Free Markets, Free People
Monty Pelerin, writing in The American Thinker, is thinking about the unthinkable. What would happen if the US held a bond auction..and no one bought any bonds? Even worse, what would happen if we were to default on the $16 trillion in bonds already outstanding?
What occasions this thinking is something he read in Bob Woodward’s new book on the Obama administration, a portion of which is excerpted in the Washington Post. This excerpt discusses last year’s debt ceiling crisis. In it Treasury Secretary Timothy Geithner tries to explain how bad it would be if credit markets stopped buying Treasuries.
But, here’s the thing:
Credit markets have (or nearly have) stopped US government debt financing. That’s why we have the Federal Reserve, the counterfeiter of last resort. If government can raise the debt limit, then it would be legal for the Treasury to issue new debt. The Treasury’s sibling, the Fed, would buy it by printing new money. That would allow the government to pay its bills for a while longer…
No one will buy US Treasuries other than the Federal Reserve. Raising the debt limit only puts the government more hopelessly in debt, ensuring that Treasuries will be even more difficult to sell. Without intending it, Geithner admits that Bernanke will be printing money until the electricity is shut off or until hyperinflation shuts everything economic down. In either case, we reach his "indelible, incurable" situation which will "last for generations."
Take a look at the monetary base of the United States, which I would describe simply as all the money of all types floating around in the economy. You know why that number has jumped massively since 2009? Because the Fed has been the major buyer of US treasuries, and it buys them by simply printing new money.
Now, the US Dollar is the world’s reserve currency. What that means is that it is expected to be strong, stable, and plentiful enough—though not too plentiful—to be used as the primary backup currency for the entire world’s global trade.
But, since 2009, we have essentially financed our massive debt, which is now at 104% of GDP by having the Fed print the money to buy the Treasury’s bonds. The chart you see here is the result of two separate rounds of Quantitative Easing of that sort, and the Fed is now considering QEIII.
Now, Greece, the sick man of Europe’s financial system, has a debt to GDP ratio of 128%. At the current rate of spending, we could reach that within a decade. But we won’t, of course, because at some point between 104% and 128% of GDP, we will have so much debt that the US will be the world’s financial sick man. At some point credit markets will simply not bid on US Treasuries, because the specter of inflation or default will loom so large that only the Fed would be stupid enough to show up at a bond auction.
When that happens, current foreign holder of US treasuries will face intense pressure to divest themselves of them. Prices will collapse, and interest rates will skyrocket. If the Fed steps in to buy those treasuries to support the price—which they almost certainly will, because politicians will demand it—we will then be clearly seen as fully monetizing the debt.
At that point, foreign holders of US dollars will demand that some other currency or asset be used as a reserve, at which point foreign holders of dollars will scramble to repatriate those dollars as quickly as they can.
The dollar will then become worthless in foreign trade, and we will face massive hyperinflation in the US.
On our current spending path, with our current level of debt, this is inevitable, and we have no idea when it will happen. We are literally a single bond auction away from a complete and utter collapse of the US financial and monetary system. We just don’t know when, exactly, that bond auction will be. It might be this week. It might be five years from now.
But, I repeat, at this point, barring a massive change to our fiscal and monetary policy, it is inevitable. There is no way credit markets will continue to buy US Bonds as our debt to GDP ratio climbs towards that of Greece. When that happens, we will either monetize that debt or default on it. Either way, the result will be years, if not decades, of American poverty.
And once that process starts, there will be no way to stop it. We can’t come back a week later and say, "hey, we fixed it!" Once it starts…we’re done.
After WWII, the US debt to GDP ratio was 124%. At the end of WWII, we slashed government spending by 50%, and eliminated the most onerous and confiscatory wartime taxes, and, though marginal rates were still high, offered a myriad of exemptions that essentially ensured that no one paid the marginal rates. We also scrapped the entire wartime system of industrial production regulation and eliminated rationing. And, of course, we had the only fully industrialized economy left in the world, as everyone else’s had been bombed, if not back into the Stone Age, at least into the Age of Reason, and we became the world’s chief industrial power, exporter, and global business leader.
To do something similar today, we’d have to completely eliminate the entirety of the Federal government, with the exception of the Departments of State, Defense, Justice, Interior, and Treasury, and cut Social Security, Medicaid and Medicare spending by at least 50%.
That’s not going to happen. I believe the current Republican plan to attack the debt and balance the budget won’t even eliminate the budget deficit until sometime around 2040.
Ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha!b That’s rich. Like we have 30 years available to fix this. It is to laugh.
Update: And, this morning, right on time, I see that House Speaker John Boehner says he’s "not confident" that Congress and the administration can reach a debt deal. In which case, Moody’s has already warned that they will downgrade the US credit rating by another step. Meanwhile, the rumor is that the Fed is now preparing for another $840 billion in quantitative easing.
That bond auction just keeps getting closer.
In the comments of yesterday’s photoblogging thread, Looker asked why, when he takes photos of plain old stuff, it looks like plain old stuff. My answer is that he’s probably looking at the actual photograph he took, not the photo it could be.
For instance this is a crappy photograph:
This is better:
Unlike the photo on top which is a an uncorrected RAW export of the full original image to JPG format, the photo on the bottom crops out all the extraneous stuff possible, uses the rule of thirds to put the barred window on the bottom right, steps the exposure down about half a stop, warms the color temperature about 500°, and alters the color balance.
If I really wanted to spend the extra time to make it dramatic—and, now that I’ve done it, I wish I would have—I could’ve done this:
This, by the way, is why you shoot in RAW format. You can fiddle with stuff as much as you want, and fiddling around in RAW is non-destructive. You can always recover the image as it was when it came out of the camera, no matter what you do to it. The only drawback is that the RAW image is about 6 times larger than a JPG, which, at 12.1 megapixel, translates to about 20MB per image.
So, I carry 4 32GB SD cards, and shoot as much as I want. Disk space is cheap.
Here are some more examples of dishonesty, when compared to the photos in the previous post. Here are the originals of two more images from the previous photoblogging post:
Mitt Romney stopped and bought Girl Scout cookies during a campaign stop this morning. He bought two boxes of Do-si-dos and a box of Trefoil butter cookies.
Debbie Wasserman-Shultz derided the incident as yet more evidence that Romney is out of touch with average Americans. "He didn’t get a single box of Samoas or Thin Mints? That’s unpardonable. Those are the Girl Scout Cookie varieties Americans love. Mitt Romney has proven again that he’s not fit to lead America during this tough economy."
Los Angeles mayor Antonio Villaraigosa called Romney a racist over the flap. "He didn’t buy anything that has any chocolate in it. Not only did he turn down the totally brown Thin Mints, he wouldn’t even take the partially brown Samoas. The only reason I can think of for such blatant insensitivity is outright racism."
Senate Majority leader Harry Reid said a friend in the Girl Scouts told him Romney had never purchased Samoas or Thin Mints. "The facts are clear. Unless Romney releases his purchase records of Girl Scout cookies for the last twenty years, we’ll all know exactly what to think."
A Romney campaign spokesman pointed out that the group of Girl Scouts selling cookies outside a supermarket was out of Samoas and Thin Mints. "We were all disappointed that there were no Samoas, but that’s not Mitt Romney’s fault. The Obama economy with its high unemployment has made it impossible for the Girl Scouts to predict how many cookies of each variety to order. I really wanted some Samoas with vanilla ice cream on top, but, hey, that’s just how it goes."
Politifact looked at the Romney campaign’s claim that they didn’t buy Samoas or Thin Mints because they were not available that day. Since there were some Samoas and Thin Mints available from other scouts elsewhere in the country, they rated the claim "mostly false".
Jonah Goldberg provides a little history lesson that helps one understand why it is that politicians are now credited with the country’s economic progress or lack thereof:
The idea that presidents “run” the economy is both ludicrous and fairly novel. Before the New Deal (which in my opinion prolonged the Great Depression), the notion that presidents should or could grow the economy was outlandish. But, as the historian H. W. Brands has argued, it was JFK who really cemented the idea that the president is the project manager for a team of technicians who create economic prosperity. “Most of the problems . . . that we now face, are technical problems, are administrative problems,” he explained, and should be kept as far away from partisan politics as possible.
It may have been JFK who “cemented” the idea, but it was FDR who first sold it and the myth that grew up around him that claimed he had saved us from the Great Depression. Subsequent study of the era has yielded pretty solid evidence that, in fact, his policies failed and it was a world war that dragged us out of the Depression.
That said, it really doesn’t matter – the perception and belief has been established that the President does indeed have an effect on the economy – right or wrong. That’s just the reality of the matter. Additionally, politicians haven’t been shy about cultivating that perception. It is another means of padding the resume (if the results during their term have been good) or attacking the incumbent (if the results haven’t been very good).
The truth is politicians do have an effect – usually when they chose to intervene, the economy does worse and when they get out of the way, it does better. For the most part, they have yet to realize that, however.
But that’s not really the point I’m interested in making. All of that said, what this race boils down too is a President, who has had poor results, claiming he should be given another 4 years to do better.
The problem with that? He’s already proven he doesn’t know what he’s talking about:
President Obama, a hybrid reincarnation of Kennedy and Roosevelt according to his fans, came into office with similar misconceptions. Controlling the White House, the House, and the Senate, his team of propeller-heads insisted that if we passed exactly the stimulus they wanted, the unemployment rate would top out at 8 percent and would be well below that by now.
They waved around charts and graphs “proving” they were right, like self-declared messiahs insisting they are to be followed because the prophecies they wrote themselves say so.They got their stimulus. They were wrong.
They were dead wrong.
So the question then, given their “know-it-all” claim and their assertions that their plan would work if we’d only give them the money, why should we trust them to do better the second time around, given the fact that we’re actually worse off now than when we were in the actual recession?
As Goldberg points out, their claim is the downturn was “so much worse than anyone realized” isn’t a good excuse given the assurance with which they made their previous claim.
Why didn’t they realize it? That’s a fair question.
A more important question though is why in the world would you give another chance to someone who didn’t drive the vehicle of the economy out of the ditch as promised, but instead put it into a telephone pole?
It makes absolutely no sense.
And Obama’s plan for his coming 4 years? As best as I can discern, pretty much maintain course and tax the rich. That’s it. We’re banging along the economic bottom, unemployment is trending worse, and Obama wants to raise taxes on a single group that would pay for a total of 11 hours of government spending.
You’re asked to buy into that nonsense as solid economic policy – i.e. giving him more time.
Are you actually going to do that?
If so, and if you give this incompetent president and his clueless advisers another 4 years, you deserve everything that comes with that choice – to include a hearty “I told you so” from me if I’m still around in 2016.