November 2012 Archives

Lessons from last night:

Demographically, Republicans can no longer win national elections. It doesn't matter who lied, it doesn't matter how unfair the media coverage, it doesn't matter the amount of cheating. Those are all included in the final result.

The Democrats saw that lying was successful. They will continue to do it.

The media are not going to become less biased. They are a focused filter favoring the Democrats - except for Fox, and Fox is preaching to the choir. The minority. The demonized minority.

The Democrats have a firm hand on the mechanisms for cheating, especially in urban centers. They are not going to suddenly stop.

Nor will there be fewer people dependent upon government handouts at the next election.

None of this matters because we are facing a financial crisis that could happen literally any day now. Nobody seriously thinks that the government has - or can get - the money to pay what it already owes. Our creditors - existing and potential - have already cut us off. Right now, the only thing standing between the US Government and a failed treasury auction is the fact that the Federal Reserve is buying up 70% of each new issue. They are paying for them with dollars created out of thin air, on the spot, and that is the only thing enabling the government to pay its bills right now.

If the Federal Reserve can do this, people who accept dollars are asking, then what real value does a dollar contain? What if the answer is "no real value at all"? There really isn't a good counter-argument to that.

So what happens when the people with goods and services to sell stop accepting dollars? Or at least, stop accepting them voluntarily?

The government, like any organism, will do whatever it takes to survive for as long as possible. It will confiscate what it needs from the citizenry and sell it to the highest bidder in order to get the most cash possible so that they can continue to pay law enforcement and all of the other bills.

(Military culture and ethos is wrong for this kind of work - so the military will be cut, mercilessly. But just like nobody can fight the military, we can't fight law enforcement either. What did you think the push behind giving law enforcement military toys was? I am telling you flat out NOT to fight, ever. The day for civil disobedience - not fighting - may come when the government is at the end of its rope. That day is not today, and if there is one thing I can guarantee looking at the long sad history of this kind of collapse it is that the government will not lack for brownshirt recruits. Those who believe in the mission will volunteer, and they will be thugs right out of the mold of all the worst internal police down through the centuries.)

That the government will then re-confiscate that sold item when they need the money again is something that may not be immediately apparent, but the smart folks with money will have it figured out right away. If it cannot be moved away from the government's ability to confiscate and re-confiscate, it won't really be worth anything. This means economic dislocation, as people either follow their jobs elsewhere or lose them.

The government will not tolerate anything competing with it. Not successfully. The people with their hands on the tiller cannot allow successful private schools for the middle class, or anything else the government oversees. For the upper class - those schools can afford to pay the government bribes (or whatever you want to call them) out of what their customers pay. But not the middle class - the necessary costs to pay those bribes put them out of reach for the middle class, as well as being large numbers of customers that the affluent are not. The people whose economic well being is rooted in control of the government function will not allow it, and even if they would, the entire mechanism of the President and his party are rooted in Envy - they cannot abide someone being better off than the average voter, unless that someone is somehow a member of an acceptable group (like actors) that publicly say they hate wealth while privately sitting on a fortune that makes most businesses look like paupers and laughing their backside off at the suckers who believe it. They must destroy those who seek to better themselves, or they lose people dependent upon them, and when they lose people dependent upon them, they lose power.

But the wealth to pay off the government's existing debts does not exist. Not in the entire world, let alone in the United States. Meanwhile, the demands of those siphoning from the public trough will continue and add to the bill. There will therefore come a day when the government falls short, as their constituents clamor ever more loudly for what they were promised and finally even law enforcement isn't getting what is due to them. It will take some time - years, maybe decades, but when law enforcement stops getting paid the end will be almost here.

What it's about now is mutual support networks that enable individuals to survive government economic persecution. Once upon a time we had such networks in place. They atrophied when the government outcompeted them for resources by holding a metaphorical gun to the donor's heads and saying "Give us your money instead." We need to rebuild them so that when one person is victimized by the government's ever more voracious appetite, we can somehow get them what they need to survive.

It's not about fighting. It's about banding together to help one another survive while the now-inevitable government collapse plays out. Because every last one of us is going to be a target - a victim - at least once before it's all over.

PS: All of this does assume we will not be successfully invaded as the government comes apart. But that's not something we can reasonably hope to forestall as the government becomes unable to modernize, then to maintain, then even to pay the military. Frankly, at some point the government will probably hold a fire sale on military equipment and our only real protection at that point will be a perception that we don't have enough left to make it worth the invader's while.

I haven't been talking much about the election here this time.

Instead of making an endorsement, I am going to talk about the most salient fact of the election, and the rest of our lives until it is dealt with. Neither of the campaigns has made a big deal of this, but in a rational world would have been getting saturation coverage for the last year.

The debt clock.

The number that everyone obsesses about is the cast debt. $16.2 trillion and change as I am writing this.

Our government income is $2.4 trillion per year.
Our government will spend $3.5 trillion this year

We are borrowing $1.1 trillion per year.

Before we leave the debt clock, look at one more number: Last line of numbers, first one. Total of unfunded liabilities. This is money that our government is currently obligated to spend in coming years on various entitlements - money we have already promised to people. $121 trillion and change as I'm typing this. Social security, prescription drugs, medicare. In a rational world, we would have been setting the money aside as we accrued the liability.

Until the mid-1960s, we actually were. That's when President Lyndon Johnson and the Congress of the day chose to allow themselves to spend the Social Security (and Medicare) trust money. They put a "virtual" IOU in the Social Security - not even real bonds, just a promise of reimbursement someday - and spent the money. To be fair, every congress and every president since then has had the option of fixing this - all they would have to have done would have been return every penny that had been stolen from the trust fund and drastically increase revenue or decrease spending to match. In the early years, Social Security was running surpluses that were large by comparison with the rest of the budget. If those surpluses shrank in later years, the built up debt made it practically impossible. Today, the total unfunded liabilities are FIFTY YEARS of every penny the government takes in. That's right, we'd have to shut down the entire rest of the government for fifty years to pay that off - and that's if there was no interest.

Medicare and Social Security are now spending more than they take in. That money is now due to start being actually paid out. This money stream that Johnson and the Congress fifty years ago tapped into is now a drain on the budget - and it will be one forever. Even if we did shut down the government for fifty years to pay that liability off, we're still accruing new ones.

What would happen to a person in this situation? No matter how productive they were, the people with money would eventually cut them off. There would be no way they can repay their debts, and even if the alternative was losing every penny previously loaned, the lenders would decide that's throwing good money after bad, and stop.

This is the situation as it exists today. Wikipedia isn't the most reliable resource for information, but it's got the basic idea here.

The expression "QE2" became a "ubiquitous nickname" in 2010, when used to refer to a second round of quantitative easing by central banks in the United States.[58] Retrospectively, the round of quantitative easing preceding QE2 may be called "QE1". Similarly, "QE3" refers to the third round of quantitative easing following QE2.[59][60]

QE3 was announced on 13 September 2012. In an 11-to-1 vote, the Federal Reserve decided to launch a new $40 billion a month, open-ended, bond purchasing program of agency mortgage-backed securities and also to continue extremely low rates policy until at least mid-2015.[61] According to NASDAQ.com, this is effectively a stimulus program which allows the Federal Reserve to relieve $40 billion dollars per month of commercial housing market debt risk with no maximum amount or time limit.[62] Ratings firm Egan-Jones said it believes the Fed's decision "will hurt the U.S. economy and, by extension, credit quality." As a result the firm once again slashed the U.S. bond rating bringing it down to AA-. Federal Reserve chairman Ben Bernanke acknowledged concerns about inflation

It says the Fed is buying mortgage backed securities. What it's really buying is US Treasury securities, at auction. The share of new US debt being bought by the Federal Reserve is seventy percent, and they're being bought with fiat money, made up on the spot. Not only that, they're going on to the secondary market of existing treasury securities and buying those up.

Folks, if that's not the people with actual money cutting us off, I don't know what is.

So now the Federal Reserve is making up money - pretend dollars - to fund our continued borrowing.

But those brand new pretend dollars tap into the same pie of real world value as shared by all of the existing dollars. A known amount of goods and services - but now there is another $40 billion per month with claims on them. This means existing dollars are now worth less.

Furthermore, I cannot emphasize too strongly that the dollar is a fiat currency. Since 1973, there has been nothing providing value to the dollar but the perception that there is value there. The thing driving that is the productive capacity of the people who use dollars.

Tradition and a lot of hereditary factors from when the US was forty percent of the world economy back before most of us were born have enabled that illusion to continue to be strong.

But what happens if that perception changes? In short, what happens when the people with goods and services we want stop accepting dollars because they don't believe they will recover their value?

At that point, we have an instant crisis. A real crisis that we can't send the Marines to - they won't do any good, and they also need to be paid somehow in something they can actually use to feed their families with.

So at that point, we're going to have no choice. People are already moving their businesses offshore and even giving up US citizenship rather than pay our existing taxes. Try and increase them, and instead of paying those taxes, productive people will move their income generating activities out of the United States. Oh, not everyone. But enough so that income from taxes actually drops.

So we're going to have to cut spending. Nearly $100 billion of spending every month. $3 billion every day. And that's just so we're able to pay the bills. Scratch that. Those will be all the things we can pay for.

This is going to be politically very difficult. People demanding the government live up to what it promised it would do. People demanding the government continue things it has done for a very long time. And don't forget paying the people who run the government. The military has a lot of very powerful toys - I don't think they would turn them on the rest of us for their pay, but there's nothing physically preventing them from trying. And there just isn't money enough to go around. That's going to be damned difficult to deal with.

In the last four years, can you name me one time Barack Obama did something politically difficult?

Even when it was clearly the smart thing to do? When it would limit damage by accepting some pain now rather than more later?

Didn't think so.