FedUpUSA

Archive for July 2nd, 2011

You heard that right folks:

Representative Ron Paul has hit upon a remarkably creative way to deal with the impasse over the debt ceiling: have the Federal Reserve Board destroy the $1.6 trillion in government bonds it now holds. While at first blush this idea may seem crazy, on more careful thought it is actually a very reasonable way to deal with the crisis. Furthermore, it provides a way to have lasting savings to the budget.

Remarkably creative?  Wait a second…. .Ron Paul has told us time and time again that he’s for “sound money.”  That is, money that doesn’t change in value.  Monetary policy that abides the actual statements in The Federal Reserve Act of 1913 (which, incidentally, The Fed has wantonly violated ever since with their so-called “inflation target”, whether explicit or otherwise.)

In fact, Ron Paul has consistently railed against that very inflation in essentially every case where he’s had Bernanke in front of him in a committee.

So let’s think through Mr. Paul’s “creative” solution.  Destroying the bonds The Fed holds while leaving the “excess reserves” that are on deposit, which The Fed creates with a push of a button to pay for those bonds, is in fact exactly identical to unbacked emission of currency.

That is, raw printing of money.

(Incidentally, that’s illegal under The Federal Reserve Act as well, but heh, who cares about the law, right?)

I have repeatedly and very publicly held that Mr. Paul has no clue what the hell he’s talking about when it comes to these matters.  That gold-backed currency does nothing to address the problems we face, and the empirical evidence backs my position (panics and wild bouts of both inflation and deflation under a metallic monetary standard.)  I further have charged repeatedly that Mr. Paul, despite multiple opportunities to grill Bernanke on the simple and easily-understood violation of the standard of stable prices in the Federal Reserve Act, has utterly failed to do so.

Now you know why: He doesn’t believe in stable prices and a stable and strong currency as he in fact is now suggesting intentional monetary inflation in an outrageous amount through this so-called “solution.”  This is exactly the sort of crap FDR ran in the 1930s – in fact, it’s functionally identical to FDR’s “executive order” gold devaluation!

To those who have supported Mr. Paul all these years, you’ve now seen his true colors.  Will you be man (or woman) enough to admit that he never actually understood what the hell he was screaming about, nor did he ever have an actual intent of restoring “sound money” to America?

We’ll see.

The Market-Ticker

It does not help your case when you make absurd statements to support your views. All it does is damage your credibility. Here are a couple of completely unrelated viewpoints that will show what I mean.

“No Food at Any Price”

Speaking on food shortages, Jim Rogers says Global Agriculture Supply Worsening May Spur Food Shortages

The global agriculture supply situation has worsened and a failure to boost food production fast enough to meet demand may lead to shortages, said investor Jim Rogers, chairman of Rogers Holdings.

“We’ve got to do something or we’re going to have no food at any price at times in the next few years,” Rogers said in a Bloomberg Television interview with Rishaad Salamat today in Singapore. “I still own agriculture. If I found something to buy, I would buy it.”

Rogers likes agriculture. Maybe he’s right, and maybe not. However, the notion “We’ve got to do something or we’re going to have no food at any price at times in the next few years” is one of the more blatantly absurd things regarding food shortages that I have ever heard.

US has record grain forecasts. Even if you do not believe those forecasts, the US is going to have a good crop. How does that translate to “no food”? The short answer is “it doesn’t”.

Many reported shortages are weather-related. Some “alleged” shortages are not shortages at all, but unavailability because of government price controls. The rest of the “shortage” problem is  higher prices caused by speculation and/or rampant inflation in China and India.

The idea there will be no food at any price is absurd. There may not be food available at government mandated prices, but that is certainly not what Rogers said.

“U.S. Needs a Massive Public Works Program”

Barton Biggs Says U.S. Needs a Massive Public Works Program

Don’t expect the economy to perk up any time soon.

The U.S. and Europe are set to grow at an anemic pace for the foreseeable future unless the government can step in with an enormous fiscal stimulus, according to a veteran investor.

Speaking exclusively with The Wall Street Journal, Barton Biggs, managing partner at multibillion dollar hedge fund Traxis Partners, painted a bleak outlook for the developed world with only huge government intervention likely to improve things.

On the final day of the Federal Reserve’s bond-buying program, Mr. Biggs dismissed a further round of the so-called quantitative easing as a possible solution. It was meant to lower borrowing costs and simulate investment.

Instead, Mr. Biggs, former chief global strategist for U.S. investment banking powerhouse Morgan Stanley, demanded the U.S. government temporarily return to ideas used in the Great Depression as a way to get the country back to higher growth.

“What the U.S. really needs is a massive infrastructure program … similar to the WPA back in the 1930s,” he says.

He suggested financing such building through the sale of U.S. Treasuries.

Failure of Japan

It amazes me that apparently bright people can neither think nor see. Biggs is proposing the same medicine Japan tried. Where did it leave Japan? After 20 years of infrastructure projects, Japan has government debt to the tune of 200% of GDP and is still mired in deflation.

Looking Down the Road

Demographics and debt levels now are both far more precarious than they  were in the 30′s and 40′s. Worse yet, Davis-Bacon and prevailing wage  laws guarantee government will overpay for what it gets.

What if we tried the idea anyway? What if we fixed everything in 5 years?

The economy would boom for 5 years, then what? How would the US pay back that debt? What would happen to jobs the moment the projects finished? How would our children and grandchildren pay back that debt?

No Painless Solution, No Free Lunch

The very last thing the US needs is a massive infrastructure program paid for via the printing presses. Instead, we need to cut military spending, scrap Davis-Bacon, scrap prevailing wage laws, get rid of government workers, reduce public worker pensions, and get the budget in shape before the US becomes the next Greece.

Will that cause pain? Of course it will. However, Biggs wants a free lunch. If printing money solved problems, Zimbabwe would be the wealthiest nation on the planet.

Biggs Cannot See, Hear, Think

It  would help if Biggs could look at Greece, or Spain, or Portugal, or  Ireland. Those countries show what happens when debt gets excessive and the bond market takes matters into its own hands.

The  logical conclusion is Biggs is cannot see, hear, or think.

Perhaps Biggs is simply talking his short-term book with complete disregard to what his proposal would do to our children and grandchildren, so that he could have one last party.

Mike  “Mish”  Shedlock
Global economic Analysis

It sure looks like they did.

Yesterday.

Here’s the DTS (daily cash statement) for Treasury.

And here’s the problem with it:

Note that the pink line did not move much.  In fact, it went down.

It should have gone up – a lot – because the “Trust Funds” (you know, Social Security and Medicare?) that you folks on the left keep bleating about being “money good” and “actual debt” had a coupon payment from Treasury due yesterday.

IT WAS NOT MADE.

IF IT HAD BEEN, IT WOULD HAVE BLOWN THE DEBT LIMIT.

That’s a default, and it instantaneously destroys both the claim that such activity is not “selective” or, if you prefer, “strategic” and it also destroys the argument that Medicare and Social Security Trust fund “debt” – not just public debt – is subject to the 14th Amendment and thus is “protected” against the Treasury choosing to blow it off.

By the way if you’re curious about how much this should amount to (~$90 billion, more or less) have a look at the June 30th, 2010 DTS statement.

Oh, and as for Geithner?  He said that any default on any obligation would trigger an immediate market panic.  Well, this did – straight up on the S&P and DOW.  So much for Timmy’s lies.

Have a nice day.

Hattip Publius on the forum who caught it before I did.

The Market-Ticker