Category Archives: Economic Takedown

Secession 2.0: States Seek to Drop Dollar For Own Currency

policymic.com | Feb 13, 2013

by Ernest Ludwick

texasAt least a dozen states have introduced legislation to implement or at least study the concept of creating an emergency currency to serve as a medium of exchange should there be a breakdown of the federal government’s currency or their ability to distribute it to the states. Could this work? Some examples:

— Texas, which receives 1/3 of state revenue from the federal government and has many dependent retirees, is considering a “Self Sufficiency Act” to keep goods and services flowing.

— Virginia is authorizing a commission to study the use of gold and silver currency.

— Utah has already authorized the use of gold and silver money.

— Wyoming is considering an alternative currency in the event the US dollar becomes useless.

— Other states have included in their disaster preparedness plans various forms of replacements for federal money in the event of a political or economic meltdown.

There are serious legal and/or constitutional issues involved in making one’s own money. The Constitution originally only authorized states to create gold and silver coins as money (maybe because the Revolution was financed with what became worthless, un-backed, paper “continentals”). Article I, Section 10, says, “No State shall … emit Bills of Credit ….” (paper intended to circulate as money but not redeemable in gold and silver). Another part of the same Article reads, “No State shall … make any Thing but gold and silver Coin a Tender in Payment of Debts …” We soon began to print gold-backed dollars to augment our gold and silver coins. Legal tender laws later allowed unredeemable paper to circulate as money. The first dollar notes were printed in 1792 but by 1862 we switched to fiat dollars to finance the Civil War. Since then, the U.S. has returned to gold-based money several times only to abandon it in favor of paper notes during every major war.

Before standardized bank note “dollars,” there were many privately issued kinds of paper money. Lightweight, portable, standardized U.S. dollars came to predominate despite resistance. Madison and the other framers of the Constitution were deeply concerned not with states’ independent currencies but with the threat of un-backed notes that they had seen used to enrich despots and ravage economies elsewhere.

The un-backed paper push was led by commodities brokers in the 1800s that saw that their markets would give the appearance of constantly rising as long as more dollars were being created. Things haven’t changed much — today’s securities brokers enjoy the same benefit of apparent prosperity in our stock markets due to the huge influx of “funny money.”

The unfortunate dependency on ever increasing rates of return in our pensions, investment portfolios, and in credit-financed government handouts has made our thirst for more and more inflation insatiable. As the ruler elite came to realize, this could not be sustained forever. But instead of acting to stem the flood of red ink, our Congress and several presidencies took the cowardly way out and sacked the Treasury to buy favor and enrich their cronies. Executive Order 6102, enacted during the Depression, aimed to limit private gold ownership to prevent hoarding. It has since been abused by the most notorious limiter of metal as money, Richard Nixon, who enacted the latest decoupling of dollars from gold in order to finance war and curb the drain of gold from the U.S. by speculators.

Inflation becomes real against the fixed measuring stick of bullion. Unlike the times when coins were part of everyday commerce a modern 2.3 gram dime made of gold would today have a value of $150. Easy to buy a cart of groceries but you’d need a coin the size of a pinhead if you wanted to just grab a gallon of milk.

At today’s price the U.S. owns about 2 cents of gold for every dollar in circulation. This, some states feel, leaves us very vulnerable to a precipitous drop in the value of our paper money. Ignoring abstract currency reserve considerations and other assets contributing to U.S.’ solvency this implies no real-world floor of support for the dollar until it reaches a devaluation of 1/50 its current buying power ($100 for a loaf of bread).

So in the event of a global loss of faith in dollars, a back-up system makes sense. But with all of these limits on state and private issuance of money, how are they getting away with these emergency acts? Most of the state measures set up “studies” or “commissions” or “emergency plans,” so no unlawful issuance of money will actually take place until the emergency kicks in.

Utah’s law limits the use of gold and silver as currency to federally minted coins but importantly they can be exchanged at their intrinsic value rather than their face value.  They plan to follow up with a law allowing foreign coins to be treated similarly, possibly paving the way for acceptance of coins minted by other states?

As Ron Paul famously pointed out in the 2012 debates, you could buy a gallon of gas for one silver dime ($4.00 then, now worth $5.00 apiece at bullion price). In Britain, pound coins are used for many larger purchases. It’s not that impractical to trade in metal money especially when the paper alternative offers no way to know from day to determine its worth. My Argentine friends tell stories of how shopkeepers would add zeros to the numbers on the money with felt tip pens to keep up with government proclamations.

The threat of severe inflation or hyperinflation is real and in the opinion of many prestigious economists inevitable. If a state’s seismologist gave a warning of a 50%-60% likelihood of an imminent earthquake or tsunami the state would be remiss (and liable) if they failed to create emergency preparations. It appears that the Constitution trumps some of the later Tender Acts.

As a practical matter, the preparation of a money system based on scrip, coin, vouchers, or even a state currency has many precedents. The “state currencies movement” is not a form of protest like the secession movements that popped up following the recent election. It is a wise protection of the states’ citizenry against having their economy reduced to a Stone Age barter system if the federal system fails.

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China overtakes US in world trade

Employees work at a shoe factory in Lishui, Zhejiang province, China
Employees work at a shoe factory in Lishui, Zhejiang province, China. Photograph: Lang Lang/Reuters

Combined total for imports and exports of Chinese goods hits $3.87tn, edging past the US for the first time

guardian.co.uk | Feb 11, 2013

by Phillip Inman

China has become the world’s biggest trading nation in goods, ending ending the post-war dominance of the US, according to official figures.

China’s customs administration said the combined total for imports and exports in Chinese goods reached $3.87tn (£2.4tn) in 2012, edging past the $3.82tn trade in goods registed by the US commerce department.

The landmark total for Chinese trade indicates the extent of Beijing’s dependence on the rest of the world to generate jobs and income compared with a US economy that remains twice the size, and more self-contained. The US economy is worth $15tn compared with the $7.3tn Chinese economy.

The US not only has a large internal market for goods, but also dominates the trade in services. US total trade amounted to $4.93tn in 2012, according to the US Bureau of Economic Analysis (BEA) with a surplus of $195.3bn.

But like most western nations, the US deficit in the trade of goods weighs heavily and is only expected to get larger.

The deficit in goods was more than $700bn compared with China’s 2012 trade surplus, measured in goods, which totalled $231.1bn.

Jim O’Neill, head of asset management at Goldman Sachs, said the huge market for western goods would disrupt regional trading blocs as China becomes the most important commercial partner for some countries. Germany may export twice as much to China by the end of the decade as it does to France, he told Bloomberg.

“For so many countries around the world, China is becoming rapidly the most important bilateral trade partner,” he said. “At this kind of pace by the end of the decade many European countries will be doing more individual trade with China than with bilateral partners in Europe.”

Congressional Budget Office: National debt $7 trillion larger by 2023

dailycaller.com | Feb 6, 2013

The nonpartisan Congressional Budget Office released an estimate Tuesday saying that by 2023, the federal debt will be $7 trillion larger.

“If current laws remain in place, debt will equal 77 percent of GDP and be on an upward path,” CBO projects.

Based on their modeling, the deficit will total $845 billion in 2013, making it the first year in five years to have a deficit below $1 trillion.

“With such deficits, federal debt would remain above 73 percent of GDP — far higher than the 39 percent average seen over the past four decades,” says the CBO.

Economists commonly recommend that the debt-to-GDP ratio should not exceed 60 percent. It currently exceeds 70 percent.

US Debt Clock

“The CBO’s report is yet another warning that we need to get spending under control,” House budget committee chair Paul Ryan said last week. “The deficit is still unsustainable. By 2023, our national debt will hit $26 trillion. We can’t let that happen. We need to budget responsibly, so we can keep our commitments and expand opportunity.”

Included in the CBO’s budget outlook is the future of medical insurance programs. The CBO projects that 7 million people will no longer have employer-provided health insurance by 2022, because of changes required by the Affordable Care Act.

The cost of Social Security is expected to nearly double over the next ten years, from $773 billion in 2012 to $1.43 trillion in 2023.

G. William Hoagland, senior vice president of the Bipartisan Policy Center, testified before Congress that by 2022, the debt will be $27 trillion. Hoagland agreed that the debt-to-GDP ratio will reach 77 percent.

In all, the CBO expects economic growth to be slow for the remainder of the year as the expected budgetary cuts take place. Following 2013, the CBO estimates economic growth will speed up, “causing the unemployment rate to decline and inflation and interest rates to eventually rise from their current low levels,” the CBO writes.

“Nevertheless, the unemployment rate is expected to remain above 7½ percent through next year,” making 2014 the sixth consecutive year with unemployment exceeding 7.5 percent — the longest period of extended unemployment in the last 70 years.

Federal Reserve enters ‘uncharted territory’ with assets of $3 trillion

federal reserve
Federal Reserve Chairman Ben Bernanke speaks during a news conference at the Federal Reserve Board in Washington, Wednesday, Dec. 12, 2012, following the Federal Open Market Committee meeting. The Federal Reserve sent its clearest signal to date Wednesday that it will keep interest rates super-low to boost the U.S. economy even after the job market has improved significantly. (AP Photo/Manuel Balce Ceneta)

The central bank’s balance sheet has provided record windfalls to the Treasury.

Bloomberg News | Jan 26, 2013

By Joshua Zumbrun and Jeff Kearns

WASHINGTON • Federal Reserve Chairman Ben Bernanke’s unprecedented bond buying has pushed the Fed’s balance sheet to a record $3 trillion as he shows no sign of softening his effort to bring down unemployment.

The Fed is buying $85 billion of securities every month, using the full force of its balance sheet to stoke the economic recovery. The central bank began $40 billion in monthly purchases of mortgage-backed securities in September and added $45 billion in Treasury securities to that pace this month.

“We’re in uncharted territory,” said Julia Coronado, chief economist for North America at BNP Paribas SA in New York.

The Fed’s assets climbed by $48 billion in the past week to $3.01 trillion as of Wednesday, according to a release from the central bank.

Fiscal astrology forecast: Trillion is the new billion
http://www.seacoastonline.com/articles/20130127-NEWS-301270359

Fed policy makers have voiced increasing concern that record-low interest rates are overheating markets for assets from farmland to junk bonds, which could heighten risks when they reverse their unprecedented bond purchases.

Yet with unemployment still high almost 3½ years into an economic recovery, Fed officials are expected to affirm their accommodation when they meet in Washington next week.

“You’re hard pressed to find another example in history where the Fed pulled out all the stops to help a recovery along,” said Michael Hanson, senior U.S. economist at Bank of America Corp. in New York. “It’s at least as revolutionary as Paul Volcker coming in and saying we’re going to hike rates until inflation” declines.

The Fed has a dual mandate from Congress to achieve stable prices and maximum employment. Volcker, Fed chairman from 1979 to 1987, pushed interest rates to as high as 22 percent to rein in inflation that was approaching 15 percent. Now Bernanke is focusing Fed policy on the other mandate, aiming to reduce the ranks of the nation’s 12.2 million unemployed workers.

Fed officials have said their $85 billion pace of purchases will continue until the labor market improves “substantially.”

Still, they disagree on how long to continue the buying.

The minutes from the Federal Open Market Committee’s December meeting show that participants were “approximately evenly divided” between those who said the purchases should end around mid-2013 and those who said they should continue longer. Some policy makers are concerned that the size of the Fed’s holdings “could complicate the Committee’s efforts to eventually withdraw monetary policy accommodation,” according to the minutes.

The central bank’s balance sheet has provided record windfalls to the Treasury. After paying its own expenses out of its interest income, the Fed sent the Treasury $88.9 billion last year.

Federal Reserve Pushes Assets to Record $3 Trillion

ben
Chairman of the Federal Reserve Ben Bernanke speaks during a press briefing at the Federal Reserve. Brendan Smialowski/AFP via Getty Images

bloomberg.com | Jan 24, 2013

By Joshua Zumbrun

The Federal Reserve pushed its balance sheet beyond $3 trillion for the first time this week while undertaking open-ended purchases of Treasuries and mortgage-backed securities to combat 7.8 percent unemployment.

The Fed’s total assets climbed by $48 billion in the past week to $3.01 trillion as of Jan. 23, according to a release from the central bank today in Washington. Holdings of Treasuries climbed by $7.8 billion while mortgage-backed securities in the Fed portfolio rose by $35.6 billion.

The bond buying is part of Chairman Ben S. Bernanke’s campaign to use the full force of the central bank’s balance sheet to stoke the economic recovery. The Fed began purchasing $40 billion of mortgage-backed securities a month in September and this month added $45 billion in Treasury securities to that pace, bringing total monthly purchases to $85 billion.

CEO of JPMorgan says you don’t need to know how banking works, it’s like an airliner engine, too complex to explain, just shut up and pay us.

“You’re hard-pressed to find another example in history where the Fed pulled out all the stops to help a recovery along,” said Michael Hanson, senior U.S. economist at Bank of America Corp. in New York, and a former Fed economist. “It’s at least as revolutionary as Paul Volcker coming in and saying we’re going to hike rates until inflation” declines.

The Fed has a dual mandate from Congress to achieve stable prices and maximum employment. Volcker, Fed chairman from 1979 to 1987, pushed interest rates to as high as 22 percent to rein in annual price acceleration approaching 15 percent. Now Bernanke is focusing Fed policy on the other mandate, aiming to reduce the ranks of the nation’s 12.2 million unemployed workers.

Substantial Gains

Fed officials have said their $85 billion pace of purchases will continue until the labor market improves “substantially.” Still, they disagree on how long they should press on with the buying.

The minutes from their Dec. 11-12 meeting Federal Open Market Committee participants “approximately evenly divided” between those who said it would be appropriate to end the purchases around mid-2013 and those who said they should continue beyond that date. A number of policy makers are concerned the size of the Fed’s holdings “could complicate the Committee’s efforts to eventually withdraw monetary policy accommodation,” according to the minutes.

The central bank’s balance sheet has provided record windfalls to the U.S. Treasury. The Fed uses interest income from its bond holdings to cover its own expenses and sends the rest to the Treasury. In 2012, that dividend to taxpayers was $88.9 billion.

Hit Zero

One risk from a large balance sheet is the possibility that the Fed’s interest income could evaporate in coming years as rates rise, according to a paper released last week written by researchers in the Fed’s monetary affairs division. The paper studied different scenarios and concluded that the central bank’s payments to Treasury “will likely decline for a time, and in some cases fall to zero.”

The Standard & Poor’s 500 Index, the benchmark for U.S. equities, was little changed today at 1,494.82 at 4 p.m. in New York, while the yield on the 10-year Treasury note increased 0.03 percentage point, to 1.85 percent. The yield has increased from 1.72 percent on Sept. 13, the day the Fed announced its third round of quantitative easing, while stocks have climbed 4.8 percent.

The central bank’s balance sheet is now more than triple its size before the financial crisis. Fed assets stood at $924 billion on Sept. 10, 2008, the week before the bankruptcy of Lehman Brothers Holdings Inc. helped spark a global financial crisis.

The Fed responded to the financial crisis first with emergency credit programs, and then with bond purchases known as QE or quantitative easing. In the first round of purchases, the Fed bought $1.7 trillion of securities. In a second round of QE, begun in November 2010, the central bank added an additional $600 billion of Treasuries to its holdings.

The Treasury Has Already Minted Two Trillion Dollar Coins

What the advocates of the $1 trillion coin are, therefore, proposing is to tax us in a hidden way.  This is not just taxation without representation.  It’s also taxation with misrepresentation.

While inflation, let alone hyperinflation, has not yet occurred, everything is in place for this outcome. 

forbes.com | Jan 19, 2013

by Laurence Kotlikoff

No doubt, you’ve heard about the latest irresponsible fiscal/monetary proposal to be floated by members of Congress and the erstwhile economist, Paul Krugman, whose lunch was just eaten by Jon Stewart.  

It entails having the Treasury avoid the federal debt limit by handing the Federal Reserve a single $1 trillion platinum coin.  The Fed would then credit the Treasury’s bank account with $1 trillion, which the Fed could spend on the President’s lunch, a $200 toilet seat, a new aircraft carrier, more Medicare spending – anything it wants.

Is there anything special about platinum? Well, yes.  The coin doesn’t have to contain $1 trillion worth of platinum.  It can be microscopic for all the Fed cares as long as they can use a electron microscope to read the $1 trillion In God We Trust inscription.   But it has to be made out of platinum.  No other metal or substance, like a piece of pizza, will do.  The reason is that the Treasury has the right, by an obscure law, to mint platinum coins, but only platinum coins.  Otherwise, making money by making money is the Fed’s domain.

Countries that pay for what they spend by printing money or, these days, creating it electronically, are usually broke.  That certainly fits our bill.

Our country is completely, entirely, and thoroughly broke.  In fact, we’re in worst fiscal shape than any developed country, including Greece.   We have fantastically large expenditures coming due in the form of Social Security, Medicare, and Medicaid payments to the baby boom generations – I.O.U.s, which we’ve conveniently kept off the books.

When the boomers are fully retired, Uncle Sam will need to cough up $3 trillion (in today’s dollars) per year to pay us (I’m one of us.) these benefits.   To put $3 trillion in perspective, it’s 1.5 times Russia’s GDP.

These benefits are called entitlements because, presumably, we feel we are entitled to hit up our children to cover their costs.  Borrowing from them and letting them tax themselves and their kids to pay themselves back is a good trick, but it’s running afoul of the debt ceiling.  Taxing them more and promising to the pay them benefits they’ll never receive is an old trick that’s run its course.  So we’re now onto printing money that will, we hope, raise prices only after we have protected our assets against inflation.

And we’re printing lots and lots of money.  Indeed, over the past five years, the Treasury has, in effect, done its $1 trillion coin trick twice.

Come again?

Well, substitute a $2 trillion piece of paper called a Treasury bond for the platinum coin.  Suppose the Treasury prints up such a piece of paper and hands it to the Fed and the Fed puts $2 trillion into its account.  No difference right, except for the lack of platinum.

Next suppose the Treasury doesn’t hand the $2 trillion bond to the Fed directly, but hands it to John Q. Public who gives the Treasury $2 trillion and then hands the bond to the Fed in exchange for $2 trillion.  What’s the result?  It’s the same.  The Treasury has $2 trillion to spend.  John Q. Public has his original $2 trillion.  And the Fed is holding the piece of paper labeled U.S. Treasury bond.

Finally, suppose the Treasury does this operation in smaller steps and over five years, specifically between 2007 and today.  It sells, i.e., hands to John Q. in exchange for money, smaller denomination bonds, which Johns Q. sells to the Fed, i.e., hands to the Fed in exchange for money.   Further, suppose the sum total of all these bond sales to the public and Fed purchases of the bonds from the public equals $2 trillion.  Voila, you’ve got U.S. monetary policy since 2007.

In 2007, the monetary base – the amount of money our government printed in its entire 231 years of existence totaled $800 billion.  Today it totals $2.8 trillion.  And it increased by this amount via the process just described – the Treasury’s effective minting out of thin air two $1 trillion platinum coins.

Now what happens when the Treasury spends its freebee money?  It raises prices of the goods and services we buy or keeps them from falling as much as would otherwise be the case.  Either way, the money we have in our pockets or in the bank or coming to us over time as, for example, interest plus principal on bonds we’ve bought in the past – all this money loses purchasing power.  So we are effectively taxed $2 trillion.

What the advocates of the $1 trillion coin are, therefore, proposing is to tax us in a hidden way.  This is not just taxation without representation.  It’s also taxation with misrepresentation.   The fact that a Nobel Laureate in economics would propose this without making clear this fact raises the question of whether his prize should be revoked.  Lance Armstrong, after all, is losing his medals for discrediting his profession.  Perhaps the Nobel committee should consider taking back Krugman’s.

This is no innocent omission.  Every PhD economist is taught about seigniorage.  It’s a term that was coined (excuse the pun) in the 15th century and stems from the right of feudal lords – seignurs – to coin money, use it to buy, say, chickens and debase the purchasing power of the coins they had given their serfs in the past for, say, wild boar.

Today, 12 cents out of ever dollar being spent by our government is being printed.  As indicated, the money supply has more than tripled.  While inflation, let alone hyperinflation, has not yet occurred, everything is in place for this outcome.  If you want to see what things will look like, check out Zimbabwe, which has surely been reading Krugman’s articles.

Foreign holdings of US debt increased to record $5.56 trillion in November

Associated Press | Jan 16, 2013

WASHINGTON — Foreign demand for U.S. Treasury securities rose to a record level in November, further evidence that overseas investors remained confident in U.S. debt despite looming budget battles in Washington.

The Treasury Department says foreign holdings of U.S. Treasurys rose 0.6 percent in November from October to $5.56 trillion. It was the 11th consecutive monthly gain.

China, the top foreign holder, increased its portfolio by $200 million to $1.17 trillion. Japan, the second-largest holder, boosted its investments by $900 million to $1.13 trillion.

Demand kept rising even as Congress neared a deadline to raise its $16.4 trillion borrowing limit. The government reached its borrowing limit on Dec. 31, but began using bookkeeping maneuvers to keep operating. The Treasury is expected to exhaust those measures by mid-February to early March.