Sunday, January 9, 2011

Sleight of Hand, Part 2

Chronicles is a magazine that I cannot recommend highly enough. I try to swing by and read what is written there at least once a week. The analysis is excellent and, even if I disagree with what is written there, I find I still learn something.

Pat Buchanan has an article from December 31, 2010, entitled Is a Bond Crisis Inevitable? Here we review some excerpts:

With Christmas shoppers out in force and the stock market surging to a two-year high, talk is spreading that the long-awaited recovery is at hand.


But gleaning the news from Europe and Asia as U.S. cities, states and the federal government sink into debt, it is difficult to believe a worldwide financial crisis that hammers governments, banks and bondholders alike can be long averted. Consider.


If anyone is an alarmist, it is The New York Times. In an editorial the day after Christmas, "The Looming Crisis in the States," the Times writes, "Illinois, California and several other states are at increasing risk of being the first states to default since the 1930s."

California and Illinois are to America what Germany and Spain are to the European Union—the first and fifth largest states.

Illinois, writes the Times, "is faced with $4 billion in overdue payments." The state "has lacked the money to pay its bills. Some of its employees have been evicted from their offices for nonpayment of rent, social service groups have laid off hundreds of workers while waiting for checks, pharmacies have closed for lack of Medicaid payments." Illinois is also still borrowing to finance half of its budget.

By Sept. 30, the U.S. government will have run three straight deficits of close to 10 percent of GDP. And Barack Obama and the GOP just passed $858 billion in new and extended tax cuts and fresh spending.


In America, it is the Fed that is the last line of defense and has shown a disposition to act in a financial crisis.

Since 2008, it has doubled the money supply and taken a trillion dollars in bad debt off the books of U.S. banks. Secretly, it has lent trillions to banks and businesses all over the world and is now buying U.S. bonds to inject more dollars into the economy.

But how does the Fed prevent a state like Illinois from failing to meet its debt obligations and defaulting? How does the Fed prevent a series of municipal bond defaults by cities and counties that lack the tax revenue to pay their bills and whose credit rating has reached a junk-bond status where they can no longer borrow?

Congress would have to vote the bailout money. But will a House that owns its majority to the Tea Party approve half a trillion dollars to bail out Democratic-run cities or Obama's home state or Jerry Brown's California?

This June, the stimulus money runs out, and as housing prices continue to fall across America, property tax revenue will fall.

The Feds are about to stop bailing out the states, and the states, on shortening rations, will stop bailing out counties, cities and towns.

We may be closer to the falls than we imagine.

The first commentator seemed rather optimistic, explaining that a crisis is not a mistake, but rather the correction of a mistake. In principle, the commentator's logic is correct, but attempts to apply such logic to our financial system tend to shipwreck on the rocky shores of our monetary system. My response:

The trouble is, this crisis is not the correction of a mistake. Instead, it is the perpetuation of a mistake. The international banking elite peddles debt to us, on which they charge us interest, and call that debt "money". They create "money" with an entry on a computer; most of it they don't even have to print.

Since the "money" is debt - a loan - any "money" they create is the principle on the loan; not enough "money" is created to pay the interest on the loan. To do that, they have to "print" more "money" - in other words, give us a new loan, on which we pay interest. Since the loan we need to pay the interest is itself another loan accumulating interest, we need yet another loan to pay that.

We are in perpetual debt to those who control the US money supply and the money supplies of significant parts of the industrialized world. The situation is engineered so that the way out is difficult to find. Control of the money supply by these elites have made our economies the de facto slaves of these elites and, since our ability to own the fruits of our labors has been so fundamentally compromised, the net result is our gradual enslavement at the hands of these banking elites.

These crises are not corrections of mistakes; they are symptoms of an extremely significant underlying problem.

Debt being peddled as "money", with Congress taking its Constitutional authority to coin money for the United States and outsourcing that authority to self-interested private enterprise operations under the auspices of the Federal Reserve, is a federal problem that requires a federal fix. And while there are some elected officials in Washington who are addressing the issue, you can bet the bulk of them will not back a bill to fix the problem, nor will the financiers' White House lapdog sign it.

So, what can be done?

From Fear of defaults putting pressure on municipal bonds, January 3, 2011:

Investors are panicky about losing their money in municipal bonds and have been calling their financial advisers for assurances since a recent "60 Minutes" TV show predicted massive bond defaults by local governments over the next 12 months.

"When people hear 'defaults,' they imagine bankruptcy like a Madoff event, with their money gone," said Lewis Altfest, a New York financial adviser who's been getting some of those nervous calls. "It's difficult for individuals psychologically because they think of bonds as their safe area, their no-worry zone."

Instead of safe, financial analyst Meredith Whitney said in the "60 Minutes" interview that there "is not a doubt in my mind" that there will be defaults, perhaps totaling hundreds of billions of dollars, because many states, cities and counties can't pay their bills.

Whitney commands national attention because she ignored Wall Street's smiling faces prior to the 2008 financial crisis and detailed the underlying banking messes that ultimately led to a near collapse of the system. Now, she said, the economy is threatened by ongoing declines in housing values and unwillingness by states, counties and cities to take their financial problems seriously.

Since her interview, critics have challenged the size of her default prediction, which some estimate at about 10 percent of the $3 trillion municipal bond market.

Still, they do not argue with her underlying concern: For a decade or more, many state and local governments have been pretending they could afford pension promises and spending without coming to grips with how they would pay.

Now, many are obligated to meet promises but have less tax money than imagined as layoffs and plunging home and real estate values leave tax coffers deficient. The problem could get worse as the year goes on because billions in help from the federal government will end.

"All they have to do is raise taxes, and the whole thing goes away, but that may be more difficult to do than to think about doing," Altfest said. So he's been telling clients that their concerns are legitimate within reason.

Raising taxes is not the answer. The economy is already suffering. Burdening it further with increased taxes might just kill the goose that lays the golden eggs.

Very few people understand that (up to a point) lowering the tax rate increases productivity, and thus raises tax revenue.

From Bond Default Is About Too Much Debt, Too Little Time: Joe Mysak, July 20, 2010:

The last time a state defaulted on its bonds, it took eight years and the federal government's help to come up with a remedy.

When Arkansas defaulted on its bonds in 1933, the politicians and investors talked about the same things we would talk about today. The state blamed underwriters for allowing it to sell too many bonds. Investors compared the willingness to repay debt with the ability to pay, and weighed the advantages of bonds backed by a pledge of taxing powers to those secured by specific revenue.

Unlike today, nobody thought the federal government should come to the rescue.

The author goes on to describe how Arkansas rebounded without help from the federal government. Please read the entire article.

But, there is still that issue of debt being peddled as money, and the federal government's outsourcing of its Constitutional power to coin money, making us all pay interest as the fee collected by private enterprise to create "money" for us to use.

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