Archive for March, 2012

“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

With those words, John Maynard Keynes–the inventor of the “prime the pump,” economic stimulus theory employed by both FDR and Obama–tells you everything you need to know about current U.S. monetary and fiscal policy.  And while he said this as an attack on inflation, it is ironic that his policies have–in some people’s minds–led to high levels of inflation right here in the United States.

American Endgame has already touched upon inflation in fleeting terms.  We have discussed the idea that inflation is the rate at which a particular currency loses its value.  For example, a 2% rate of inflation will leave a dollar with 25% of its buying power after about 75 years.  A 6% rate of inflation will accomplish the same in just over 20.  But one thing we have not discussed is how inflation may be purposely being employed by the U.S. Government–and governments around the world–to both buy this economy more time and to establish a solution to America’s “there’s no way we can pay off our debt” problem.

The mechanics of inflation are fairly straightforward.  Assuming a fixed supply of currency, businesses will accept the fact that there is a finite amount of money to be “earned,” and prices will stabilize around a strategy to maximize a business’ ability to get the largest chunk of that pot as possible.  By way of example, if there were $1,000,000 in the U.S. economy, an intelligent businessman would recognize that there are $1,000,000 in circulation and “up for grabs” among the workers.  Some of these dollars would be given to the workers through paychecks, while others would be made available through bank loans, credit card borrowing, etc.  This intelligent businessman would also recognize that, on average, each American has access to $1,000,000/x, with x being the number of workers in the country (this is dramatically simplified, but bear with me).  After factoring how much of that money must go to basics needed to survive, a businessman makes a calculation of how much they will charge for their good or service to entice workers to spend a portion of their $1,000,000/x dollars on their product to maximize their profit.  Conversely, as a worker with only $1,000,000/x dollars available to spend, one must carefully determine how much they must spend to survive, buying food and clothing, paying rent and utilities, before going out to buy other goods.  Every purchase results from a calculation that goes approximately like this: “I have $1,000,000/x, so I can still afford to buy…”

Now, what would happen if the U.S. Government made arrangements to introduce an extra $1,000,000 into the economy?  This could be done through various methods, including physically creating more currency or by lowering the amount of money banks must hold in reserve, thus allowing them to fractionally lend greater amounts of their deposits.  Either way, let us say that now the U.S. economy consists of $2,000,000, and the amount of money available to workers is $2,000,000/x, on average.  Of course, this increase will come almost entirely from bank lending and credit card borrowing, since no one is going to advocate doubling a worker’s pay in America–not even in our hypothetical scenarios is that anywhere near realistic.  So, now the intelligent businessman recognizes that there are two times as many dollars out there to get his hands on.  In this way, prices would rise in all sectors because people are now “twice as able” to buy the products they’ve been buying all along.  And while the original intent of the government introducing more currency would have been to get people to buy “extra” stuff with their “extra” money, the effect is almost always different: people will end up buying the same stuff at an “extra” cost.  The effect is highly detrimental, and not stimulative at all.

One doesn’t have to be a prize-winning economist to see that this set of circumstances is not only happening today, but very dangerous indeed.  After all, if I make a fixed amount of money, and prices continually rise because more money is available to use, this is highly problematic.  My purchasing power drops continually as my slice of the overall pie continues to dwindle as I sit helpless.  If, in order to keep up, I do what so many Americans do and borrow money from banks or use credit cards to fill the gap, I am doubly in trouble.  How will I ever pay it back on a fixed, finite amount of pay? (I say “fixed” and “finite,” and I use those terms in a relative sense.  A 3% payraise–unimaginable for most of us–is not “fixed,” but might as well be for the purposes of taking on inflation, since the numbers we see suggest inflation is somewhere near 9 or 10%.)  So why does the U.S. Congress and the Federal Reserve continue to make more money available?  Consider the alternative.  Should the Federal Reserve end its policy of introducing more currency into the system on a fairly constant basis–this introduction is easy because U.S. Dollars, as we’ve learned, are fiat and have no real value–people will be forced, finally for the first time in probably 30 years, to live within their means.  “Living within their means” scares the Hell out of Congress.  Without more money always being introduced into the system, the United States would experience a highly deflationary event.  Americans would quickly begin to conserve and spend far more preciously the currency they possess in order to survive.  Without additional availability of credit, we would see money spent on food, utilities, gasoline to get to and from work, clothing, and other basics.  Goodbye, Channels 2-300…  Goodbye, trips to the movies for a family of four…  Goodbye new cars that can’t be paid for from savings…  You get the picture.  While the uber-rich would probably be fine, the 99% would vastly reduce their spending, and this would cause a massive collapse of the United States’ economy for want of customers.  Layoffs would ensue, and a deflationary spiral–where prices would fall to keep up with spending habits, which would lead to layoffs, which would lead to businesses shuttering, which would lead to catastrophe–would be almost certain.

There are some who dare suggest that this type of event is inevitable and necessary to fix the problem we’ve created by allowing too much debt to accumulate in the system.  After all, $55 trillion is a lot of debt, and like any massive debt, it will save a lot of money in the long-term were it paid down or paid off.  The devil is in the interim.  The contraction of such an overinflated economy would most likely feel like something between the Great Depression and the Dark Ages.  And as we’ve seen this year in Greece, when the government reduces its spending–ending favored social programs, reducing benefits, lowering minimum wages, and potentially increasing taxes–ain’t nobody gonna be happy.  The problem then becomes not only an economic problem, but a major social problem and a political problem.  And Congress and the White House don’t have the stomach for an American Spring, which is what they would be looking at if they make the necessary changes.

I am of the mind that we are definitely going to experience this “something between the Great Depression and the Dark Ages” event–you could probably tell by the title of this blog.  The question is not whether a major credit crisis will occur.  The questions are “when will it occur,” “how do we mitigate the impact on our society,” and “what do we owe to our progeny?”  If our generation could shoot for the Great Depression–an event which we survived–and take that on, it would be a great contribution to our nation’s future.  This would be far better than the Dark Ages scenario.  However, we grew up in a society so focused on material gain, selfish behavior, and instant gratification, that we may not have the mental fortitude to take this on.  The alternatives are dire.

One way or another, this event is unavoidable unless we make changes to our spending now.  The selfish path leads to our annihilation.  The selfless path–where Medicare, Social Security, low taxes, and military omnipresence are sacrificed–may get us out of this mess in the next 50 or 60 years.  I am simply not yet convinced we as a people have the foresight and strength to recognize the need for these changes and make them.  Even if our Congress sees the need and tries to save us from ourselves, we will probably “unelect” them or riot in the streets.  Either way, the outcomes will most likely be the same and we’ll have an interesting lifetime to look forward to.

~ DS

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 “Every time the workers come out in the only way they know to protest against conditions which are unbearable the strong hand of the law is allowed to press down heavily upon us.” ~ Rose Schneiderman

One of the more predictable reactions of the Federal and state governments in this period of change–a period when we begin to slowly realize in this country that expansion is not infinite, regardless of how Congress and the Fed try to keep it that way–is the desire to curb protest and demonstration.  Two key events in 2011–the public workers’ occupation of the Wisconsin State House and the general public’s occupation of Zuccotti Park outside the New York Stock Exchange–convinced The Powers That Be that Americans are still far too free to speak up and speak out in the event that the government begin to impose austerity on its population a la Greece.  After all, as George Carlin once said, “even in a fake democracy, the People ought to get what they want once in a while…”  Even as it pretended to support democratic demonstrations in Egypt last year, the U.S. Government was understanding the power of the people to create a mass movement that could overthrow a political system.
And how did this predictable reaction manifest itself?  In three key ways.  First, we’ve seen the unconstitutional National Defense Authorization Act signed into law by Barack Obama.  This Act does nothing less than eliminate Habeas Corpus.  That is, it allows American citizens who have not been charged with a crime to be held indefinitely and without hearing or access to counsel if the President deems that they are supporting terrorism.  This of course flies in the face of what it means to be American, but is not without precedent.  These tactics were used by other Presidents, namely Lincoln and FDR, both men held up by their parties as shining examples of righteousness and justice, during periods of national crisis.  Why, suddenly in 2011/2012, do we need to lock up Americans without hearing or counsel?  Are we suddenly more in danger from American would-be terrorists than we were 10 years ago?
Next, we experienced the flash fury that surrounded Congress’ attempts to control the Internet through the Stop Online Piracy Act and the Protect IP Act, both of which intended to outlaw “piracy” on the Internet.  These laws would have essentially given the U.S. Government carte blanche to regulate Web content.  A post should be dedicated some day to how quickly Congress abandoned these bills when millions of Americans contacted Congress to demand SOPA and PIPA be rejected.  While we will probably never be sure how many people contacted their legislators on this issue, it must have been a fantastic amount.  Congress was scared to proceed, and probably decided the American people were not ready to be ram-rodded in this fashion.
But this week, a little-known story that even this author would not be aware of except by random chance comes to us from news source rt.com, an English-language news site from Russia.  You can find the article linked here.  Below I present a selection:
The US House of Representatives voted 388-to-3 in favor of H.R. 347 late Monday, a bill which is being dubbed the Federal Restricted Buildings and Grounds Improvement Act of 2011. In the bill, Congress officially makes it illegal to trespass on the grounds of the White House, which, on the surface, seems not just harmless and necessary, but somewhat shocking that such a rule isn’t already on the books. The wording in the bill, however, extends to allow the government to go after much more than tourists that transverse the wrought iron White House fence.
Under the act, the government is also given the power to bring charges against Americans engaged in political protest anywhere in the country.
Under current law, White House trespassers are prosecuted under a local ordinance, a Washington, DC legislation that can bring misdemeanor charges for anyone trying to get close to the president without authorization. Under H.R. 347, a federal law will formally be applied to such instances, but will also allow the government to bring charges to protesters, demonstrators and activists at political events and other outings across America.
The new legislation allows prosecutors to charge anyone who enters a building without permission or with the intent to disrupt a government function with a federal offense if Secret Service is on the scene, but the law stretches to include not just the president’s palatial Pennsylvania Avenue home. Under the law, any building or grounds where the president is visiting — even temporarily — is covered, as is any building or grounds “restricted in conjunction with an event designated as a special event of national significance.”
The article alarmed me, to say the least, and I honestly thought it was a joke.  Is this from the Onion?  So, to help me relax, I went to thomas.loc.gov, a Library of Congress website that allows you to search bills before Congress.  This is the official Congressional source for pending legislation.  Sure enough, there it sat:
Amazingly, I noticed under “Latest Action” the phrase, “On motion that the house suspend the rules and agree to the Senate amendment Agreed to by the Yeas and Nays: 388 – 3.”  This is Cspan nerdspeak for the fact that the Senate has already passed a similar version of this bill, and that the House was agreeing to the Senate’s proposed changes in order to create an identical bill that could be passed by both chambers and sent to the President for his signature.  It is now essentially waiting to be signed.
Now, before we go off half-cocked, one has to ascertain the context of this bill.  On its face, it sounds insidious, but it could also be a simple update of current law related to Secret Service protection for principals of the U.S. Government and presidential candidates.  So, is this a massive change designed to suppress American resistance to government control, or a minor security update?  Its hard to say without knowing how the law currently reads, but thanks to American Endgame,you can at least judge the text of the bill here:
    `(a) Whoever–
      `(1) knowingly enters or remains in any restricted building or grounds without lawful authority to do so;
      `(2) knowingly, and with intent to impede or disrupt the orderly conduct of Government business or official functions, engages in disorderly or disruptive conduct in, or within such proximity to, any restricted building or grounds when, or so that, such conduct, in fact, impedes or disrupts the orderly conduct of Government business or official functions;
      `(3) knowingly, and with the intent to impede or disrupt the orderly conduct of Government business or official functions, obstructs or impedes ingress or egress to or from any restricted building or grounds; or
      `(4) knowingly engages in any act of physical violence against any person or property in any restricted building or grounds;
    or attempts or conspires to do so, shall be punished as provided in subsection (b).
    `(b) The punishment for a violation of subsection (a) is–
      `(1) a fine under this title or imprisonment for not more than 10 years, or both, if–
        `(A) the person, during and in relation to the offense, uses or carries a deadly or dangerous weapon or firearm; or
        `(B) the offense results in significant bodily injury as defined by section 2118(e)(3); and
      `(2) a fine under this title or imprisonment for not more than one year, or both, in any other case.
    `(c) In this section–
      `(1) the term `restricted buildings or grounds’ means any posted, cordoned off, or otherwise restricted area–
        `(A) of the White House or its grounds, or the Vice President’s official residence or its grounds;
        `(B) of a building or grounds where the President or other person protected by the Secret Service is or will be temporarily visiting; or
        `(C) of a building or grounds so restricted in conjunction with an event designated as a special event of national significance; and
        `(2) the term `other person protected by the Secret Service’ means any person whom the United States Secret Service is authorized to protect under section 3056 of this title or by Presidential memorandum, when such person has not declined such protection.’.
            So, are we entering an Orwellian state where public protest is being controlled by the Federal government?  We’ll see as things progress.  The average citizen sees what he wants to see, I suppose.  Does the thoughtful citizen have reason to be concerned?  Judge for yourself…
                ~DS