our government is walking a tightrope hoping to delay the crash that is inevitable. They know it's coming but it's like a game of musical chairs. Nobody wants to be sitting in the oval office when it happens. They will be blamed and vilified for eternity.

So now what? Nothing can be done to save the economy. Nothing can be done to stop the crash. So why are they having talks about the fiscal cliff? Because the illusion that they can fix it is the only thing keeping the economy rolling. Well, that and 85 billion dollars a month in funny money. They have the ability to keep the check book filled at the cost of the wealth you and I own, devalued. They are stealing from you to keep the farce rolling. Welcome to the punch line. You're it!

The only thing they are accomplishing with this strategy is making the hole we fall in deeper. They are adding debt to our grandkids now, there is no way we can pay it in our lifetimes.

There has to be a way to fix it, right? No, there isn't. Lets look at cutting costs on the federal level to compensate. Legally required spending for 2013 is still going to be about 400 billion higher than the intake. So lets trim some departments. Labor, interior, NASA, agriculture, education, intelligence and stop all discretionary spending. Wait a minute, we can't do THAT! We'd put millions of people out of work and reduce tax revenue by several hundred billion dollars. Not to mention what it would do to the economy when millions of new foreclosures hit the market, (remember those mortgage backed securities?) as well as the unemployment/welfare benefits require to keep people from starving after the unemployment rate hits near 35% . Crap, what now?

Can't cut costs, so lets look at new revenue. Higher taxes. Why do that when we can look to the highest tax levels since 1920 for next year. Yes, I'm not joking. Next year,  if the tax cuts roll off automatically, we will have the highest tax level since the 1920's. Well, lets add more taxes anyway to make it up. A quick look at the numbers and yes. We can do that. Our current tax rate is a little over 20% of wages and profits for individual and corporate taxes. We have to double it to make up the difference and still borrow 80 billion from the Fed. Somewhere near 46-48% of your income would have to be assessed in taxes to make the country run on it's current budget.

Wealth would be destroyed again because business owners don't like to work for free. They work to make money. If the government took half your paycheck every week, would you keep going back? No. Could you make it on half your wages? Doubtful for most. Add in inflation of 9% annually this year and I'm guessing 11% next year (QE4, remember) and you're operating on around 40% of your wages from last year. Can you make it on that? What happens when everyone but the super rich can't make it?

Social breakdown, riots, death, destruction, murder, martial law..... This is our future.
 Welcome to Zimbabwe


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