Sunday, October 26, 2014

My View

Random ruminations from your resident curmudgeon...

There is no secret that the Federal government has too much debt. In fact, by all reasonable definitions, our country is broke, with too much debt and not nearly enough income to service those debts.

So what are our options as a country to deal with this situation?

We could default. We have seen countries such as Argentina do that, and the results have been disastrous not only for the economy of that country but for its people as well. Standards of living have crashed and the ability of Argentina to borrow in world markets to support its economy has been severely hampered. Slower growth has been the inevitable result, further depressing the standard of living of its people.

We could begin a period of austerity, curtailing spending and paying down debt. This is painful, but the long term results are ultimately healthy for the economy and result in a better standard of living for our country. With nearly 50% of the population receiving some form of government benefit, this option is not palatable to our elected leaders since it would mean that those benefits would have to be severely curtailed to make this option work. Our elected leaders do not have the cajones to even propose this, much less implement this course of action.

We could do nothing and wait for the financial train wreck to happen. The consequences of that would be unimaginable, resulting in a tremendous decline in our standard of living and opportunity in this country.

We could implement policies that create inflation, allowing our debt to be repaid with dollars that are worth less. We could couple that policy with artificially low interest rates that result in negative real rates (negative rates occur when savers- those that deposit money into savings accounts, certificates of deposit, or buy Treasury notes and bills)- are paid an interest rate that is less than the rate of inflation (which represents the increase in the cost of living).


That's exactly what we are doing.

How does this work?

Negative real interest rates erodes the value of the government debt. Inflation allows the government to pay creditors with dollars that are worth less than what they ere when they were originally borrowed. Basically, the declining purchasing power of the average citizen is being used to pay or reduce the amount of the debt of our federal government.

At its core, the results of this policy, known as financial repression, results in a tax on those that have been diligent enough to save and on those whose income fails to keep up with the rising costs of living. Since 2008, real household incomes in this country have fallen 10%; nominal interest rates have been pushed to record low levels through the Federal Reserve's Zero Interest Rate Policy (ZIRP); and real inflation (counting food and energy costs) is running around 6%, far above the Fed's measurements of below 2%.

The bottom line of financial repression is that it destroys household wealth of most people; redistributes wealth form the majority of people to those that already have wealth and are able to take advantage of the current circumstances; and allows the government to continue to spend profligately without having to face the consequences of those actions.

Getting out of the dire circumstances that we face will require an honest discussion and assessment of where we are financially in this country. It will require courage to make the necessary changes to put our country back on sound financial footing. And it will require exemplary leadership to make it happen.

Sadly, all those things are lacking at the Federal Reserve and in Washington.

So you and I bear the brunt of these oppressive and misguided policies.

And that, my friends, is my view.

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