Best of the Week
Most Popular
1.Crude Oil Price Trend Forecast 2016 Implications for Stock Market - Nadeem_Walayat
2.Odds of Winning Walkers Crisps Spell & Go olidays K, C and D Letters - Sami_Walayat
3.Massive Silver Price Rally During The Coming US Dollar Collapse - Hubert_Moolman
4.Pope Francis Calls For Worldwide Communist Government - Jeff_Berwick
5.EU Referendum Opinion Polls Neck and Neck Despite Operation Fear, Support BrExit Campaign - Nadeem_Walayat
6.David Morgan: There Will Soon Be a Run to Gold Like You've Never Seen Before - Mike Gleason
7.British Pound Soars on BrExit Hopes Despite Remain Establishment Fear Mongering - Nadeem_Walayat
8.Gold Price Possible $200 Rally - Bob_Loukas
9.The Federal Reserve is Not Going To Raise Interest Rates and Destroy Gold - Michael_Swanson
10.Silver Miners’ Q1’ 2016 Fundamentals - Zeal_LLC
Free Silver
Last 7 days
Gold Price Not Ready for a Final Intermediate Cycle Low - 31st May 16
EU Referendum - British People vs Establishment Elite, Vote LEAVE an Act of Defiance! - 31st May 16
Gold - Mr. Cool Cucumber is starting to Sweat - 31st May 16
AMAT Chirps, b2b Ramps, Yellen Hawks and Gold’s Fundamentals Erode - 31st May 16
Stock Market Re-Testing Overhead Resistance - 30th May 16
David Cameron Questioned on Out of Control Immigration at TEN TIMES Conservative Election Pledges - 30th May 16
Bitcoin Price Skyrockets And Is Now Up More Than 100% This Jubilee Year - 30th May 16
This Is Not The America My Parents Immigrated To In 1957 - 30th May 16
“Debt, Not The Economy, Reaches Escape Velocity” With Graham Mehl - 29th May 16
EU Referendum, Black Vote LEAVE or REMAIN? Which is Worse for Racism for Britain's Ethnic Minorities? - 29th May 16
Billionaire Gross: Jubilee Debt Relief as Prelude to New Global Economic Order - 29th May 16
Wargaming North Korea - Assessing the Threat - 29th May 16
EU REMAIN Population Forecasts - England 4.1 million Explosion, London Migration Crisis - 28th May 16
A Guide to the Trump-Sanders Debate - 28th May 16
Gold And Silver – At Significant Support. New “Story” Developing - 28th May 16
The Next Systemic Lehman Event - New Scheiss Dollar & Gold Trade Standard - 27th May 16
Energy and Debt Crisis Point to Much Higher Silver, Metals Prices - 27th May 16
Gold Junior Stocks Q1 2016 Fundamentals - 27th May 16
These Crisis Markets Are Primed to Deliver Big Gains, Platinum Never Cheaper! - 27th May 16
Operation Black Vote BrExit Warning for the Wrong EU Referendum - 27th May 16
UK Immigration Crisis Hits New Extreme, Catastrophic ONS Migration Stats Ahead of EU Referendum - 27th May 16
Many of the World’s Best Investors Made Their Fortunes This Way…And You Can Too - 27th May 16
The Ugly Truth About Stock Market Manipulation and Gold Prices - 27th May 16
Gold Price Looking Vulnerable While Gold Stocks Correct - 27th May 16
The 5 Fatal Flaws of Trading - 27th May 16
The Next Big Crash Of The U.S. Economy Is Coming, Here’s Why - 27th May 16
A New Golden Bull or Has the Market Gone Too Far Too Fast? - 27th May 16
It Feels Like Inflation - 26th May 16
Negative Interest Rates Set to Propel the Dow Jones to the Stratosphere? - 26th May 16
S&P Significant Low has Occurred – Not Likely! - 26th May 16
Statistics for Funeral Planning in UK Grave - 26th May 16
Think Beyond Oil And Gold: Interview With Mike 'Mish' Shedlock - 26th May 16
Hard Times and False Mainstream Media Narratives - 26th May 16
Will The Swiss Guarantee 75,000 CHF For Every Family? - 26th May 16
Is There A Stocks Bear Market in Progress? - 26th May 16
Billionaires Are Wrong on Gold - 26th May 16
How NOT to Invest in the Gold Market - 26th May 16
The Black Swan Spotter...Which Saw the Oil-Crash coming; now says the “Invisible Hand” will push Brent to $85 by Christmas - 26th May 16
U.S. Household Debt Still Below 2008 Peak - 25th May 16
Brexit: Wrong Discussion, Wrong People, Wrong Arguments - 25th May 16
SPX is at Strong Resistance - 25th May 16
US Dollar, Back From the Grave? - 25th May 16
Gold : Just the Facts Ma’am - 25th May 16
The Worst Urban Crisis in History Could be Upon Us - 24th May 16
Death Crosses Across The Board Are IRREFUTABLE Stock Market Sell Signals - 24th May 16
Bitcoin Trading Alert: Bitcoin Price Stays below $450 - 24th May 16
Stock Market Crash Death Cross Doom Prevails - 23rd May 16
Did AMAT Chirp? Implications for the Economy and Gold - 23rd May 16
Stocks Extended Their Rebound On Friday - Will They Continue Higher? - 23rd May 16
UK Treasury Propaganda Warns of 3.6% Brexit Recession, the £64 Billion Question? - 23rd May 16
Stock Market Support Breached, But Not Broken! - 23rd May 16
George Osborne Warns of 18% Cheaper House Prices - BrExit for First Time Buyers - 22nd May 16
Gold Bull-Phase I Continues to Confound (The Trek to “Known Values”) - 22nd May 16 r
Avoiding a War in Space - 22nd May 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Why 95% of Traders Fail

Our Collapsing Economy and Currency

Politics / US Politics Dec 02, 2012 - 03:13 PM GMT

By: Paul_Craig_Roberts

Politics

Is the “fiscal cliff” real or just another hoax? The answer is that the fiscal cliff is real, but it is a result, not a cause. The hoax is the way the fiscal cliff is being used.

The fiscal cliff is the result of the inability to close the federal budget deficit. The budget deficit cannot be closed because large numbers of US middle class jobs and the GDP and tax base associated with them have been moved offshore, thus reducing federal revenues. The fiscal cliff cannot be closed because of the unfunded liabilities of eleven years of US-initiated wars against a half dozen Muslim countries--wars that have benefitted only the profits of the military/security complex and the territorial ambitions of Israel. The budget deficit cannot be closed, because economic policy is focused only on saving banks that wrongful financial deregulation allowed to speculate, to merge, and to become too big to fail, thus requiring public subsidies that vastly dwarf the totality of US welfare spending.


The hoax is the propaganda that the fiscal cliff can be avoided by reneging on promised Social Security and Medicare benefits that people have paid for with the payroll tax and by cutting back all aspects of the social safety net from food stamps to unemployment benefits to Medicaid, to housing subsidies. The right-wing has been trying to get rid of the social safety net ever since Franklin D. Roosevelt constructed it, out of fear or compassion or both, during the Great Depression.

Washington’s response to the fiscal cliff is austerity: spending cuts and tax increases. The Republicans say they will vote for the Democrats’ tax increases if the Democrats vote for the Republican’s assault on the social safety net. What bipartisan compromise means is a double-barreled dose of austerity.

Ever since John Maynard Keynes, economists have understood that tax increases and spending cuts suppress, not stimulate, economic activity. This is especially the case in an economy such as the American one, which is driven by consumer spending. When spending declines, so does the economy. When the economy declines, the budget deficit rises.

This is especially the case when an economy is weak and already in decline. A declining economy means less sales, less employment, less tax revenues. This works against the effort to close the federal budget deficit with austerity measures. Instead of strengthening the economy, the austerity measures weaken it further. To cut unemployment benefits and food stamps when unemployment is high or rising would be to provoke social and political instability.

Some economists, such as Robert Barro at Harvard University, claim that stimulative measures, the opposite of austerity, don’t work, because consumers anticipate the higher taxes that will be needed to cover the budget deficit and, therefore, reduce their spending and increase their saving in order to be able to pay the anticipated higher taxes.

In other words, the Keynesian effort to stimulate spending causes consumers to reduce their spending. I don’t know of any empirical evidence for this claim.

Regardless, the situation on the ground at the present time is that for the majority of people, incomes are stretched to the limit and beyond. Many cannot pay their bills, their mortgages, their car payments, their student loans. They are drowning in debt, and there is nothing that they can cut back in order to save money with which to pay higher taxes.

Many commentators are complaining that Congress will refuse to face the difficult issues and kick the can down the road, leaving the fiscal cliff looming. This would probably be the best outcome. As the fiscal cliff is a result, not a cause, to focus on the fiscal cliff is to focus on the symptoms rather than the disease.

The US economy has two serious diseases, and neither one is too much welfare spending.

One disease is the offshoring of US middle class jobs, both manufacturing jobs and professional service jobs such as engineering, research, design, and information technology, jobs that formerly were filled by US university graduates, but which today are sent abroad or are filled by foreigners brought in on H-1B work visas at two-thirds of the salary.

The other disease is the deregulation, especially the financial deregulation, that caused the ongoing financial crisis and created banks too big to fail, which has prevented capitalism from working and closing down insolvent corporations.

The Federal Reserve’s policy is focused on saving the banks, not on saving the economy. The Federal Reserve is purchasing not only new Treasury bonds issued to finance the more than one trillion dollar annual federal deficit but also the banks’ underwater financial instruments, taking them off the banks’ books and putting them on the Federal Reserve’s books.

Normally, debt monetization of this amount results in rising inflation, but the money that the Federal Reserve is creating in its attempt to manage the public debt and the banks’ private debt is hung up in the banking system as excess reserves and is not finding its way into the economy. The banks are too busted to lend, and consumers are too indebted to borrow.

However, the debt monetization poses a second threat that is capable of biting the US economy and consumer living standards very hard. Foreign central banks, foreign investors in US stocks and financial instruments, and Americans themselves observing the Federal Reserve’s continuous monetization of US debt cannot avoid concern about the dollar’s value as the supply of ever more dollars continues to pour out of the Federal Reserve.

Already there is evidence of central banks and individuals moving out of dollars into gold and silver bullion and into other currencies of countries that are not hemorrhaging debt and money. According to John Williams of Shadowstats.com, the US dollar as a percentage of global holdings of reserve assets has declined from 36.6% in 2006 to 28.7% in 2012. Gold has increased from 10.5% to 12.8% and other foreign currencies except the euro increased from 38.4% to 44.4%.

Russia, China, Brazil, India, and South Africa intend to conduct trade among themselves in their own currencies without use of the dollar as reserve currency. The EU countries conduct their trade with one another in euros, and although not reported in the US media, Asian countries are discussing a new common currency for trade among themselves.

The world is abandoning the use of the dollar to settle international accounts, and the demand for dollars is falling as the Federal Reserve increases the supply of dollars.

This means that the price of the dollar is threatened.

Concern over the dollar means concern over dollar-denominated financial instruments such as stocks and bonds. The Chinese hold some $2 trillion in US financial instruments. The Japanese hold about $1 trillion in US Treasuries. The Saudis and the oil emirates also hold large quantities of US dollar financial instruments. At some point the move away from the dollar also means a move away from US financial instruments. The dumping of US stocks and bonds would destabilize US financial markets and wipe out the remainder of US wealth.

As I have previously written, the Federal Reserve can create new money with which to purchase the dumped financial instruments, thus maintaining their prices. But the Federal Reserve cannot print gold or foreign currencies with which to buy up the dollars that foreigners are paid for their US stocks and bonds. When the dollars in turn are dumped, the exchange value of the dollar will collapse, and US inflation will explode.

The onset of hyperinflation can be as sudden as the collapse of a currency’s exchange value.

The real crisis facing the US is the impending collapse of the US dollar’s foreign exchange value. The US dollar’s value in relation to silver and gold has already collapsed. In the past ten years, gold’s price in US dollars has increased from $250 per ounce to $1,750 per ounce, an increase of $1,500. Silver’s price has risen from $4 per ounce to $34 per ounce. These price rises are not due to a sudden scarcity of gold and silver, but to a flight from the dollar into the two forms of historical money that cannot be created with the printing press.

The price of oil has risen from $20 a barrel ten years ago to as high as $120 per barrel earlier this year and currently $90 a barrel. This price rise has come about despite a weak world economy and without any supply restrictions other than those caused by the attempted US occupation of Iraq, the Western assault on Libya, and the self-harming Western sanctions on Iran, impacts most likely offset by the Saudis, still Washington’s faithful puppet, a country that pumps out its precious life fluid in order to save the West from its own mistakes. The moronic neoconservatives wish to overthrow the Saudi Arabian government, but what more faithful servant has Washington ever had than the Saudi royal house?

What can be done? For a number of years I have pointed out that the problem is the loss of US employment, consumer income, GDP, and tax base to offshoring. The solution is to reverse the outward flow of jobs and to bring them back to the US. This can be done, as Ralph Gomory has made clear, by taxing corporations according to where they add value to their product. If the value is added abroad, corporations would have a high tax rate. If they add value domestically with US labor, they would face a low tax rate. The difference in tax rates can be calculated to offset the benefit of the lower cost of foreign labor.

As all offshored production that is brought to the US to be marketed to Americans counts as imports, relocating the production in the US would decrease the trade deficit, thus strengthening belief in the dollar. The increase in US consumer incomes would raise tax revenues, thus lowering the budget deficit. It is a win-win solution.

The second part to the solution is to end the expensive unfunded wars that have ruined the federal budget for the past 11 years as well as future budgets due to the cost of veterans’ hospital care and benefits. According to ABC World News, “In the decade since the Sept. 11, 2001 terrorist attacks on the World Trade Center, 2,333,972 American military personnel have been deployed to Iraq, Afghanistan or both, as of Aug. 30, 2011 [more than a year ago].” These 2.3 million veterans have rights to various unfunded benefits including life-long health care. Already, according to ABC, 711,986 have used Veterans Administration health care between fiscal year 2002 and the third-quarter of fiscal year 2011. http://abcnews.go.com/Politics/us-veterans-numbers/story?id=14928136#1

The Republicans are determined to continue the gratuitous wars and to make the 99 percent pay for the neoconservatives’ Wars of Hegemony while protecting the 1 percent from tax increases.

The Democrats are little different.

No one in the White House and no more than one dozen members of the 535 member US Congress represents the American people. This is the reason that despite obvious remedies nothing can be done. America is going to crash big time.

And the rest of the world will be thankful. America along with Israel is the world’s most hated country. Don’t expect any foreign bailouts of the failed “superpower.”

Paul Craig Roberts

http://www.paulcraigroberts.org/

Paul Craig Roberts [ email him ] was Assistant Secretary of the Treasury during President Reagan's first term.  He was Associate Editor of the Wall Street Journal .  He has held numerous academic appointments, including the William E. Simon Chair, Center for Strategic and International Studies, Georgetown University, and Senior Research Fellow, Hoover Institution, Stanford University. He was awarded the Legion of Honor by French President Francois Mitterrand. He is the author of Supply-Side Revolution : An Insider's Account of Policymaking in Washington ; Alienation and the Soviet Economy and Meltdown: Inside the Soviet Economy , and is the co-author with Lawrence M. Stratton of The Tyranny of Good Intentions : How Prosecutors and Bureaucrats Are Trampling the Constitution in the Name of Justice . Click here for Peter Brimelow's Forbes Magazine interview with Roberts about the recent epidemic of prosecutorial misconduct.

© 2012 Copyright Paul Craig Roberts - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

davidg
02 Dec 12, 22:47
This is a poor analysis

Paul:

You're trying to find some "other" explanation that will miraculously save us from the wart on the end of our collective noses.

We are in debt. I don't care if you believe we got their through wars, through entitlement spending, through reducing manufacturing, or outsorucing jobs. Debt is our only problem. It is our slave.

We live far beyond our means. The impoverished in America own a car, have two or three television sets, and can afford vacations. The wealthy among us own mutliple homes on multiple continents. We eat out instead of in. We allow advertisers to make us believe we need to buy things we do not need. The average american, if they were to live within their means, would not only save themselves, they would liberate the government from the burden of having to take care of far too many people who want to live too far beyond what is possible.

If we lived within our means, the banks would have no one to loan to. And if no one borrowed, the banks would grow into the monstrosities they are today. The appetite for debt has gotten us where we are. And it will destroy us. Individually and collectively.

Get rid of our thirst for a debt-driven lifestlye, and all our problems to away.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife