June 27, 2011

Federal Reserve's "Quantitative Easing II" ending on June 30. Now what?

Patrick Samuels~
Several months ago I wrote an article entitled "Three Months to Live?" about the end of the Fed's "Quantitative Easing II" ending on June 30. That time is upon us. Where do we stand? Here are the facts.

In nine months the Federal Reserve has bought $600 billion worth of treasuries issues following $1.75 trillion in "QE I" from March 2009 to March 2010. It is this printing that has kept the economy going at all the last two years and created the illusion of normalcy for most. Now that printing is supposedly going to stop. The first question is "who is going to buy them?" We are running a deficit of around $1.5 trillion a year and right now the Fed is buying up 70% of that debt. If the Fed stops buying, who's going to lend us over a trillion dollars a year? Where is the government going to get the money required for its insatiable spending? The debt ceiling may be immaterial if no one buys any more of our debt. We'll deal with that in a minute. What happens when the printing presses cool down for a moment? It's speculation because no one's ever done this much printing. We could see a short term rally in the dollar and a drop in commodity prices, including precious metals. People will think that prices will stop going up and start "hoarding" dollars (also refered to as saving) and Bernanke's greatest fear, deflation, may rear its ugly head. Economic activity will slow even more. Then chairman Bernanke will crank up the presses again with "QE III". When that happens, it will send a clear message to our creditors that they will never get the full value of their money back, that all debts will be repaid in devalued dollars. When "QE III" begins it will be the final nail in the coffin for the dollar.

Several months ago the debt ceiling was background noise. It has now moved front and center. Since the financial crisis of 2008, a crisis caused by government, we have nearly doubled our national debt. In his first, and hopefully only, term, president Obama will likely add $6,000,000,000,000 to the debt. It is expected that deficits will run between $1.5 and $2 trillion for the foreseeable future. Government spending at all levels now accounts for 45% of the economy and the same percentage of people now receive direct payments from the government-welfare, unemployment, social security, etc. That is unsustainable, we cannot afford that and it is why we have had to borrow so much from the federal to the municipal levels of government. Two things are possible with the debt ceiling. It will be raised, perhaps with some concessions to reduce spending over the next ten years, a meaningless gesture. A few trillion over ten years does nothing to reduce a $1.5 trillion deficit now. Any rise in the debt ceiling will demonstrate to the world that we are not serious about addressing our fiscal mess, causing confidence in our bonds and currency to collapse. Ratings agencies, who usually downgrade an entity after its collapse, are already talking about lowering the credit rating of the US. The other, albeit remote, possibility is that it will not be raised. If that happens we will pay our interest and cuts, drastic cuts, will be made elsewhere. If we are borrowing 40 cents of every dollar we spend, we will have to reduce spending by 40%. The Obama administration will make those cuts in areas that will be most advantageous to him and his party. When the Social Security checks stop coming and Medicare reimbursements are suspended, the people will cry out for more debt even if it represents the country's last gasp of normalcy before it all comes crashing down.

Regardless of what happens with the debt ceiling, our debt level is unsustainable for another reason. 61% of all marketable treasury debt will mature within four years. That means that the treasury must either repay or refinance one trillion a year in addition to financing the $1.5 trillion deficit. That means the treasury must borrow or refinance ten trillion dollars over the next four years! Do you see that there is no way out of this mess? Our insatiable desire as a people for entitlements has put us on this path that will either end in default and collapse or hyperinflation and collapse.

The failure of socialism in the United States is only one of the most obvious that will affect the world this summer. The crisis in European socialism will lead to actual defaults and the end of the Euro. Greece is the most obvious problem but Portugal, Italy, Spain and Ireland are on the brink as well. In 2009 Greece's deficit was 14% of GDP. The same year Ireland's was the same and it's debt was 90% of its GDP. Portugal's deficit was 9.3% of GDP. Either the EU will do what Bernanke is doing and crank up the printing presses for the Euro with more bailouts or these nations will start defaulting. Neither way ends well for them, or for us. Its just like dominos.

As these three things culminate this summer, we are ill equipped to handle the fallout. We are in a depression although for the moment it is hidden. Housing, real unemployment, and economic activity are all comparable to the levels found in the Great Depression. We just don't see it because the bread lines and tent cities aren't obvious-everyone gets a check from the government. Food stamps are just a credit card away, there is 99 weeks of unemployment, and a plethora of other government programs exist to keep the poor and unemployed invisible to most, including the media. That all is dependent on the government maintaining its ability to borrow and print dollars effectively. When that comes to an end, the unrest in Greece will look like a picnic compared to what will happen here.

Our government isn't the only entity in debt here in America. If you add up all of America's debt; federal, state, municipal, as well as private debt; mortgages, student loans and other credit, we are talking about a number greater than $56 trillion. This does not include the unfunded liabilities of our "entitlements" which total over $100 trillion more. To service this debt at the low interest rates we currently enjoy we must pay $3.6 trillion a year. Those interest rates will go up. Add our tax burden to our debt burden and we are flushing almost five trillion dollars down the toilet every year, money that could be used to grow our economy. That is unsustainable and we will never grow our way out of our financial difficulties with more of the same. Yet this is all our government knows. Helicopter Ben Bernanke admitted in his most recent press conference he has no idea why his efforts haven't put the economy on more secure footing. He reiterated the President's loss for an explanation, repeating Obama's frustration at the mysterious "head winds" buffeting the economy. Could it be those "head winds" are the result of the President and the Fed chairman turning a massive wind turbine against the ship of our nation!? The contrary winds of regulation, taxes, entitlements, anti-business and energy policy, and money printing? Could that be it? I don't have a Harvard education but I do believe those may be major contributing factors.

The sad fact is that we will have to go through a very difficult time. We have put off the day of reckoning for far too long and now we must pay a very steep price. The question is, what will we, the American people, do about it? It is we who have sold our future for a little government candy now. We have traded our dignity and humanity for government largess we cannot afford. We have exchanged our precious liberty for an illusory safety and soon we may have neither. When all we know is in ruins, when the checks no longer come, when the looters have nothing to give the moochers, what will we, the American people, do? Will we plead in humble supplication before our masters in government, the very ones who have brought us to our sorry state, willingly holding out our wrists for the chains that accompany false promises of deliverance? Or will we stand up on our own two feet as Americans, brave and free men and women for whom liberty, family, community and capitalism are the values most dear? Can you muster the fortitude to be that kind of person? Do you have the ability and courage to convince your neighbors that freedom is better than slavery, that capitalism is better than socialism, that government is the problem and not the solution? If those of us who love freedom do not show the courage, foresight and intelligence needed in these dark times to raise the torch of liberty, we will condemn our posterity to a life of slavery and misery. How will your children and grandchildren remember you?

My comment

 When President Bush43 announced the debt crisis on September 12, 2008, we were 12 days over the expired extension of BASEL IV which demanded all nations open their books.  The only Nation to not meet the August 1st deadline was the Federal Reserve. It is my opinion the purpose of the insane spending by the Federal Government has been to accelerate the demise of our Nation fiscally to usher in the New World Order Plan that President Bush41 spoke to and tinfoil hats have been warning about for decades.
The upcoming G-20 summit has on it's agenda the establishment of a New World currency to replace the USA dollar which earned that title by default.  When President Reagan implemented the free trade policy, Congress made an gesture to fix the tax structure which is designed for closed border trade. By creating a flat tax of the production tax structure, they essentially left in place the embedded Federal tax in domestic products making it impossible to compete with imports.  The Corporate world took full advantage by buying out struggling American companies in every cyclic recession that came along.  A graph of our Federal deficit grew every year even during the so called good years. The federal reserve continued to suppress labor by holding it at over 5% until it was evident that our economy was in it's last gasps, at which time Allan Greenspan allowed it to drop to 0%. With 57% of our people on foodstamps, it tells us we are at a place of which 57% are either under employed or unemployed. All the presumptive planning by the Federal Government in the event of an national collapse into anarchy has shown that it has been intentional, in my view.  But that is not of comfort to what is coming. 
Victory gardens can still be planted as potatoes will grow to harvest if planted the first part of July in Northern America. One bit of advise, stock up and if you find yourself starving, a bitter root cooked with tree bark is sustainable.  We will need to return to family ties and forge ourselves as the Walton Mountain has taught. If you still have a community Church, get there now.  If you don't have one, plant one. Remember, our contentment does not come from the earth, but is a gift of God through Faith in Him. May Jesus find you present and doing his bidding. Love each other and help your neighbor as best you can. Fear not, for creation is with you if you but embrace it. 
There is one possible way out of this fiscal collapse and it is changing our tax structure and saying no to this seventh Beast becoming a menace to the world. Reign in the Federal Government with the Document that has blessed us for so long, the Constitution. Demand constitutional conduct, use Constitutional Convention to quell the beast and enact Fairtax to make the USA once again dependent upon itself for industry.
R. George Dunn
If everyone knew all there is to know, they would not do half the things they do, including myself, therefore I must forgive them, including myself.

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R. George Dunn
R. George Dunn 10:28pm Jun 26
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If everyone knew all there is to know, they would not do half the things they do, including myself, therefore I must foregive them, including myself.