The US Heads for High Inflation and Probably Default. Spending Must be Cut.

Abstract: Our government is spending us into unrecoverable debt and massive inflation. They will NOT cut spending and will NOT lower taxes for businesses. We are at the point where we cannot recover from the debt, the stimuli are failing to aid the GDP and more spending is envisioned by Obama and his leftists. Our currency is being debased by our cleptocratic [defined as the government stealing from its citizens] government using the obvious mechanism of inflation. Things are going to get a lot worse.

In a previous blog entitled Deflation and Defaults: The Path Downward from Debt and Excessive Spending,[1] I outlined some potential problems concerning deflation, inflation and the Fed’s printing of vast, and mostly unknown, amounts of money. In a more recent blog entitled Maximizing Both Tax Revenues and Economic Growth: The Folly of Government and the Generation of Phony Numbers and Class Warfare [2]problems with US Treasury bonds are emphasized. Our credit rating is bound to slip. We face a crisis.

The topics of inflations or deflation, in particular, always provoke a contentious political and economic dispute[3] consisting of those players who insist this phenomenon is in progress, and can actually prove the existence thereof, in a fierce battle with the opposing forces who insist we are inflating or other. The analysis process to solve this riddle is seemingly wrought with technical difficulties because there are many varied financial inputs and calculations that must be assessed by the jury in this trial until a final verdict is returned. It appears that even identical economic elements can be used to argue either case thus leading to a conundrum.  The proof, however, that we have transitioned, in part, from deflation to potential high inflation happens when we examine the US Treasury bond auctions.

This spending is what is driving our deficit into an ocean of debt[4] and we rank high amongst the list of other losers who may soon default on their sovereign debts:

* Figures from OCED forecast in November 2009. [5]

The US debt is crushing our society. Since there are only 65 million workers to handle 12 trillion dollars in National Debt [soon to be 14 and rising] and only half of them pay taxes above the median of $32,000 then this works out to $192,000 each for these workers and that ignores Social Security, Medicare, Medicaid and state debts.[6][7] But, there is no signal to stop spending.  

Overspending, to bribe voters to keep socialists in power as we see in California[8][9][10][11] [Our National Leper[12][13]], New York, and other states, is testing the bond markets. California now hopes for a miracle in revenues and will ‘wait.’ The federal stimuli had a very short and shallow effect on the US economy but did send money to the states. They spent that and now want to spend and borrow much more. Attempts to provide federal “stimuli” lead to disasters like the previous ‘jobs’ program that spent $92,000 per job![14] And, then, we spent $24,000 per car on the Clunker Follies and a mere $43,000 per house on the housing scam. [15] This is a farce.

All along, we were reassured that inflation was not a problem and that we could unwind the Fed monies used to salvage our Zombie Banks, which are, to be frank, quite dead.

The Geithner Pledge:

"We have the deepest and most liquid markets for risk-free assets in the world. We're committed to bring our fiscal deficits down over time to a sustainable level.

"We believe in a strong dollar ... and we're going to make sure that we repair and reform the financial system so that we sustain confidence," he said.”[16]-- Geithner tells China its dollar assets are safe On Monday June 1, 2009 [Emphasis is mine in all quotes.]

We are already past the limit of sustainability of our currency values and the bond interest rates that just shot up a few days ago show that inflation concerns are now affecting into the market for US Treasuries. Inflation is on the rise.

US Treasury Sales:

“For more than a year, analysts have been warning that record sized debt sales by the US Treasury were at odds with a 10-year yield sitting comfortably below 4 per cent. This week, the yield on 10-year notes jumped from 3.65 per cent to a peak of 3.92 per cent on Thursday. On Friday it was 3.87 per cent.

Falling inflation [deflation, ed] , rising unemployment, the housing market slump, the Federal Reserve’s policies of a near zero overnight borrowing rate and its purchase of up to $1,700bn in bonds have all helped keep Treasury yields near historic lows.”[17]-- Supply fears start to hit Treasuries By Michael Mackenzie in New York and David Oakley in London Published: March 26 2010 [Emphasis is mine in all quotes.]

The Fed has, we think, some 1. 7 trillion in bonds on their books  and what not, but we cannot know what the Open Market Committee is doing or what is happening in the Fed’s Off-Balance Sheet operations. We do know that Fannie Mae and Freddie Mac hold some 3-5 trillion dollars worth of worthless mortgages of the Toxic Asset type. We also need to understand that Barney Frank and other liberals want the banks to readjust interest and principal levels for many home owners who are ‘underwater’ and cannot make mortgage payments. The banks are asked to take massive loses. Mortgage defaults are still soaring and unemployment is still too high. Where is this money going to come from? The printing presses? Probably.

US and state budgets are out of control:

““The spotlight on Greece only helped to reveal that the US’s kitchen – with Federal and state budget balances – was itself full of cockroaches,” says William O’Donnell, strategist at RBS Securities””-- Supply fears start to hit Treasuries [Emphasis is mine in all quotes.]

More massive spending.

““The environment for debt auctions has turned negative,” says Rick Klingman, managing director at BNP Paribas. “Long-term rates are rising and it is no coincidence that this has occurred after the passage of healthcare reform and the end of Fed buy-backs.””--Supply fears start to hit Treasuries

Social Security is going broke:

“Also rattling US investors this week was a report by the Congressional Budget Office that falling payroll taxes due to high unemployment, means that the social security programme will pay out more in benefits than it receives for this fiscal year.“”--Supply fears start to hit Treasuries [Emphasis is mine in all quotes.]

All this was predicted by me and many others although Paul  Krugman seems to think we can handle this and 9 trillion[18] more dollars to spend.[19]

So, what do we do about this?

Slow spending? Lower he deficits?

Actually, none of the above as the Obama Administration, Congress and many states will NOT STOP SPENDING.  Thus, we are crashing into a debt limit barrier that we cannot reverse without massive inflation. Soon, nobody will buy our debt.

Many bonds are ‘insured’ by interest rate swaps, a very complicated process that is mostly confined to sovereign bond markets.[20] Before such ‘insurance’ on debt was available in world markets, a bond holder was at risk of a default or a currency debasement, two favorite avenues for governments to take when they overspend and cannot meet their debt obligations [known as cleptocracy] as we read in the new book This Time is Different: Eight Centuries of Financial Folly[21] by Carmen Reinhart and Kenneth Rogoff. This tome reviews this very common process of overspending, massive debt, bank crises and inevitable defaults that plague California, Greece, New York and other entities and shows that such defaults are very common in the last several centuries. The US has no option but to default on this massive debt.

Now bonds for private issuance are now sold at lower rates than US 10-year bonds—a signal that the current notion of ‘safety’ of the US Treasury is not accepted:

“For the first time since swaps emerged in the mid-1980s, the 10-year swap rate traded below that of the “risk free” 10-year Treasury yield. Analysts say this reflects how government debt issuance has altered the dynamics between “risk-free” yields and swaps, which reflect borrowing costs for non-sovereign borrowers.”--Supply fears start to hit Treasuries

Money markets and capital acquisition operations are now global and it appears that the massive spending and huge, unsustainable deficits in the US are showing up in market actions. Once the Fed stopped buying up stuff to keep the rates artificially low the market forces are driving up the interest rates and the US Treasury will have to offer debt at a higher rate. That means that our debt service, currently $191 billion on $12.1 billion in debt for an average  rate of only 1.5% will have to rise. That will, in turn, drive our deficits higher at constant spending and tax revenues. As bonds mature and are redeemed new bonds will have higher interest rates so the 1.5% will tend to double and with it the debt service of $191 billion will double too.

This starts off a spiral: if interest rates are trending higher then businesses will suffer in earnings and will not hire more people. They may have to lay off more workers to keep their bottom lines reasonable. The new Obamacare costs are now being incorporated into business plans and many companies like ATT, Deere and others have publicly given notice that they will have to raise prices. Fewer employed workers will buy less and default more on mortgages and the problem will become worse in time. Higher prices means inflation.

Spending must be halted at this time and new spending on illegal aliens, weird green things that may be only asset bubbles brewing[22], and avoiding massive tax increases like the Cap and Trade Taxes are all mandatory. There is no way to solve this problem with more spending as Krugman and other Keynesian economists advise. Tax cuts to allow businesses to hire more employees are the only way out of this and that avenue is not acceptable to the far left and their lackeys.

This massive spending by liberals, intoxicated by their own phony rhetoric, will sink our economy and we will return to the depression days of the 30s.

We MUST cut spending and furlough several government projects and reject EcoNazism[23][24] and Cap and Trade and other phony nostrums.

rycK

Comments: ryckki@gmail.com