Will Obama raise taxes on the rich?
Would Romney cut spending and balance the budget?
What about the current deficit cliff-hanger that goes into place at the end of the year cutting defense spending?
There wont be tax increases. There won't be any spending cuts. There won't be any implementation of the ridiculous penalty bill now slated to explode at the end of the year. Anything that destroys money
will push the economy off a cliff.
Here is the mechanism:
1) Spending is cut (or taxes raised)
2) Therefore, less money is in the economy
3) Immediate effect: state, federal, local employees are cut
4) Fewer government goods and services are bought
5) Suppliers of goods and services cut back, go broke, lay-off their employees
6) Businesses those employees supported cut back - fewer trips to restaurant, dry cleaner, Home Depot, fewer new cars bought
7) Economy slows, sliding faster
8) Businesses make "insurance cutbacks", cutting way deeper than needed
9) Economy slides into recession/depression
10) Government receipts decline as tax receipts decline, unemployment, welfare, foodstamps increase
11) Deficits stay the same or get bigger
This cycle will continue until spending increases. Spending will increase if 1) the US spends money or or 2) the US goes to war (ie, the US spends money) or 3) magically private spending increases, ie by increasing personal debt...people HAVE to eat, for example...they will spend for that. And there are LOTS of steps after step 11....the rest of the world follows the US down the shitter since we STILL drive the world economy. For fun I will roll it out a little further...
12) US consumption decline causes collapse in oil prices
13) trade gap diminishes as US exports less
14) Exporters to the US such as China and Germany experience slowdown in economic activity
15) Europe further fucked economically by decline in tourism
16) Auto industry on verge of bankruptcy again as car sales plummet
17) Airlines on verge bankruptcy as travel declines
18) Housing industry collapses because no one is buying or building houses
19) Crime increases out of desperation
20) Railroads idle as they were in 2008 with 1000s of freight cars abandoned
21) Ports and freight yards filled with abandoned tankers, ships and freighters as they were in 2008
22) Personal bankruptcies exploding; Chapter 7 bankruptcies explode (only way to get rid of credit card and student loan debt)
23) More malls become ghost towns
24) Commercial loan failures skyrocket. High rise office towers abandoned
25) Foreign purchase of hard US assets skyrockets: China buy GM or IBM or Microsoft
26) Interest rates pushed to zero across the board in desperate attempt to spur loans and spending
27) Laws passed to force banks to lend and then forgive bad loans
28) Homelessness skyrockets, people living in tents all over America
29) Abandoned vehicles litter roadways as no one can afford insurance, excise, registration or gas, even though gas is about 2 dollars a gallon - or less
30) Environmental regulations increasingly relaxed in attempt to spur manufacturing
31) China goes into recession; Germany in recession; Spain defaults; Italy defaults, Europe in turmoil
32) Russia invades or co-erces many former satellites to rejoin resurgent Russian empire.
Is this extreme? Sure it is. This assumes there is no floor to slowed economic activity when government reduces spending. And herein lies the fear -- ask any Republican how the US got out of the Great Depression and he will say, "World War 2 pulled us out of the Depression". Republicans are CONVINCED that the war saved us. How? By "private industry" suddenly creating millions of new jobs to build tanks, planes and guns. That's the fear. If Romney wins the election and the economy goes into a tailspin, the Republicans till be sorely tempted to go to war with Iran -- because to a Republican, War Means Prosperity. On Nov 2, 2008, VP Candidate Sarah Palin said, "We're in a war with Iran, make no mistake, and when we win, we will kick that war up to full speed and end Iran in 100 days."
But Republicans forget the crucial step of war and "private industry" creating millions of jobs -- the Government is the customer and is buying all that stuff. Spending is spending whether its for bombs or for bridges. The difference is, if you spend to build a bridge, you get a bridge. If you spend to build a bomb you get a useless bomb that sits in a warehouse and has to be guarded. Republicans never seem to grasp this concept.
Make no mistake -- spending ISN'T going down. Taxes ARE NOT going up.
And look -- last week tbill yields
hit record lows....everyone is throwing money at us. there is no need to
cut spending dramatically. or raise taxes right now. Republicans claim that cutting spending will free up money for industrial investment, a sound economic principle. But even if that worked -- it would take a minimum of a year to START to show impact. And if Romney also follows through with cutting foodstamps, healthcare, social security, welfare and Section 8, it could be years before any positive impact is seen - years of starving children, homeless elderly and so on. And with foreigners throwing money at us, we don't need to do it right now.
I predicted
the fed would implement QE3 in June, and they were oh so close but didnt.
Bernanke didnt even mention it in July....I doubt he will talk about it in August unless June economic stats are bad. the govt is uneven...housing
prices are the highest they have been since 2008. But earnings are
slipping. Interest rates are at record lows. but no one is borrowing. and
so on. If unemployment starts to go up even a little, then you will see
QE3. They will throw money at the consumer. However you can't do that AND
keep interest rates low forever. We are going to see big inflation from
food prices this fall/winter anyway due to the drought in the midwest
(non-existent global warning anyone?) and I expect a warmer than normal
winter. The entire Greenland ice cover melted in 4 days last month, though to be fair this appears to be a cyclic event.
Politically, all indicators show Obama as strong favorite to win
the election. The RNC and Superpac ads are overwhelming Obama something
like 4 to 1 right now, and its worse in swing states. But if Romney wins
-- the entire government, all 4 branches, will be in the hands of the
Republicans. The US will become like Mexico. It's what they did when Bush
was Pres and they will do it again --- absolute power corrupts absolutely.
And Romney hasn't had an orignal thought in 20 years. He will be a puppet
of the right. And the right wants war with Syria or Iran. War with Syria
is a proxy war with Russia. That's one reason we aren't there now. War with
Iran means the end of the US as a super-power. We will be a 3rd world
nation with a huge army and nothing more, no influence, no power
projection, irrelevant. If Obama wins you get two choices -- more of the
last 4 years -- OR...bold initiatives that will go nowhere AND scathing
rhetoric. A second term President Obama has nothing to lose. He wont have the senate
or congress. But he WILL have the Executive Order that allows him to rule
like a king for 4 years. At least til 2014 Congress wont have the numbers
to impeach him. But he is between a rock and a hard place -- raise taxes
or cut spending and send the economy into depression.
No matter
what, we are going into depression or recession and we are losing power
and influence. For this we can thank Bush. The war with Iraq cost us the
future and propelled China to the world stage. They are the new superpower
and there will be few who are going to pick the US over the Chinese. The
US is nice but China is a brutal enemy with a long memory. The US forgets
its friends on a regular basis. Ask Georgia after Bush swore to the living
Christ he would protect them from the Russians. Yeah. Ok. It was
Czechoslovakia 1968 all over again. This is a constant US pattern. And
don't think I'm just condemning Bush -- Obama threw Mubarak under the bus
as soon as the opportunity presented itself, despite 30 years of trust and
friendship. Mubarak was a brutal despot but so what? He gave us Egypt from
the Russians. We COULD have offered him refuge. But we did what Americans
do -- use people and nations like our toilet paper.
Things are
sliding. It's not because of our debt. On the contrary -- it's because
there is not enough Keynesian activity. And as long as we carry the personal debt
load we carry it will be hard, oh so hard, for us to recover. Obama knew
that it would take something like the internet boom of the 90s for that to
happen, and he tried to spark that by investing in Green Technology, but the Chinese undercut our prices,
the Germans overrode our technology and the Republicans second guessed the
strategy so that hope failed. If we DONT get something like the internet
of the 90s again, then America will be a has-been nation in no time at
all. Not like Greece, but more like England. Reflecting glory of the past,
with flashes of power and brilliance but without the strength to impose
its will unless it fires a gun.
Showing posts with label spending. Show all posts
Showing posts with label spending. Show all posts
Saturday, July 28, 2012
Saturday, March 17, 2012
Greece, Europe, the US and Options for Dealing with Debts
I don't care who you are, a Republican or a Democrat, an American or a European. There is a limited number of things that anyone can do about debt, deficit and growth. Right now Greece is the sacrificial lamb for German and French bankers as they try to save their skins, but they are doing Greece no favors and Greece is its own worst enemy and always has been.
Here are the FACTS:
There are only 5 ways to lower or eliminate the deficit:
1) Cut spending.
2) Raise taxes.
3) Grow the economy.
4) Induce inflation.
5) Default selectively or totally on the debt forcing a balanced budget.
Also remember that DEBT and DEFICIT are 2 different things. The deficit is the difference between what we take in for taxes and what we spend, running in the US right now about 1.2 trillion per year. The debt is all those deficits added up, year after year. The debt is about 15 trillion dollars right now, and it's the INTEREST on that debt that really hurts us. Right now, it's probably the number 2 biggest item behind Defense spending, and it grows every year, meaning less money for highways, tanks, airports, customs inspectors, FBI, etc, etc,
Chart 1: US Budget Line Items for 2012
Interest on the debt is about 400 billion dollars and is included in "All Other Government Spending". This number goes up alot every year. Ask yourself...what could the US do with an additional 400 billion dollars every year?
Option 1: Cut Spending
This is the ONLY option of the Republicans. They somehow think that by cutting spending they are going to make the economy grow. Here's a reality check for you -- DO YOU SEE ANY GROWTH AT ALL IN GREECE??? Do you even FORESEE any growth in Greece in the near future? The devil is in the details. Cutting spending would be like throttling down the engine on your car. You would go slower. Sometimes you stall. This is the problem with cutting spending. Every dollar you cut means fewer jobs. If we cut our 1 trillion dollar deficit next year, for example, it would probably mean the loss of something like 10 million jobs. Does anyone REALLY think the Republicans would ever do this? If we lost 10 million jobs it would make the Great Depression look like a small divot. They are LYING when they say they will cut spending. Especially if they go to war with Iran. You can see this in Greece today. One of the goals of "austerity" is to drive the Greeks towards a balanced budget. We see the results on the news every night -- high unemployment; lost pensions; rising fees; riots. And the US could pay all of Greece's debts and hardly even notice it -- what do you think would happen if WE had to suddenly balance the budget??? It would be the end of the world as we know it. Drug addicts often die when they quit cold turkey.
Option 2: Raising Taxes
Raising taxes is the Democrat's plan. At least they always seem to get the reputation for this. -- in Keynesian terms, raising taxes is the same thing as "destroying money". When you destroy money, it slows the economy. The current economy is going so slowly now that if we slow it anymore it will go backwards, ie, recession. That means lost jobs. That's why the Democrats only want to raise taxes on the rich. They have money and don't spend it. It impacts the economy less.And don't believe the hype about taxing the rich "kills the job creators". About 75 percent of the jobs in the US are created by companies with 50 employees or less. Those companies are started and run, by and large, by POOR PEOPLE. And if the rich were creating soooo many jobs, why was job creation under George W. Bush the worst since the depression? (You can look these facts up on Wikipedia under "Jobs created during U.S. presidential terms. And don't give me any shit about using Wikipedia as a source).
3. Growing the Economy
Growing the economy allows you to generate more revenues on the existing tax structure. It was this, more than anything else, that helped Clinton balance the budget in the 90s. The government was taking in tax receipts hand over fist. This is the double edged sword of the recession -- not only do you have to pay more in welfare and foodstamps, but you are getting LESS in tax revenues. Ouch.
But growing the economy is hard to do. How do you "grow the economy"? You'd have to have another major change like the internet boom, or remove SOX rules for entrepreneurs...or create another major bubble in housing. Note that this is what the Japanese tried and failed at...they had NEGATIVE interest rates for awhile (that is, if you took a loan, they paid YOU money instead of you paying interest) and it still didn't work. Growth really worked for the US after WW2 but we don't have the Manufacturing economy we once did. This is the reason the Fed pumps money into the economy...the hope is that by making money available, people will spend and spending will lift the economy, the same way priming your lawnmower with gasoline gets it to start faster. Right now it's not really working so well.
4. Inflation
Induce Inflation -- inflation makes old debt cheap. This is why George W. Bush brought Ben Bernanke onto the Fed in the first place. Bernanke is a big fan of inflation and Bush was running huge deficits. Bush's plan was to inflate as much of the debt away as possible. This would have had two benefits -- it would make the debt less valuable (and dangerous) and it would screw the Chinese to whom Bush was secretly selling the US to the tune of 3 trillion dollars. Until Bernanke became Chairman, inflation in the US was miniscule less than 1 percent during the entire Clinton administration...during the entire Bush years, it ran at 3 - 5 percent, which is huge for the US and contrary to the goals of the Fed since the 1980s. Each percentage point of inflation "destroyed" billions in dollar value. It was like getting "free" money from the Chinese and the Arabs. On the other hand, when you are the world's reserve currency and people look to you for stability, why would you piss off your creditors that way?
Now we are suffering from the possibility of Deflation, which is even worse. Deflation means a dead economy...prices keep dropping but no one buys anything because they think it will be cheaper next week. Note that the Fed has dumped trillions of fake dollars into the economy and yet inflation is still low. This is a really bad sign. (Note, oil prices don't count here, there are other factors). Look at Housing -- prices are at 1990s levels (according to "Chart of the Day" ) and interest rates are at the lowest levels they have ever been -- AND NO ONE IS BUYING!!!! (Actually lots of people are buying, people with cash. Now is the time when people with cash and nerves of steel get rich beyond their wildest dreams).
Chart One: Holders of US Debt
Holder Amt ($T) Percent
5. Default
Default - when the government defaults it says it will not honor its debts. The problem with this is that 75 percent of all US debt is owned by Americans and American institutions such as 401K, pension plans, banks and corps, individuals and governmental departments. So defaulting REALLY screws up Americans. Selectively defaulting -- for example, saying we just won't pay back the Chinese, is an ACT OF WAR. There would be serious repercussions for doing that. The Chinese have been selling off US debt for just this eventuality. They were holding as much as 3 trillion in 2008 but latest reports indicate they have much less than 2 trillion now. And look who else as stopped buying US debt -- Japan. They were the number 4 purchaser of US debt. Now they buy Chinese debt. ARE ALARM BELLS RINGING ANYWHERE? Note that in October 2007 a catastrophe occurred in the US little noticed by anyone. This was the first time in US history that no foreign governments purchased ANY US debt. The world was sending George Bush a signal to cut the debt. He didn't listen. There's another thing that is EXTREMELY interesting to note -- in 2000, when George W. Bush was elected, England was the number one or two holder of US debt, holding about 500 billion dollars in debt. By the time Bush left office, England had sold off all but 50 billion dollars of US debt. They had so little confidence in the Bush Administration that they sold off all our debt. That speaks volumes. The question comes, then, what does England think of the Obama Administration? In the years since Obama was elected, England is back to holding about 430 Billion dollars. They put their money where their mouth is.
In any event, once you default, it means you MUST balance your budget because no one will loan you money anymore or if they do, it will be at extremely high rates (look at Greece -- they had 5 year rates as high as 162 percent). So defaulting is a drastic step that cleans your slate and prepares you for the future, but it also puts the country into steep, steep decline, a great depression and lots of misery. No highways, no school funding, cut down military, no OSHA, no food inspectors, no parks, no rails, no airports, etc, etc. You would only do that as a last resort. You can actually see this happening in slow motion in Greece today -- that's why they are rioting, although their riots are pointless...you can't make it rain blood. You have to suck it up and prepare for tough times and a better future.
In actuality, it's a shame what the EU is doing to Greece, and all for a few French and German bankers. Greece NEEDS to default. Greece NEEDS to leave the EU for awhile. They are small enough that they don't matter and once the initial pain is accepted, they can grow again, and if they fix their miserable and corrupt books and tax system, they can rejoin the EU in 10 years or so. What's happening to Greece now is a travesty and only means they will be revisiting default again with 5 years at the most. Let the poor bastards default and get it over with.
So those are the basics.
So what WILL happen in the US? Ideally, spending WILL be brought under control...next year's budget is supposed to show a 900 billion dollar deficit...really bad, but still better than last year's budget deficit at 1.5 trillion. If the economy picks up steam (and it won't), the extra revenue from that growth will help. If we tax the rich a little more (and we won't), that will help too. But we will be seeing AT LEAST 500 billion dollar deficits for the forseeable future.Doesn't matter who is elected.
What does it mean?
It's the end of American supremacy. Syria is a case in point. America no longer has the financial muscle to accomplish great tasks. China, India and Russia can brush us aside. We are still enormously powerful, but we are no longer a "super power". We just think we are, but that's because the real super powers, the ones with real money, let us think that way. It's to their advantage. For now.
What will happen in the near term?
"By raising the price of gasoline we can cause the Obama re-election campaign to fail"
- anonymous oil industry executive, "Energy Industry News", July 2011
The US economy is growing slowly, but it will collapse in the June time frame. The stock market will collapse and S&P earnings are already projecting losses for the June report. The rapid rise in the price of gas is attributable to many things, not least is that oil companies want Obama to lose the election in the fall, but it is irrelevant -- the rise in the price of gas is the single biggest cause of recession and collapse of the economy. Gasoline has more power than the government to create or destroy money because it acts faster than the government can. The only tool the government has to counter it is to force higher MPG or encourage non-oil energy, and that is very slow and subject to the laws of and limits of physics.
Be prepared. You want to start moving your money out of ETFs, mutuals and the stock market into cash funds, US bond funds and gold. Bond funds will drop in yields but the money is safe. Gold is probably going to rise...a huge symbol of US power deterioration is that India and China have decided to go around the US and buy Iranian oil and pay...IN GOLD. By doing this they not only weaken the US further, they give Iran hard currency (gold), and show they don't care about the US or Iran's atom bomb...and it puts 20 billion dollars of pressure on Gold prices. But gold is volatile. Bonds are not. If we do attack Iran -- gold will be untouchable.
What SHOULD we do?
We should do all of (1 - 4) above but not default. There is no political will to make it happen but we have to cut spending faster than we are; we have to raise taxes, probably on everyone, not just the rich; we have to invest in something that might promise amazing growth, like space travel, fast rail or water infrastructure, and we have to let natural inflation do its job. We would have to bite the bullet and accept that the US is going to be weak for about 10 years. We have to cut entitlements and pensions and put limits on imports to foster manufacturing here. We would have to force savings and punish credit card purchasing. We have to eliminate college loans and create really cheap mortgage rates, like 1.5 percent, to induce house buying and refinance. If we forced every homeowner in America to refi at 2 percent for 30 years, not only would the recession be over but we would be back in boom times. This is of course, just opinion.
That's the report for today. Bet you are sorry you asked.
Here are the FACTS:
There are only 5 ways to lower or eliminate the deficit:
1) Cut spending.
2) Raise taxes.
3) Grow the economy.
4) Induce inflation.
5) Default selectively or totally on the debt forcing a balanced budget.
Also remember that DEBT and DEFICIT are 2 different things. The deficit is the difference between what we take in for taxes and what we spend, running in the US right now about 1.2 trillion per year. The debt is all those deficits added up, year after year. The debt is about 15 trillion dollars right now, and it's the INTEREST on that debt that really hurts us. Right now, it's probably the number 2 biggest item behind Defense spending, and it grows every year, meaning less money for highways, tanks, airports, customs inspectors, FBI, etc, etc,
Chart 1: US Budget Line Items for 2012
Interest on the debt is about 400 billion dollars and is included in "All Other Government Spending". This number goes up alot every year. Ask yourself...what could the US do with an additional 400 billion dollars every year?
Option 1: Cut Spending
This is the ONLY option of the Republicans. They somehow think that by cutting spending they are going to make the economy grow. Here's a reality check for you -- DO YOU SEE ANY GROWTH AT ALL IN GREECE??? Do you even FORESEE any growth in Greece in the near future? The devil is in the details. Cutting spending would be like throttling down the engine on your car. You would go slower. Sometimes you stall. This is the problem with cutting spending. Every dollar you cut means fewer jobs. If we cut our 1 trillion dollar deficit next year, for example, it would probably mean the loss of something like 10 million jobs. Does anyone REALLY think the Republicans would ever do this? If we lost 10 million jobs it would make the Great Depression look like a small divot. They are LYING when they say they will cut spending. Especially if they go to war with Iran. You can see this in Greece today. One of the goals of "austerity" is to drive the Greeks towards a balanced budget. We see the results on the news every night -- high unemployment; lost pensions; rising fees; riots. And the US could pay all of Greece's debts and hardly even notice it -- what do you think would happen if WE had to suddenly balance the budget??? It would be the end of the world as we know it. Drug addicts often die when they quit cold turkey.
Option 2: Raising Taxes
Raising taxes is the Democrat's plan. At least they always seem to get the reputation for this. -- in Keynesian terms, raising taxes is the same thing as "destroying money". When you destroy money, it slows the economy. The current economy is going so slowly now that if we slow it anymore it will go backwards, ie, recession. That means lost jobs. That's why the Democrats only want to raise taxes on the rich. They have money and don't spend it. It impacts the economy less.And don't believe the hype about taxing the rich "kills the job creators". About 75 percent of the jobs in the US are created by companies with 50 employees or less. Those companies are started and run, by and large, by POOR PEOPLE. And if the rich were creating soooo many jobs, why was job creation under George W. Bush the worst since the depression? (You can look these facts up on Wikipedia under "Jobs created during U.S. presidential terms. And don't give me any shit about using Wikipedia as a source).
3. Growing the Economy
Growing the economy allows you to generate more revenues on the existing tax structure. It was this, more than anything else, that helped Clinton balance the budget in the 90s. The government was taking in tax receipts hand over fist. This is the double edged sword of the recession -- not only do you have to pay more in welfare and foodstamps, but you are getting LESS in tax revenues. Ouch.
But growing the economy is hard to do. How do you "grow the economy"? You'd have to have another major change like the internet boom, or remove SOX rules for entrepreneurs...or create another major bubble in housing. Note that this is what the Japanese tried and failed at...they had NEGATIVE interest rates for awhile (that is, if you took a loan, they paid YOU money instead of you paying interest) and it still didn't work. Growth really worked for the US after WW2 but we don't have the Manufacturing economy we once did. This is the reason the Fed pumps money into the economy...the hope is that by making money available, people will spend and spending will lift the economy, the same way priming your lawnmower with gasoline gets it to start faster. Right now it's not really working so well.
4. Inflation
Induce Inflation -- inflation makes old debt cheap. This is why George W. Bush brought Ben Bernanke onto the Fed in the first place. Bernanke is a big fan of inflation and Bush was running huge deficits. Bush's plan was to inflate as much of the debt away as possible. This would have had two benefits -- it would make the debt less valuable (and dangerous) and it would screw the Chinese to whom Bush was secretly selling the US to the tune of 3 trillion dollars. Until Bernanke became Chairman, inflation in the US was miniscule less than 1 percent during the entire Clinton administration...during the entire Bush years, it ran at 3 - 5 percent, which is huge for the US and contrary to the goals of the Fed since the 1980s. Each percentage point of inflation "destroyed" billions in dollar value. It was like getting "free" money from the Chinese and the Arabs. On the other hand, when you are the world's reserve currency and people look to you for stability, why would you piss off your creditors that way?
Now we are suffering from the possibility of Deflation, which is even worse. Deflation means a dead economy...prices keep dropping but no one buys anything because they think it will be cheaper next week. Note that the Fed has dumped trillions of fake dollars into the economy and yet inflation is still low. This is a really bad sign. (Note, oil prices don't count here, there are other factors). Look at Housing -- prices are at 1990s levels (according to "Chart of the Day" ) and interest rates are at the lowest levels they have ever been -- AND NO ONE IS BUYING!!!! (Actually lots of people are buying, people with cash. Now is the time when people with cash and nerves of steel get rich beyond their wildest dreams).
Chart One: Holders of US Debt
Holder Amt ($T) Percent
FRS 6.328 46
China 1.132 8.3
Citizens 1.107 8.1
Japan 1.038 7.6
US Pension Funds .8423 6.2
US Mutual Funds .6535 4.8
US State/Local Gov .4844 3.6
UK .4294 3.2
US Banks .2824 2.1
US Insurance Co .2501 1.9
All other funds 1.000 7.4
China 1.132 8.3
Citizens 1.107 8.1
Japan 1.038 7.6
US Pension Funds .8423 6.2
US Mutual Funds .6535 4.8
US State/Local Gov .4844 3.6
UK .4294 3.2
US Banks .2824 2.1
US Insurance Co .2501 1.9
All other funds 1.000 7.4
All US Held by Percent: 74%
Foreign Held: 26%
Foreign Held: 26%
Source: http://finance.yahoo.com/news/biggest-holders-of-us-gov-t-debt.html
5. Default
Default - when the government defaults it says it will not honor its debts. The problem with this is that 75 percent of all US debt is owned by Americans and American institutions such as 401K, pension plans, banks and corps, individuals and governmental departments. So defaulting REALLY screws up Americans. Selectively defaulting -- for example, saying we just won't pay back the Chinese, is an ACT OF WAR. There would be serious repercussions for doing that. The Chinese have been selling off US debt for just this eventuality. They were holding as much as 3 trillion in 2008 but latest reports indicate they have much less than 2 trillion now. And look who else as stopped buying US debt -- Japan. They were the number 4 purchaser of US debt. Now they buy Chinese debt. ARE ALARM BELLS RINGING ANYWHERE? Note that in October 2007 a catastrophe occurred in the US little noticed by anyone. This was the first time in US history that no foreign governments purchased ANY US debt. The world was sending George Bush a signal to cut the debt. He didn't listen. There's another thing that is EXTREMELY interesting to note -- in 2000, when George W. Bush was elected, England was the number one or two holder of US debt, holding about 500 billion dollars in debt. By the time Bush left office, England had sold off all but 50 billion dollars of US debt. They had so little confidence in the Bush Administration that they sold off all our debt. That speaks volumes. The question comes, then, what does England think of the Obama Administration? In the years since Obama was elected, England is back to holding about 430 Billion dollars. They put their money where their mouth is.
In any event, once you default, it means you MUST balance your budget because no one will loan you money anymore or if they do, it will be at extremely high rates (look at Greece -- they had 5 year rates as high as 162 percent). So defaulting is a drastic step that cleans your slate and prepares you for the future, but it also puts the country into steep, steep decline, a great depression and lots of misery. No highways, no school funding, cut down military, no OSHA, no food inspectors, no parks, no rails, no airports, etc, etc. You would only do that as a last resort. You can actually see this happening in slow motion in Greece today -- that's why they are rioting, although their riots are pointless...you can't make it rain blood. You have to suck it up and prepare for tough times and a better future.
In actuality, it's a shame what the EU is doing to Greece, and all for a few French and German bankers. Greece NEEDS to default. Greece NEEDS to leave the EU for awhile. They are small enough that they don't matter and once the initial pain is accepted, they can grow again, and if they fix their miserable and corrupt books and tax system, they can rejoin the EU in 10 years or so. What's happening to Greece now is a travesty and only means they will be revisiting default again with 5 years at the most. Let the poor bastards default and get it over with.
So those are the basics.
So what WILL happen in the US? Ideally, spending WILL be brought under control...next year's budget is supposed to show a 900 billion dollar deficit...really bad, but still better than last year's budget deficit at 1.5 trillion. If the economy picks up steam (and it won't), the extra revenue from that growth will help. If we tax the rich a little more (and we won't), that will help too. But we will be seeing AT LEAST 500 billion dollar deficits for the forseeable future.Doesn't matter who is elected.
What does it mean?
It's the end of American supremacy. Syria is a case in point. America no longer has the financial muscle to accomplish great tasks. China, India and Russia can brush us aside. We are still enormously powerful, but we are no longer a "super power". We just think we are, but that's because the real super powers, the ones with real money, let us think that way. It's to their advantage. For now.
What will happen in the near term?
"By raising the price of gasoline we can cause the Obama re-election campaign to fail"
- anonymous oil industry executive, "Energy Industry News", July 2011
The US economy is growing slowly, but it will collapse in the June time frame. The stock market will collapse and S&P earnings are already projecting losses for the June report. The rapid rise in the price of gas is attributable to many things, not least is that oil companies want Obama to lose the election in the fall, but it is irrelevant -- the rise in the price of gas is the single biggest cause of recession and collapse of the economy. Gasoline has more power than the government to create or destroy money because it acts faster than the government can. The only tool the government has to counter it is to force higher MPG or encourage non-oil energy, and that is very slow and subject to the laws of and limits of physics.
Be prepared. You want to start moving your money out of ETFs, mutuals and the stock market into cash funds, US bond funds and gold. Bond funds will drop in yields but the money is safe. Gold is probably going to rise...a huge symbol of US power deterioration is that India and China have decided to go around the US and buy Iranian oil and pay...IN GOLD. By doing this they not only weaken the US further, they give Iran hard currency (gold), and show they don't care about the US or Iran's atom bomb...and it puts 20 billion dollars of pressure on Gold prices. But gold is volatile. Bonds are not. If we do attack Iran -- gold will be untouchable.
What SHOULD we do?
We should do all of (1 - 4) above but not default. There is no political will to make it happen but we have to cut spending faster than we are; we have to raise taxes, probably on everyone, not just the rich; we have to invest in something that might promise amazing growth, like space travel, fast rail or water infrastructure, and we have to let natural inflation do its job. We would have to bite the bullet and accept that the US is going to be weak for about 10 years. We have to cut entitlements and pensions and put limits on imports to foster manufacturing here. We would have to force savings and punish credit card purchasing. We have to eliminate college loans and create really cheap mortgage rates, like 1.5 percent, to induce house buying and refinance. If we forced every homeowner in America to refi at 2 percent for 30 years, not only would the recession be over but we would be back in boom times. This is of course, just opinion.
That's the report for today. Bet you are sorry you asked.
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