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Interest-Rates / US Debt Aug 14, 2012 - 11:44 AM
By: Dan_Amerman
The United States government has five interrelated motivations for destroying the value of the dollar:
1. Creating money out of thin air on a massive basis is all that
stands between the current state of hidden depression, and overt
depression with unemployment levels in excess of those seen in the US
Great Depression of the 1930s.
2. It is the most effective way to meet not just current crushing
debt levels, but to deal with the rapidly approaching massive
generational crisis of paying for Boomer retirement promises.
3. It creates a lucratively profitable $500 billion a year hidden tax
for the benefit of the US government which is not understood by
voters or debated in elections.
4. It is the weapon of choice being used to wage currency war and reboot US economic growth; and
5. It is an essential component of political survival and enhanced power for incumbent politicians.
In this article we will take a holistic approach to how
individual short term, medium and long term pressures all come
together to leave the government with effectively no choice but to
create a substantial rate of inflation that will steadily destroy the
value of the dollar.
If you have savings, if you rely on a pension, if you are a retiree
or Boomer with retirement accounts - any one of these five fundamental
motivations is by itself a grave peril to your future standard of
living. However, it is only when we put all five together and see how
the motivations reinforce each other, that we can understand what the
government has been and intends to continue doing, and then begin the
search for personal solutions.
Reason One: The Political Interests Of Self-Serving Politicians
As further covered herein, almost 9% of the US economy is currently
funded by deficit spending. From a political perspective, this $1.3
trillion a year is "free money" that politicians get to disburse on a
political district and favored special interest group basis. In other
words, roughly $1,000 per month, per American household can be used
to reward friends and can be withheld from enemies, with personal
credit being taken by the benevolent politicians for this never-ending
largess.
In past decades, politicians were restricted to spending perhaps $200
or $300 per month per household over and above what the government
was collecting in taxes, with the difference being borrowed in the
bond market. Anything above that would require the unpleasantness of
raising taxes, which might put individual politicians in danger of
actually losing their position and privileged lifestyle if he or she
wasn't in a "safe" district. However, in the current climate all
limitations are gone, the pork is rolling out on a historically
unprecedented basis, and the politicians are wielding unprecedented
power.
So why do the limitations usually exist on at least some level, and
why are they gone now? Historically, the US government has directly
created money out of thin air on a massive basis to fund deficit
spending during the Civil War, and also during the Revolutionary War.
There is a very good reason such governmental actions are so rare:
the value of the US dollar was rapidly destroyed in both instances.
So, this spending without limit would not ordinarily be a sensible
path. Unless, from the government's perspective, there were other
dangers that were considered a greater threat, that could be addressed
only through destroying the value of the dollar.
Reason Two: To Hide A Depression
I have written numerous articles about various aspects of Reasons
Two through Five for some years now, and my long term readers and
subscribers have been well aware of the building pressures. While the
emphasis of this article is on the interweaving of the short, medium
and long-term relationships between the five reasons, we will first
set the stage by taking a few paragraphs each to briefly review the
individual government motivation, with a link to a full length article
that covers the problem in more depth.
While you wouldn't know it from government press releases or media
headlines, there has been a gaping hole in the US economy since 2008,
as illustrated below:
During the first round of the financial crisis, the US private
economy nearly collapsed, threatening to send the US economy straight
into deep depression. We're talking about a $1.3 trillion private
sector collapse that was contained only by the government
fantastically increasing the money it spent, even while tax revenues
were falling. The creation of huge government deficits has been all
that has maintained even a facade of semi-normalcy. Remove the
mechanism of the government creating money so that it can spend what
it doesn't have, and it is straight to official Great Depression-level
unemployment in months.
Even as the true gravity of the situation is hidden from the general
public, so too is the true cost of the grossly irresponsible
short-term "band-aid" that is being used to cover the hole in the US
economy. The destruction of the value of savings in general, as well
as the impoverishment of Boomers and retirees in particular, is
explained in my article linked below, "Hiding A Depression: How The
US Government Does It."
Reason Three: A Desperate Attempt To Escape Depression By Waging Currency War
The US government has been waging currency war since September of
2010. Simply put, the US would have great difficulty emerging from
the depression described above so long as the US dollar is "strong",
because a strong dollar translates to "expensive" US workers who have
difficulty competing for market share even in the US economy, let
alone abroad. One solution is that when a nation slashes the value of
its currency, its workers become relatively cheaper, and they then
cannot only better defend their domestic market share, but can begin
to take market share in foreign economies as well. However, when a
major nation goes on the offensive, many trading partners will
counterattack and try to defend their economies, not by making their
own currencies stronger, but by making their own currencies weaker, so that their domestic workers remain relatively inexpensive and will be better able to compete for market share.
To successfully go on the currency offensive and negate attempted
counterattacks, Federal Reserve Chairman Bernanke chose a radical tool -
he publicly announced that the Fed would be directly creating money
on a massive scale equal to 9% of the US economy, with the proceeds
going to purchase US government debt in the secondary markets.
Ultimately, the only protections for a symbolic currency (such as the
US dollar) are the policies deployed by the central bank to maintain
that value. And when the nation's chief central banker directly
threatens to use his power to destroy the symbol rather than preserve
it - the threat is extraordinarily effective.
There is no free lunch, however. While the US government is
insisting to the world-at-large that it is not engaged in currency
warfare, in order to maintain the plausible deniability that is
essential to diplomatic doublespeak, it is also hiding the heavy cost
from its own citizens. The US standard of living since the late 1990s
has been based on having a "strong" dollar and huge trade deficits -
meaning we haven't actually been able to pay for what we consume for a
long time. Therefore, even as jobs and the real economy grow, there is
a drop in the overall standard of living, that is not evenly weighted
- but is disproportionately born by savers, Boomers and retirees.
Much more information on how this works and the specific ways that
older citizens will be bearing most of the pain can be found in my
article linked below, "Bullets In The Back: How Boomers &
Retirees Will Become Stimulus, Bailout & Currency War Casualties".
These second and third elements of hiding a depression and waging
currency war are tightly interwoven, and could even be called "killing
two birds with one stone". The money doesn't exist to keep the US
from openly plunging into depression, it simply isn't there for a
fiscally responsible government. And covering the economic hole by
creating money out of thin air at a rate equal to 9% of the total US
economy is so fiscally irresponsible that few nations dare a
counterattack of such magnitude. For now, massive monetary creation
allows the US to not only cover over the current hidden depression,
but also to wage all-out currency war to try to emerge from that
depression.
However, to fully understand the agenda of the US government, we have
to look at the greatest financial problem of all, and how destroying
the value of the dollar is the intended solution.
Reason Four: Dodging National Bankruptcy
Sometimes households reach the unfortunate point where when they add
up the credit cards, mortgage payments, and 2nd mortgage payments -
they realize that they will never be able to pay their bills. They
know they are bankrupt and there is no way of dodging that. But
instead of reducing their spending - they may even step up the
spending, until all the lines of credit are maxed out, and the bills
are all in arrears. Because, once you know bankruptcy is inevitable
anyway - why slash your standard of living before you absolutely have
to? Partying it up now for another few months won't change the
destination, so why not?
Fortunately, relatively few ordinary people think that way. There is
ample evidence, however, that a good number of politicians hold that
mindset when it comes to budget deficits that appear impossible to
repay, at least in the conventional manner.
There is a lie that is being frequently repeated, which is that our
children and grandchildren will be slaving away for decades to pay
back the money that we've been borrowing to fund this reckless deficit
spending. The assumption underlying the lie is that if it weren't
for the current spending, the nation would be fine, and therefore
increased taxes will be needed to pay back the borrowing.
Except that the nation isn't fine. Like most other major developed
nations in the world, the United States has been effectively bankrupt
for quite some time, with a day of reckoning that is approaching fast
with or without the current outrageous level of deficit spending.
The graph below is from my article, "Six Layers Of Deficit Impossibilities Mean Retirement Catastrophe".
http://danielamerman.com/articles/2011/LdeficitC.html
As developed step by step in "Six Layers", when we add up current and
future Federal deficits, as well as unfunded Social Security,
Medicare and other unfunded government promises, the total comes to over $785,000 per non-retired household (over the coming years) that has an above poverty line income.
And this isn't even the total cost - it is the excess cost over and
above current estimated tax receipts, which assumes a healthy and
growing economy. When we drop the assumption of an economy growing at
the same rates of the last 50 years, then the shortfall goes far
higher - perhaps over $200 trillion for Social Security and Medicare
alone by some recent estimates. That would raise the total shortfall
to over $2 million per non-retired and above-poverty-line household.
If taxes can’t pay (and it’s ludicrous to think they can), and the US doesn’t declare bankruptcy, then just how do we cover the gap?
Short answer: pay in full, but make the dollar worth five cents.
This drops the per household cost for everything from almost $800,000
down to about $40,000. Painful, but manageable over a period of 20-30
years.
Merely make a dollar worth five cents, and impossible government
promises become quite payable. The problem with this "solution" is
that it also requires making most people's life savings worth five
cents on the dollar.
Reason Five: Create A Massive Hidden Tax
The Federal Reserve effectively controls short, medium and long-term
interest rates in the United States, and this means that it controls
the borrowing costs of the United States government. As developed my
article linked below, "Hiding A $500 Billion Tax On Savings: How The
Government Deceives Millions", by forcing interest rates below the
rate of inflation, the Federal Reserve creates about a half trillion
dollar per year "windfall" gain for the Federal government.
http://danielamerman.com/articles/2011/SaveTaxC.html
This is not "free money", far from it. Every dollar of benefit for
the government from interest rate manipulations comes directly out of
the pockets of savers. That is, for the government to come out ahead
by $500 billion per year requires savers and pension funds to come up
short by $500 billion per year. This makes it a tax in all but name.
It is also essential to note that two elements have to come together
to make this hidden tax work: 1) there have to be low interest rates,
and 2) there also has to a substantive real rate of inflation (which
can be quite different from the official rate).
From a politician's perspective this massive tax - almost three times the size of federal corporate taxation
- is a "dream tax". Half a trillion dollars a year is available to
spend without raising taxes or increasing deficits. Sure, there is a
cost, which is the entirely deliberate destruction of retirement
dreams and promises for tens of millions of US workers and retirees -
particularly Boomers - as well as pushing forward the insolvency of
state and local government pension funds around the country. But the
deliberate bankrupting of a generation is a long term problem with no
clear accountability and almost no voter understanding, which means it
is more or less irrelevant for how political decisions are made
today.
