Debt: The first five thousand years

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Our Collapsing Economy and Currency
The Coming Crash of America
by PAUL CRAIG ROBERTS
Is the “fiscal cliff” real or just another hoax? The answer is that the fiscal cliff is real, but it is a result, not a cause. The hoax is the way the fiscal cliff is being used.

The fiscal cliff is the result of the inability to close the federal budget deficit. The budget deficit cannot be closed because large numbers of US middle class jobs and the GDP and tax base associated with them have been moved offshore, thus reducing federal revenues. The fiscal cliff cannot be closed because of the unfunded liabilities of eleven years of US-initiated wars against a half dozen Muslim countries–wars that have benefitted only the profits of the military/security complex and the territorial ambitions of Israel. The budget deficit cannot be closed, because economic policy is focused only on saving banks that wrongful financial deregulation allowed to speculate, to merge, and to become too big to fail, thus requiring public subsidies that vastly dwarf the totality of US welfare spending.

Bullshit. The budget deficit cannot be closed because the GOP will not only not agree to return tax rates on people earning more than $250,000 a year to their (really very prosperous) Clinton-era levels, they won't even agree to raise them to a still historically low but somewhat-higher-than-Bush-era level.

Furthermore, although those wars were/are expensive and unfunded, that's not the long-term issue. And the bank(etc.) bail-out costs are barely a factor. And (most fucking perniciously) that stuff about the offshoring of U.S. middle class jobs and the tax base associated with them is not only absolute crap in itself -- insofar as that's such a minuscule loss of revenue relative to the deficit that it barely makes a difference -- it's basically just a very indirect way of saying that the way to raise revenues is to close loopholes and raise rates on the middle class. Which is EXACTLY what the very same GOP representatives whom Paul fucking Craig Roberts purports to be assailing want to do.

Same bullshit as Nomi Prins, IOW. Talking left while meaning right. Bait and switch. Sleight of hand. Bad news. Grrr.

The hoax is the propaganda that the fiscal cliff can be avoided by reneging on promised Social Security and Medicare benefits that people have paid for with the payroll tax and by cutting back all aspects of the social safety net from food stamps to unemployment benefits to Medicaid, to housing subsidies. The right-wing has been trying to get rid of the social safety net ever since Franklin D. Roosevelt constructed it, out of fear or compassion or both, during the Great Depression.

Like he cares. Here's a clue: RAISE TAX RATES ON THE WEALTHY.

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Some economists, such as Robert Barro at Harvard University, claim that stimulative measures, the opposite of austerity, don’t work, because consumers anticipate the higher taxes that will be needed to cover the budget deficit and, therefore, reduce their spending and increase their saving in order to be able to pay the anticipated higher taxes.

In other words, the Keynesian effort to stimulate spending causes consumers to reduce their spending. I don’t know of any empirical evidence for this claim.

Indeed. Because there is none. All the empirical evidence supports the validity and effectiviness of that particular Keynesian effort. So why single out Robert Barro's little hypothesis for attention? Apart from adding that extra little dash of alarmism that comes from raising the possibility that he's right?

Regardless, the situation on the ground at the present time is that for the majority of people, incomes are stretched to the limit and beyond. Many cannot pay their bills, their mortgages, their car payments, their student loans. They are drowning in debt, and there is nothing that they can cut back in order to save money with which to pay higher taxes.

I gnash my teeth at that "regardless," which means, effectively, "regardless of what I'm pretending not to know in order to avoid admitting that increased stimulus spending works."

Many commentators are complaining that Congress will refuse to face the difficult issues and kick the can down the road, leaving the fiscal cliff looming. This would probably be the best outcome. As the fiscal cliff is a result, not a cause, to focus on the fiscal cliff is to focus on the symptoms rather than the disease.

The US economy has two serious diseases, and neither one is too much welfare spending.

One disease is the offshoring of US middle class jobs, both manufacturing jobs and professional service jobs such as engineering, research, design, and information technology, jobs that formerly were filled by US university graduates, but which today are sent abroad or are filled by foreigners brought in on H-1B work visas at two-thirds of the salary.

The other disease is the deregulation, especially the financial deregulation, that caused the ongoing financial crisis and created banks too big to fail, which has prevented capitalism from working and closing down insolvent corporations.

The Federal Reserve’s policy is focused on saving the banks, not on saving the economy. The Federal Reserve is purchasing not only new Treasury bonds issued to finance the more than one trillion dollar annual federal deficit but also the banks’ underwater financial instruments, taking them off the banks’ books and putting them on the Federal Reserve’s books.

Normally, debt monetization of this amount results in rising inflation, but the money that the Federal Reserve is creating in its attempt to manage the public debt and the banks’ private debt is hung up in the banking system as excess reserves and is not finding its way into the economy. The banks are too busted to lend, and consumers are too indebted to borrow.

However, the debt monetization poses a second threat that is capable of biting the US economy and consumer living standards very hard. Foreign central banks, foreign investors in US stocks and financial instruments, and Americans themselves observing the Federal Reserve’s continuous monetization of US debt cannot avoid concern about the dollar’s value as the supply of ever more dollars continues to pour out of the Federal Reserve.

Already there is evidence of central banks and individuals moving out of dollars into gold and silver bullion and into other currencies of countries that are not hemorrrhaging debt and money. According to John Williams of Shadowstats.com, the US dollar as a percentage of global holdings of reserve assets has declined from 36.6% in 2006 to 28.7% in 2012. Gold has increased from 10.5% to 12.8% and other foreign currencies except the euro increased from 38.4% to 44.4%.

Russia, China, Brazil, India, and South Africa intend to conduct trade among themselves in their own currencies without use of the dollar as reserve currency.

The EU countries conduct their trade with one another in euros, and although not reported in the US media, Asian countries are discussing a new common currency for trade among themselves.

The world is abandoning the use of the dollar to settle international accounts, and the demand for dollars is falling as the Federal Reserve increases the supply of dollars.

This means that the price of the dollar is threatened.

Concern over the dollar means concern over dollar-denominated financial instruments such as stocks and bonds. The Chinese hold some $2 trillion in US financial instruments. The Japanese hold about $1 trillion in US Treasuries. The Saudis and the oil emirates also hold large quantities of US dollar financial instruments. At some point the move away from the dollar also means a move away from US financial instruments. The dumping of US stocks and bonds would destabilize US financial markets and wipe out the remainder of US wealth.

As I have previously written, the Federal Reserve can create new money with which to purchase the dumped financial instruments, thus maintaining their prices. But the Federal Reserve cannot print gold or foreign currencies with which to buy up the dollars that foreigners are paid for their US stocks and bonds. When the dollars in turn are dumped, the exchange value of the dollar will collapse, and US inflation will explode.

The onset of hyperinflation can be as sudden as the collapse of a currency’s exchange value.

The real crisis facing the US is the impending collapse of the US dollar’s foreign exchange value. The US dollar’s value in relation to silver and gold has already collapsed. In the past ten years, gold’s price in US dollars has increased from $250 per ounce to $1,750 per ounce, an increase of $1,500. Silver’s price as risen from $4 per ounce to $34 per ounce. These price rises are not due to a sudden scarcity of gold and silver, but to a flight from the dollar into the two forms of historical money that cannot be created with the printing press.

The price of oil has risen from $20 a barrel ten years ago to as high as $120 per barrel earlier this year and currently $90 a barrel. This price rise has come about despite a

weak world economy and without any supply restrictions other than those caused by the attempted US occupation of Iraq, the Western assault on Libya, and the self-harming Western sanctions on Iran, impacts most likely offset by the Saudis, still Washington’s faithful puppet, a country that pumps out its precious life fluid in order to save the West from its own mistakes. The moronic neoconservatives wish to overthrow the Saudi Arabian government, but what more faithful servant has Washington ever had than the Saudi royal house?

What can be done? For a number of years I have pointed out that the problem is the loss of US employment, consumer income, GDP, and tax base to offshoring. The solution is to reverse the outward flow of jobs and to bring them back to the US. This can be done, as Ralph Gomory has made clear, by taxing corporations according to where they add value to their product. If the value is added abroad, corporations would have a high tax rate. If they add value domestically with US labor, they would face a low tax rate. The difference in tax rates can be calculated to offset the benefit of the lower cost of foreign labor.

As all offshored production that is brought to the US to be marketed to Americans counts as imports, relocating the production in the US would decrease the trade deficit, thus strengthening belief in the dollar. The increase in US consumer incomes would raise tax revenues, thus lowering the budget deficit. It is a win-win solution.

The second part to the solution is to end the expensive unfunded wars that have ruined the federal budget for the past 11 years as well as future budgets due to the cost of veterans’ hospital care and benefits. According to ABC World News, “In the decade since the Sept. 11, 2001 terrorist attacks on the World Trade Center, 2,333,972 American military personnel have been deployed to Iraq, Afghanistan or both, as of Aug. 30, 2011 [more than a year ago].” These 2.3 million veterans have rights to various unfunded benefits including life-long health care. Already, according to ABC, 711,986 have used Veterans Administration health care between fiscal year 2002 and the third-quarter of fiscal year 2011.

The Republicans are determined to continue the gratuitous wars and to make the 99 percent pay for the neoconservatives’ Wars of Hegemony while protecting the 1 percent from tax increases.

The Democrats are little different.

No one in the White House and no more than one dozen members of the 535 member US Congress represents the American people. This is the reason that despite obvious remedies nothing can be done. America is going to crash big time.

And the rest of the world will be thankful. America along with Israel is the world’s most hated country. Don’t expect any foreign bailouts of the failed “superpower.”

The economic parts of that are nonsense. Literally. They make no sense. I mean, if it were true that the offhshoring and bail-out costs were running up the deficit, and Paul Craig Roberts knew it, how would he know? He would have to do some math, surely. So where is it?

[justdrew]

Same bullshit as Nomi Prins, IOW. Talking left while meaning right. Bait and switch. Sleight of hand. Bad news. Grrr.

I think you've just summed up the whole alex jones paul craig roberts nexus very succinctly.

[bluenoseclaret]

Evening

Out of curiosity, what are your views on Max Keiser.

Has your "Quantitative Easing" had any effect on the inflation rate? Do you know where the money spent on "Q.E" exactly went?

Thanks

Kro

[Wombaticus Rex]

Has your "Quantitative Easing" had any effect on the inflation rate? Do you know where the money spent on "Q.E" exactly went?

Setting aside your curious use of the possessive, here's a good read on the subject:

http://seekingalpha.com/article/274561- ... ctually-go

Stuck with me since the ZH article in question. The author is "contrarian" but very generous with data points.

As for effects, inflation hit anomalous highs in 2008 and dipped into the negative in 2009. Since then it's pretty much back to recent norms. There is a book-length argument to be had as to the mechanics and whether this is animal spirits market psychology or an actual fiscal lever having market effects.

For more serious wonkage, highly recommend these two pdf essays:
http://www.artemiscm.com/wp-content/upl ... s-End1.pdf
http://www.artemiscm.com/wp-content/upl ... Object.pdf

[justdrew]

http://en.wikipedia.org/wiki/Quantitative_Easing

Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective.[1][2] A central bank implements quantitative easing by buying financial assets from commercial banks and other private institutions with newly created money in order to inject a pre-determined quantity of money into the economy. This is distinguished from the more usual policy of buying or selling government bonds to keep market interest rates at a specified target value.[3][4][5][6] Quantitative easing increases the excess reserves of the banks, and raises the prices of the financial assets bought, which lowers their yield.[7]

Expansionary monetary policy typically involves the central bank buying short-term government bonds in order to lower short-term market interest rates.[8][9][10][11] However, when short-term interest rates are either at, or close to, zero, normal monetary policy can no longer lower interest rates. Quantitative easing may then be used by the monetary authorities to further stimulate the economy by purchasing assets of longer maturity than only short-term government bonds, and thereby lowering longer-term interest rates further out on the yield curve.[12][13]

Quantitative easing can be used to help ensure inflation does not fall below target.[6] Risks include the policy being more effective than intended in acting against deflation – leading to higher inflation,[14] or of not being effective enough if banks do not lend out the additional reserves.

looking at the last decade of inflation data:
http://inflationdata.com/Inflation/Infl ... lation.asp

I don't see the US economy having any problem with inflation at the moment.

[bluenoseclaret]

Hello Justdrew

".....A central bank implements quantitative easing by buying financial assets from commercial banks and other private institutions with newly created money....."

Any idea of the nature of those "financial assets" ?

Creating money out of thin air, that is supported by a deteriorating tax structure.

You can see the obvious reasons why Gold is such an attraction.

Hello Wombaticus Rex

Sorry...A bit lazy of me...it was mainly about the American economy and I guessed the earlier two posters were American.

Hope to get back to you on the rest.

Thanks.

Kro

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Evening

Out of curiosity, what are your views on Max Keiser.

Has your "Quantitative Easing" had any effect on the inflation rate? Do you know where the money spent on "Q.E" exactly went?

Thanks

Kro

It's not my quantitative easing.

And I didn't in fact refer to QE at all. I referred to stimulus spending in the abstract, although -- as it happens -- the stimulus spending part of the stimulus package that passed early on in Obama's term did have a too-mild but nevertheless stimulating effect overall. I mean, the economy was barely one permeable membrane away from a complete apocalyptic collapse of the kind that genuinely does sometimes lead to hyperinflation when he took office. And it's not now, although it still does suck.

I'm not exactly a fan of this administration or its policies, in fact. And for the most part, I oppose both. I'd like to see tax rates on high earners go up to a rate that's fair, though. Because, if I have to spell it out -- and I guess that I do -- I think that's fair.

To turn to satisfying your out-of-left-field, presumptuous, and tacitly hostile curiosity, though:

Out of curiosity, what are your views on Max Keiser.

I have none. Should I read him?

Has your"Quantitative Easing" had any effect on the inflation rate?

Yes. It did. It's inflationary by design. That's precisely why it's applied to economies that are in a state of such precipitous deflationary decline that they're at imminent risk of cratering out into flat-out literal insolvency, as I understand it.

As you can see from this handy-dandy chart...



...that was the impetus behind QE1 and, more loosely speaking, QE2, both of which temporarily restored inflation rates to something like what are usually deemed "low, stable" levels, meaning "levels that are about par for the course when things are okay," as you can confirm by referring to this handy-dandy table:

Do you know where the money spent on "Q.E" exactly went?

I don't understand the question. Quantitative easing has a real downside, that's for damn sure. It also has the potential to cause real long-term harm, although it's not inevitable one way or the other. But it's not, in itself, something you spend money on. It's an increase in the money supply.

But assuming that you mean

Do you know where the money created by "Q.E." exactly went?

I have a sneaking suspicion that the answer you're looking for might be: "Banks." Or possibly "Wall Street." But from what I've seen of your political inclinations, I'm guessing "Banks."

...

Well. I can't really argue with that, I guess. I mean, it's not exactly where it went, ultimately. But the banks definitely got a much, much bigger win out of quantitative easing than the people did. The benefits to the people were pretty much limited to "not finding themselves living in a completely insolvent, collapsed economy." And while that's obviously a generally desirable thing, I can't say I'm happy about it. The thing is, though: Quantitative easing wasn't why that happened. It happened to quantitative easing because that's what happens to all financial transactions under a regulator system that allows it to do so. And that's kind of a separate issue that's not resolvable by gathering villagers into a mob with torches and killing Quantitative-Easenstein's monster.

Doing that might feel good, of course. But it wouldn't help the villagers. In fact, they might very well be cooperating in their own continued oppression, to which they would -- at the very least -- be less alert if they were chasing some convenient phantom than if they were impartially viewing the landscape that lay before them. As I'm sure you know. That being just plain common sense.

Hope that helps.

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I don't see the US economy having any problem with inflation at the moment.

Not in the conventional sense. I mean, it's too low, and that is a problem (meaning "symptom"), but it's not THE problem. I'm not even sure whether it's presently a problem that's addressable as such via monetary policy, though.

Per my understanding, which is superficial when it comes to QE, the risk-benefit probabilities start tilting too heavily towards "high risk, little benefit" past a point that's about where we're at now. But, you know. Just preventing the ship from sinking would never have been enough, no matter what. And that's what QE does. So they always should have been doing other stuff for the long-term anyway. They just couldn't stop throwing tantrums and cutting back-room deals for long enough to do it.

[justdrew]

I don't know, they're buying Mortgage-backed assets, that crap. While we all call those 'financial instruments' crap, they are, like it or not, the form that apparently a huge number of real mortgages are contained in. So by buying them, they're restoring value to them right? The created money they're buying them with are tied up in bank reserves.

People have said "the banks aren't lending" - but how much do we really know about that? Perhaps they've just gone back to more standard loan quality assessments, and a lot of the people looking for loans aren't looking like secure places to put loans.

The main problem is a fundamental lack of jobs and poor pay.

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I don't know, they're buying Mortgage-backed assets, that crap.

They're actually not the crappy kind.

...

It's kind of a long story, which I think I maybe sorta- kinda semi-told in the course of my tirade against Ms. Prins in the "Wall Street/Schadenfreude" thread.

While we all call those 'financial instruments' crap, they are, like it or not, the form that apparently a huge number of real mortgages are contained in. So by buying them, they're restoring value to them right? The created money they're buying them with are tied up in bank reserves.

You lost me on that last part. Oh, wait. No, you didn't. Yes, assuming that the banks aren't lending --- which is another way of saying "assuming that the economy isn't healthy enough for people to routinely be investing in business ventures that create jobs and profit of the sort that banks like to provide funds to because they're good credit risks, per their highly supportable business plans -- the money is sitting in bank reserves. I don't know about "tied up." But, yeah. Basically.

WRT the MBAs, they might or might not be restoring them to value, in a way. But they're probably not valueless to begin with. It's part of a several-step Fannie-Mae/Freddie-Mac thing that serves more than one purpose, the primary virtue of which -- from a citizen's perspective -- is that one of the purposes it serves is protecting blameless homeowners from the predation and losses to which they'd likely have been exposed if those same assets had stayed in the hands of tottering, desperate banks.

However. That said. Same thing I said about why QE benefits banks more than people (ie -- that's the system) does apply. The benefit to the people is just that they don't get foreclosed upon in the course of an ongoing all-out nationwide economic collapse. And the benefit to banks is that they get direct infusions of either lots of nice safe bonds or lots of nice liquid cash. Or both.

But it's worth bearing in mind that one of the reasons for that -- and, really, the bottom-line, immoveable reason for it -- is that there's no form of direct government assistance to homeowners that anyone could possibly propose that wouldn't cause the GOP to fly into a tearful raging fit amidst shouts of "Socialism! Plus debt!" Because there's no way to provide that kind of assistance without a real, direct outlay of money that anyone who used the language accurately would have to call "spending." And there's no way for the government to directly intervene in the residential housing market that doesn't have very high pointing-and-shouting potential for people who have been body-snatched by a belief in the sanctity of private property rights.

And that leaves banks.

There's more to it than that, of course. But it's not any less true for that reason.

People have said "the banks aren't lending" - but how much do we really know about that? Perhaps they've just gone back to more standard loan quality assessments, and a lot of the people looking for loans aren't looking like secure places to put loans.

I take that as granted. They're in the lending business, they've got no reason to withhold loans to good borrowers. "People aren't doing the right kind of borrowing" would be just as accurate as "banks aren't lending," except that it falsely suggests people are to blame for the state of the economy, which they're not. And banks (investment, anyway) are, among others. So it's a conflation to blame it on banks, but not really unjust, ultimately.

______________

There are some aspects of it that are not all that complicated. You have to spend money to make money, axiomatically, meaning "investment has to occur." If only huge corporate mega-wealthy entities do that, investments are naturally going to take the form of stuff that's disproportionately beneficial to huge corporate mega-wealthy entities, which is -- after not too long -- going to become a self-perpetuating vicious circle -- ie, boom/bust.

Government spending is one of the best correctives for that, historically. And also logically. Or some kinds of government spending are. But we don't have a very robust tradition of that to begin with in this country. And I doubt we're going to develop one now.

Seriously, on the domestic tip, the present-day conservative movement is a really, really destructive and dangerous force for pretty much everyone apart from the extremely wealthy and the extremely racist, with some partial protections for the extremely fundamentally religious and quasi-theocratic. They're still basically the same coalition of interests that was formed back when die-hard opponents of the New Deal joined forces with people who had been driven mad by Brown v. The Board of Ed. So a lot of them are actually actively angling to destroy the whole show, that being the only way to rid the country of the menace of stuff like universal public education, which to them just means "blacks marrying into my family."

Again, more to it than that. But again, it's still true. That's where the Christian right as a political force comes from, originally. Brown v. The Board of Ed. They provided a work-around to compliance with it, via....It's another long story.

The main problem is a fundamental lack of jobs and poor pay.

Yes. Too, too true. Education and other stuff (unions, blah blah blah) does contribute, though.

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Hello Justdrew

".....A central bank implements quantitative easing by buying financial assets from commercial banks and other private institutions with newly created money....."

Any idea of the nature of those "financial assets" ?

Yes. Why do you ask?

Creating money out of thin air, that is supported by a deteriorating tax structure.

Would that it were so, wrt the creation of money out of thin air. Or, anyway, would that it were possible to do without limitation or attention to circumstance while still creating something of value. Which it's not. However, since quantitative easing is not something that occurs without limitation or attention to circumstance, but rather something that occurs only in a deflationary environment when it's the only option available, I guess it doesn't matter.

You do realize, don't you, that QE is not something anybody does as a preferential first choice? It's something people do when (a) they need to head off a deflationary crash that would otherwise mean sudden death (as with QE 1); or (b) when all other avenues to reversing a less dire but still pretty dire deflationary trend are blocked by, for example, partisan gridlock (as with the other rounds of QE). It has only one purpose. And that's basically deflationary crisis control. If you do nothing else, the money ends up in banks while you sit around hoping that the long, slow recovery will eventually turn into a prosperous economy on its own, which it probably won't. As it didn't in Japan.

The tax structure is not deteriorating. The tax base has been weakened to the point of unsustainability by insanely low tax demands on corporations and the wealthy.

You can see the obvious reasons why Gold is such an attraction.

Unless it's the initial capitalization, no. I can't. Gold can also, quite easily, go into the coffers of banks and stay there, with or without an assist from the government, just as well as anything else can. It doesn't have any special bank-repellent properties, after all. It's not, like, kryptonite for banks.

I don't follow. Basically.

[compared2what?]

I don't know, they're buying Mortgage-backed assets, that crap.

They're actually not the crappy kind.

Just to clarify:

Those aren't securities backed by privately issued subprime or other worthless and predatory mortgages. They're agency MBS -- ie, Fannie-Mae and Freddie-Mac issued mortgage backed securities, which are what they are in credit-risk terms because they've always effectively been government-guaranteed. So it's not like the government has no business -- one could even say "obligation" -- keeping them on sound, safe, stable footing.

Besides which, they're mostly perfectly creditworthy. A little crap got mixed in five or six years ago. But it's probably all gone, gone with the wind by now.

IOW: They -- the government, and hence the taxpayer -- are not going to be on the hook for those purchases. They're real, reputable, stable securities, which represent -- IIRC -- more than half of the residential housing market in the United States, which is -- and always has been, since the '30s -- stabilized by the existence of agency MBS.

Not to put too fine a point on it, but the chances that a home-owning taxpayer in the United States has benefited from the housing market being very indirectly quasi-subsidized via those securities border on 100 percent, assuming that he or she has a mortgage of any kind from anywhere. Or ever had one, as long as it was subsequent to the 1930s.

It's not highway robbery by the government, for banks, of the people, in short. What goes around comes around. Kinda. Because it's not actually going to cost taxpayers anything. So maybe it's more like what goes around goes around.

[justdrew]

you want to hear 38 minutes of packed solid bullshit, listen to this:

America's Economy

First hour guest, author and tangible asset expert Craig R. Smith addressed the economic problems facing the US, including the 'fiscal cliff.' If the tax cuts aren't reinstated, it would generate a large amount of revenue that could go toward the federal deficit, even though it would bring on a recession, he noted. Smith cited the "debasement" of the dollar, and how its value has been gradually siphoned away, as one of America's biggest financial issues. Returning to the gold standard could be a very viable option as a long term fix for this problem, he suggested.

Craig R. Smith is a lying piece of bought and paid for shit. A "good" salesman, but he's selling bullshit.

[compared2what?]

_______________

Enough of that is called debt on the balance sheet to count for this thread, I think. But besides that, you could kind of get the impression that the only thing the government does with your tax dollars is throw them into the air at the parties where they're cavorting naked in vats of champagne with bankers.

They actually waste most of it in more boring ways. Plus you do get some government services in exchange for the rest..