FedUpUSA

Good lord.

Lord Adair Turner, who is FSA Chairman (in London) is on this morning pumping the premise of printing money to finance deficits.

The problem is that nobody is talking about what it really means, including Turner.

There is no free lunch.  If you increase the denominator of “money” that is present in the system the value of each unit inevitably declines by the exact same percentage as that which you emitted compared to GDP — which is axiomatically the amount of economic activity in the economy.

This is exactly identical economically to a tax increase which is a decision that, in any proper government operating with the consent of the people, must reside in the legislature.

For a so-called “independent central bank” to unilaterally impose such a tax is exactly identical to counterfeiting and is widely-recognized, when committed by anyone else, as a high crime bordering on treason.

THAT is the discussion we should be having.  It is the point that none of these people will debate in public and speak of openly, nor will the so-called “journalists” on CNBS and elsewhere corner these screamers on.

The reason should be obvious: Once these “policies” are recognized for what they are these central bankers would be an endangered species by nightfall.

Disclosure: Long boiled rope futures.

Some ugly facts for your Saturday….

From 1990 to 2000 GDP expanded at an average rate of 4.80%.  Debt expanded at an average rate of 7.51%

From 2000 to 2010 GDP expanded at an average rate of 4.13%.  Debt expanded at an average rate of 6.55%.

From 2010 to 2Q 2012 GDP expanded at a rate of 3.93%.  But debt expanded at only 0.94%, which is a massive paradigm shift from the previous 20 years.

This is good instead of bad, right?

In a word, no.  It is signaling the end of the self-delusional game we’ve been running for the last three decades.  That endpoint is here, now and today.

Real economic growth has to subtract out government deficit spending. When you do that it looks like this:

There has been no growth of materiality since 2000.  We cheated.  And we cheated before too, but in the private sector with all the Internet scam companies that blew up in the tech wreck.

And by the way, at current run rates (although the numbers are not in yet) this year in terms of actual deficit and actual adjusted GDP will be almost identical to 2011, unless something dramatic changes in the next two months.

We have a grown a few things though.  First, let’s look at the growth in Federal (only) health spending.  This is what we’ve done thus far (smoothed, using the endpoints — $53 billion in 1980 and $850 billion last year.)

And then there’s what that rate projects out to for the next 35 years, which is what the government has promised all those who are 50 and older – your Medicare will not change if you’re 50 or older — remember?

Best of luck with that, Kemosabe; roughly $16 trillion on federal health spending alone in 2043?  

By the way, for the math-challenged by 2029 we will spend more on health care than the entire federal budget is today.  If you believe that can happen, say much less that 2043 will happen, I have a bridge for sale in Brooklyn.  The foundation might have had a bit of trouble of late though.  I think it was called “Sandy”.  Heh, that works, doesn’t it?

Of course we’ve all heard that the economy is recovering since early 2009.  That recovery must be real because this statistic is just skyrocketing — the number of people (and households) on food stamps.  Uh, if the economy is recovering, why does this number keep going up and why has it gone up by more than 50% in the last four years — and has never gone back down?

That must be because the fine government people and “eCONomists” are all lying to you.  Let’s see if we can find the lies.

We’ll being with employment.  We keep hearing that we’re gaining jobs.  This is half-true.  We have in fact added 7.2 million jobs from January 2010 to today.

Unfortunately we also added 7.15 million working-age people during the same time period.  So in point of fact, we added jobs – all 50,000 of them, when you account for working-age population growth.

Eh, that’s not so good, and nobody wants to talk about that.

Of course during the same time gasoline prices have roughly doubled, and most food items are up dramatically in price — 50% or more.  Milk, eggs, cheese, meats.  I wonder if that would force people onto food stamps — stagnant employment and outrageously-rising costs.

It just might!

Why is that happening?  Well that might be due to the Federal Budget.  Ok, ok, it’s not really a budget because they didn’t pass one.  But this is where we’re spending our money, and where we’re taking in money in taxes — and what we’re putting on the credit card.  I ordered a few things to point out that we must pay the interest, we must pay “General Government” (that’s the light bill for the Capitol, among other important things) and we probably want to pay for things like the Fibbies (various federal law enforcement entities and their infrastructure.)  It’s also important to keep in mind the size of those shards of the budget, so when someone says “but the FBI and government is so wasteful on such programs” you can point to exactly how much we would “save” if we stopped doing all of it.

That is, not enough to matter.

So if we were to stop deficit spending today we could pay the interest on the debt, we could pay for the lights in the White House, we could pay for the FBI and similar, we could pay for Medicare, Medicaid and Social Security.

But then we run out of money half-way through Defense and have nothing for Welfare, Other spending, Education or Transportation. 

Zip, zero, nada.

There’s this little problem with that chart too which explains all of the above with employment and food stamps, along with the other markers of actual economic health.  That nasty red bar with the label “Debt”, and which both sides of the aisle claim we can continue to add onto every year, is actually dilution of the nation’s wealth.  This is exactly identical to imposing a tax, and it’s over a trillion dollars annually.  In point of fact from 2008 to 2012 (calendar) it has been $1.40 trillion, $1.647 trillion, $1.852 trillion, $1.225 trillion and at the current (10 month) run-rate for 2012 it will be $1.246 trillion this year.

Remember, President Obama, when he took office, told us all that he would cut the deficit in half from the fiscal 2008 level, which was about $600 billion, by the time he came up for re-election.

He instead more than doubled the annual deficit and added about $5 trillion in debt across his first term.

And let’s not forget that this is not just a Democrat thing.  Oh no — all spending bills must originate in The House.  Without the House there is no spending and there is no deficit.  And who controls The House?  Why that would be Mr. Speaker Boehner, and I do think he has an “R” after his name.  Despite all the screaming about “fiscal responsibility” he (and Paul Ryan) are abject liars; when push comes to shove they are all more than happy to shove all right – they shove you, your children and every senior citizen right into the hole right along with help from Obama, Nancy Pelosi and Harry Reid.

But that’s not the bad news.  The bad news is that at the rate of escalation going on today we will try to do this by the end of the decade:

Now that is just not going to work at all; we’ll pay that light bill, the Fibbies and Health Care but then will run out of money about halfway through Social Security, at which point the FBI will have plenty to do as Granny’s shotgun comes out.

So as you go about your weekend, contemplate these facts:

• You can’t fix medical entitlement spending.  You instead have to fix the medical system, and the only way to do that is to pull all of the monopoly-style protections so that the cost of care in terms of dollars spent crumbles by 75% or more.  This will result in a lot of short-term unemployment and contraction in GDP, but if it’s not done our government and society will blow up.  This is a mathematical certainty.

• You can’t keep escalating defense spending either.  But to fix that you must solve our energy dependence problem, because a huge part of why we spend over $750 billion a year is found there.  Oh, it might help if we didn’t hand man-portable anti-aircraft missiles to our “friends” that happen to be affiliated with Al-Qaida too, as we reportedly did in Libya.

If we contracted Medical Spending by 75% and Defense by half, expiring the payroll tax credit and indexing Social Security retirement to longevity we would balance the budget and stop destroying our nation’s competitiveness and middle class.

Doubt me?  Here’s the graph, and those three things are all I changed; Social Security does not move in expense but tax receipts go up due to the payroll tax cut expiration by about $200 billion a year.

There isn’t any other way to do it.  Welfare, even if cut dramatically, can’t be cut enough.  Other spending, education and transportation don’t have enough margin in them either — even cutting them in half won’t get there.  Social Security can be slowed in escalation but in point of fact most of it is paid for by the Payroll Tax, or at least it was before Congress raided it with the allegedly “temporary” payroll tax deduction that costs about $210 billion a year in revenue.  Indexing retirement to longevity gets us the rest of the way there by halting the advance of spending on that program.

It comes down to medical spending and defense, and with medical spending the only solution is to remove the monopoly protections and allow competition to force the industry to eat well over a trillion dollars a year in decreased gross revenues, accepting the impact that has on the economy and employment in the short term.  On defense we must resolve our energy dilemma and stop pandering to the Middle East, then literally go home, cutting defense spending in half.  There is no other answer; raising taxes to close the debt gap is exactly identical to what we’re doing now in terms of economic damage; the downward spiral will continue if that is attempted exactly as if we do not and keep trying to deficit spend our way out of the hole.

This is reality folks, and yet nobody wants to face it.

Arithmetic cannot be bargained with.

It just is.

This afternoon Bernanke strode to the lectern and delivered a speech including this ditty:

But today I want to focus on a role that is particularly identified with the Federal Reserve–the making of monetary policy. The goals of monetary policy–maximum employment and price stability–are given to us by the Congress.

Notice those bolded words – price stability.

These goals mean, basically, that we would like to see as many Americans as possible who want jobs to have jobs, and that we aim to keep the rate of increase in consumer prices low and stable.

There is the lie; you just witnessed Ben Bernanke take words from a Statute – an actual law – and lie through his teeth about what they say.

This is the actual language in The Federal Reserve Act:

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

STABLE means unchanging.  It does not mean “the rate of increase in consumer prices (is) low and stable” – it means the target rate of change in consumer prices is zero.

This is the “Grand Lie” told by Bernanke, by Greenspan and by those who came before them.  It is an active and intentional act of law-breaking by every single member of the FOMC and has been serially since 1913!

Congress could change the law.  It could specify that inflation should be “low and stable.”  But Congress said no such thing.  Congress mandated stable prices, not “slowly-increasing” prices.

And let’s not kid ourselves as to the actual impact of such a policy.  The so-called “2%” inflation rate that is allegedly “low and stable” sounds like it’s a pretty harmless thing.  After all, how can 2% hurt you?

Well, over 100 years, what does 2% inflation turn a $100 item into?  If you said $100 + ($2 (2% of $100) * 100), or $300, you’re wrong.  Because an inflation rate is an exponential function that item will cost $710.26 100 years down the road.

In point of fact, however, the actual inflation rate has been approximately 3%, not 2%.  That doesn’t sound like such a bad “miss”, does it?

Well that same $100 item under a 3% inflation rate costs $1,865.89 100 years hence.

Do you still think this theft of saved funds is “no big deal” when in fact all you’re left with of that $100 100 years hence in terms of purchasing power is about $5.36?

I believe that the original Coinage Act’s provisions (passed in 1792), which proscribed death for intentional debasement of the currency, is the correct sanction for such treachery.

But despite the fact that there is currently no penalty clause of any sort in The Federal Reserve Act does not change the essential character of what Ben Bernanke and the FOMC are doing.

They are intentionally violating the law.

Now let’s talk about the other essential claim that Bernanke made today:

In normal circumstances, the Federal Reserve implements monetary policy through its influence on short-term interest rates, which in turn affect other interest rates and asset prices.1 Generally, if economic weakness is the primary concern, the Fed acts to reduce interest rates, which supports the economy by inducing businesses to invest more in new capital goods and by leading households to spend more on houses, autos, and other goods and services. Likewise, if the economy is overheating, the Fed can raise interest rates to help cool total demand and constrain inflationary pressures.

How does lowering interest rates “lead households to spend more on houses, autos and other goods and services”?

Lowering interest rates doesn’t make your wages go up, so you can’t spend more from your earned income.

No, it leads you to spend more by borrowing more money.

But borrowing to consume is in general foolish.

To begin with the more money you have chasing goods and services the more they cost!  This is economics 101, and applies to everything.  Take a look at college costs over the last 30 years if you don’t believe me and explain how Calculus has changed in that 30 years, and why it should cost five times (in inflation-adjusted dollars) as much to learn it today in college as it did in 1982.  There is only one reason this happened — too many dollars chasing too few goods and services.

As a result borrowing to consume is self-defeating as you wind up driving the price higher, which then leaves you in a position where you have to borrow even more!

That would be bad enough if it was the only thing that screws you when you engage in this behavior.

But it’s not.

In fact, there are two other problems which are at least as serious and combined are much more-so.

The first is that when you buy a good or service today instead of tomorrow you inherently overpay for it compared to tomorrow’s price.  This is due to the fact that human ingenuity continually improves productivity.  Consider the lowly handheld calculator.  If you want one today they’re $3 at WalMart.  How much did they cost 30 or 40 years ago?

This is admittedly an extreme example, but far-less extreme examples abound.  A DVD player was $500 just a few years ago.  A couple of years later they were $100.  Now they can be had if you shop carefully for under $50.  Your desire to have it “right now” meant you paid more and got less.  This is perfectly fine provided you can afford to pay for the item with your current economic surplus (savings or current wages) but if you borrowed to own it then you overpaid twice — once because you drove up the price by chasing the goods and then again because you failed to take advantage of waiting for productivity improvements to lower the cost — and thus price.

Most people do understand this cost and accept it in the name of vanity, keeping up with the Joneses or whatever.  But it is the other cost — that is, interest — that is truly insidious.

See, when a loan is made even if the law is followed (and it is not) and actual capital is lent out that was previously acquired (and it is not) the interest that you are going to have to pay in the future does not exist in the economy.

Get this straight folks – it doesn’t exist.

Now you can look at this situation in isolation — as “just you” — and shrug.

And you might get away with that.

For a while.

But 2008 showed us what happens when too many people shrug for too long.  When too many people borrow to spend now rather than spend what they can afford with current production and save some percentage of their income back to form capital eventually you hit the wall because the interest that was never created to pay the debts doesn’t exist, and eventually someone raises their hand and says “this is a Ponzi scheme — credit must expand exponentially for everyone to be able to pay, which means it won’t — and can’t — go on forever.  I quit — give me my money NOW!”

The music stops and there are not enough chairs.

What government and The Fed have done since is not a solution.  It was and is a scam. It is an attempt to sell you on the premise that the bad debts that were taken on and left people without chairs can continue to exist and be serviced by the government running huge budget deficits.

This is a lie and it is trivially provable that it is a lie.

If the economy has 10,000 units of production and 10,000 units of credit and currency in it, and the government emits another 1,000 units of credit and currency nothing has changed other than the fact that each unit of production now requires more credit or currency to buy than it did before!

This is exactly identical mathematically to the government increasing taxes by the precise same amount without telling you it has done so! 

In fact, the government can and has lied to you and told you it has and is cutting taxes while in fact it has raised them!

But what happens when you raise taxes in this fashion?  The cost of employing people goes up and the number of employed people goes down.

And what has happened?

Exactly that.

Now how do you increase government funding and thus maintain the deficit spending if you can’t put people back to work?

You can’t.

The premise that Bernanke, Bush and Obama all operated on is that by spending in deficit they could con you into restarting the exponential borrowing charade.  Four years on we now know this strategy has failed; there are simply not enough qualified and willing borrowers in the economy to take on yet another exponential load of debt ($54 trillion, approximately, this time around) to run another “cycle” of this Ponzi scheme.

But if we keep this charade up for too long, since we have now centered the gross increase in borrowings in the Federal Government, and hit that wall, the government collapses.

That is what we now face, and the only question is how far we are away from disintegration of our society, government, economy and mass unemployment.

Bernanke said much else in his speech today, but these are the only two items that matter.  The rest was nothing more than arm-waving, and I’m quite sure he hopes you didn’t catch his dissembling right up front — if anyone did, it certainly wasn’t evident in the questions that were asked.

Wake up America.