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Fed Policy Makers Wasting $10 Trillion on Bailout Liabilities

Economics / Credit Crisis Bailouts Dec 12, 2008 - 04:25 PM GMT

By: David_Haas

Economics Best Financial Markets Analysis ArticleWhat These Dangerous Clowns Don’t Understand - I had the unnerving experience last night of staying up late watching C-Span as U.S. Senators hammered and then shot down the bailout bill for the Detroit“Big 3″ (a misnomer?) automakers. I must admit, there was a great deal of heart-felt passion in the words of the representatives who were courageous enough to speak out and it was this rare display of authenticity and, dare-I-say, credibility that kept me watching.

For once, I could feel real pain and writhing in that room; pain I assume to be anguish over having to face the wrath of their financially-collapsing constituencies back home - since the teeth-grinding, almost surreal, fear of losing your job and moving your family and belongings onto the frigid streets of Winter will never likely visit the lives or families of any of these privileged orators. And that’s too bad. Perhaps if they, too, were seriously threatened with long-term unemployment, loss of benefits, financial devastation, and ultimately, homelessness, they’d think more clearly, spend more frugally, act more responsibly, and make better “legacy” decisions for us all to live with.

On the heels of the failed bailout bill, there was a session where the governors of New Jersey, Vermont, and Wisconsin each offered detailed insights into just how hard their states are being hit by the financial juggernaut that’s engulfing them and everyone else. Though I seldom admire politicians, I had great respect for each of these men and gained a new appreciation for the difficulty and urgency of their present job. Once again, rather than the usual politically-motivated, self-congratulatory BS and rhetoric, I actually saw true concern and, I might add, both doubt and trepidation about what the future may hold in store.

Though much of the focus in the media has been on the impersonal plight of multinational corporations and mega-banks - along with the various policy failings and flailing's at the federal level - the words of those three state governors began to bring the whole scary thing down to the street level where it begins to connect directly to people, to each of us, and to the things that we all will see and experience in the near future.

REAL SERVICES (police, fire/EMT, education, Medicaid, pensions, etc.) ARE BEING CUT NOW in a dramatic, unprecedented fashion and the “formerly unthinkable” risk of large-scale state and local debt-payment defaults is high and increasing rapidly. The debt-induced economic seizure of Kondratieff Winter is spreading like frost across a midnight window pane. As I see it, hunger cannot be too far behind and, like the financial crisis itself, it will arrive much sooner than anyone may think.

In addition to severe service cutbacks, what are the states’ other options to control their (our) fiscal conflagrations? Two things; either increase taxes or begin deficit spending and, unfortunately, NEITHER OF THESE IS A VIABLE OPTION.

Obviously, shrinking business activity means shrinking employment and, therefore, less income to support a tax of any kind. Higher tax rates on people who are still working means less net income to spend… which, of course, leads to less consumption, more layoffs, more business failures, and fewer new jobs. It’s a vicious, destructive cycle that’s hard to break. Actually, it’s more of a “death spiral”.

Higher sales taxes, licensing fees, and use taxes also mean higher consumer prices so, naturally, there would be a decrease in demand and fewer “things” would be consumed. Basic economics. Increasing taxes penalizes and slows the economy, simple as that. An economy suffering a broad-based, deflationary contraction such as ours is CANNOT WITHSTAND TAX INCREASES IN ANY FORM.

The states’ other option, deficit spending, is not an option at all. Why? Because almost all of them (I’m thinking I just heard 49 out of 50) have a clause in their constitutions barring deficits and requiring their budgets to be balanced each year.

So where do we look from here? By virtue of how the budgetary and funding systems have evolved over the years WE ARE ALL, TO A GREAT DEGREE, ENTIRELY DEPENDENT UPON FEDERAL LARGESSE. In the situation we find ourselves in now, we are all functioning at the whim of federal policymakers who are, for the purposes of this article, the DANGEROUS CLOWNS.

Here’s the problem…

Political elites seem to think only in terms of their network of contacts and supporters who, with few exceptions, tend to be other elites from business, media, and academia (think-tanks). They are, by their very nature, “inside the box” thinkers operating within a closed system.

The current batch of policymakers is determined - in spite of and without regard to overtly boisterous opposition from the mass-electorate - to spend OUR PUBLIC MONEY (code for “increase our debt”) propping-up what are now “utterly failed” systems and non-functioning business models, thereby continuing the hefty paychecks and bonuses of those who, either deliberately or through incompetence or corruption, destroyed what had, until recently, always been successful businesses and institutions. It wouldn’t require a stretch of the imagination to think that the folks who are benefiting most now were staunch political supporters “back in the day” before the collapse.

The clowns keep pouring money into the top of the funnel hoping some will “trickle down” and reach the streets. Anyone watching this tragic comedy can see that the funnel is full of holes and all the money poured in leaks out at the top. Yet, all the policymakers’ eyes are on the funnel’s spout where, unsurprisingly, not a single drop comes out

What we are all witnessing - and unfortunately subject to - is a FAILED UNDERSTANDING OF THE CORE PROBLEM. It’s widely known in the consulting world that, until the core problem is identified and fully understood, no proper or workable solution will likely be found - unless it’s purely by luck. Identifying the core problem is obviously step one in any resolution process.

The situation we are in is much like a high-rise building. The structure itself represents our debt-based system. Since we have allowed money to be created only through the issuance of debt, the system itself has an entrenched, unquenchable, and ever-accelerating need for more debt to be created and then somehow sustained. THE DEBT ITSELF IS THE PROBLEM YET OUR LEADERS TRY TO SOLVE THE DEBT PROBLEM BY ADDING TO IT RATHER THAN BAILING OUT THE WORKERS WHO MUST SERVICE IT. Any third-grader would understand that this is futile.

Now let’s try to imagine the scale of the debt tower we’ve had built in our names. If I were to purely make a guess - based upon all that I know about the scale of debt, leverage, and derivatives - I would have to guess that if our current structure were a real building it would be in the range of 10 MILES TALL - at least until 4 months ago when things began getting ugly. Bear in mind, it took our country over 172 years (see footnote) to incur its first $9 Trillion of debt (through FY2007). When Bush/Cheney took over in 2000, our national debt was $5.7 Trillion.

But, in our present circumstances, we are adding dozens of stories to our debt tower each day. At the frenzied speed we’re building, both the quality of construction and the continued availability of materials must be serious concerns, not to mention the wisdom of the architects and engineers!

I have read within the past day that the total of the current Federal Reserve Bank and U.S. Treasury commitments to “shore-up” the economy now tallies in the range of $10 TRILLION DOLLARS. We have just witnessed over the course of just 4 short months the creation of an additional $10 Trillion of new financial commitments being added in our names! More than 172 years’ worth of debt added in 4 months. Astonishing.

Now, let me add for veracity that some of this money hasn’t “shown up” yet on our federal balance sheet but I presume it must show up as debt some day. The money is being spent, therefore, we must owe it to someone. And, even if it were all being spent buying assets, many of those will likely prove to be worthless or bad deals and will leave little other than residual debt when the final accounting is done.

And so it appears that in just 4 short months, more than twice the amount of all the federal debt that has been created over the past 172 years (actually most of that incurred under Bush/Cheney) has been added to the top floors of our tower. The Winter winds are howling yet we continue building ever-higher, ever-faster. Something tells me this cannot end well.

Monumental Strategic Errors…

What the clowns don’t understand is that any structure is only as good as its foundation. Since all debt is supported by those who must repay it we might say that our debt tower is built upon a foundation of workers. The more prosperous and broad the worker-base, the more sound the overall debt structure becomes - as long as the base maintains its integrity.

However, since the early 1980’s our leaders have made critical strategic errors by systematically attacking and undermining both the prosperity and financial security of the worker-base WHILE THEY QUICKLY ERECTED THE LARGEST TOWER OF DEBT KNOWN TO MAN. Irresponsible is too kind a word to describe what’s been done. Any resolution to the monumental problems at-hand must be found in reversing this treacherous strategy and rebuilding the foundational strength of the work-force, while reducing the size of the structure riding upon it.

Mysteriously Silent Economists

Economists have - for reasons I have yet to understand - remained silent on another critical issue. The issue is THE VELOCITY OF MONEY MULTIPLIER EFFECT (VOMME). To describe it in just a few words, if $10 trillion dollars is poured into the top of the economic funnel, it has the stimulus effect of far less than $10 Trillion dollars because much of this money is immediately locked up in the balance sheets of insolvent companies, held for “future investment” opportunities at lower prices, or simply siphoned off to who-knows-where. The inefficiencies of this process serve to contract the money supply and business activity and is, ultimately, deflationary, and burdens the national economy with another heavy layer of additional debt. This is precisely what we’re seeing happen now.

Conversely, if that same $10 Trillion were held back from the failing institutions and, instead, scattered liberally across the land AT THE STREET LEVEL a whole different scenario would unfold due to the highly stimulative impact of the VOMME.

Here’s how it works. People get new money and many of them begin to spend it on things they need and want. The “easier” the money is to get, the more of it they’ll spend. Money that is spent is spent in businesses. Businesses with a lot of customers do well and grow. Business owners become prosperous and more confident. As they grow they hire more people and need larger buildings. The economic activity spreads and touches the lives of more and more people as it grows. Money changes hands quickly and brings benefits all who touch it (velocity). Most of this money runs through banks. Banks become solvent again due to the increased deposits and fees and they, in turn, feel confident enough to make a series of new loans (this is where the multiplication occurs). All of this increased economic activity generates higher and higher tax revenues at all levels of government. Higher tax revenues SHOULD PAY OFF GOVERNMENT DEBTS AND REDUCE TAXES! Reduced taxes stimulate the economy… and on it goes.

Sounds perfect, so far, right? Well, there is one small fly in the ointment and that is “easy money” tends to be inflationary. All the economic activity described above would eventually place considerable upward pressure on prices, wages, real estate, corporate earnings and, at some point, stock prices. Inflation also has an interesting impact on the “real” burden of personal, business, and governmental debts - over time, it makes them magically go away! Oh, lest I forget, such an inflationary “easy money” policy might trash the value of the dollar for a while and dramatically boost exports and foreign investment.

Ahem, excuse me, but isn’t most of this just what we need?

The only other bugaboo is that inflation tends to drive up interest rates. That’s wonderful! Savers and retirees could finally see some reward for saving their money in banks (further mitigating the insolvency problems) and they, too, might begin to gain confidence and spend more freely than they’re able to now. This increased spending would add a further boost to the economy.

I say it’s high time we fire the clowns and PUT THE MONEY ON THE STREETS WHERE IT WILL DIRECTLY ADDRESS THE EXPLODING CRISIS AT-HAND. After all, it will be our debt, therefore we might as well be the ones enjoying it!

The indirect approach being used now - pouring money into the top of the funnel - is obviously not working but, instead, is fomenting a potentially dangerous level of risk for social instability and real harm while it further enriches those who need it least. It’s simply another transfer of wealth upward.

WE NEED OUR MONEY ON THE STREETS TO BEGIN FUELING OUR ECONOMY. Only from there, can our problems become manageable and begin to resolve themselves. We can pick up the pieces after the inflation when debts have become proportional to incomes. Then we can set about the difficult task of creating a sound national currency after this mess is receding in the rear-view mirror.

We, as responsible Citizens, need to exert some serious pressure if we ever hope to turn the Titanic we’re all riding on away from the iceberg. Take action and be a part of the solution. Read. Study. Then call your elected officials and express your views. It’s our wealth that’s being transferred and squandered and it’s our nation’s future that’s on the line.

Footnote: The U.S. federal debt briefly contracted to zero on January 8, 1835 under President Andrew Jackson. Source; Wikipedia.

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    By David Haas

    In my consulting practice, I work with individuals, business owners, and professionals.  I assist business owners and professionals in several critical areas ranging from business start-up, marketing, operational challenges, employee retention, and strategic planning to personal asset protection, financial, and retirement income planning.  Often, these areas relate and need to be integrated to work most effectively.  I also assist business owners in developing exit-strategies that enable them to maximize the value of their business interests and preserve their lifestyle in retirement.  For individuals, I primarily focus on tax reduction, financial, and retirement income planning.

    © 2008 David Haas, Consultant

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