The politics of an economic nightmare

[David Farber <dave () farber net>]

Begin forwarded message:

From: Gordon Peterson <gep_2 () yahoo com>
Date: January 23, 2008 12:12:48 PM EST
To: dave () farber net
Subject: Re: [IP] The politics of an economic nightmare

The REALLY critical problem here (and almost nobody is
talking about it) isn't due to subprime mortgages.

The REAL problem is due to the huge and irresponsible
Federal budget deficits, combined with the falling
value of the US dollar.

The fact that the dollar is worth between half and
one-third of what it was worth when Bill Clinton left
office is a truly "inconvenient truth" that the stock
market tries to ignore, when they talk about "points"
and how high the Dow is, without rescaling that number
in terms of ounces of gold.  Once that is done, the
TRUE health of the stock market is more evident.

The falling value of the dollar, though, is UNDENIABLE
when we pay for gasoline at the gas pump, or when we
pay our electric bill.

It's not that energy costs have risen, it's that we're
paying for it with dollars which aren't worth nearly
as much as they used to be.  Thus, obviously, the
price is higher... just like the rise in the price of
bread in Germany in the runup to WW2.

The government has been irresponsibly shoving dollars
into the US economy, hoping people won't notice as the
value of the dollar tumbles.

But THIS IS A GAME YOU CANNOT PLAY (well, not for
long, anyway) at a time when the US government is
borrowing massive sums from abroad to finance their
fiacal irresponsibility.  The federal debt today is
more than twice what it was when Bill Clinton left
office, and the interest RATE we are paying on that
debt is ALSO more than twice what the financing cost
was when Bill Clinton left office.

But the TRULY worrisome part is that the interest rate
we are paying to borrow the money to finance our
deficits is SUBSTANTIALLY LESS THAN the rate of the
fall in the value of the dollar...!  Obviously, that
situation CAN NOT CONTINUE.  Ultimately, creditors
will not loan money for a lower interest rate than the
rate of devaluation of the underlying currency!  Doing
so, obviously, means a NET LOSS of value to the
creditor.

And what this means is that ultimately the T-bill rate
isn't subject to the desires of the Federal Reserve to
hold down inflation or pump up the economy.
Ultimately, at least while we are borrowing so much
money, the T-bill rate HAS to exceed the fall in the
value of the dollar.

With the dollar falling 8-10% a year since Shrub took
office (and if anything, that seems to be
accelerating), one must therefore predict that the
T-bill rate will be a half-point to a full point above
that;  bank prime another half-point to a point above
that;  mortgage rates another half-point to a point
above that.  This means that mortgage rates will
stabilize (if the dollar doesn't start falling
faster!) at 9.5% to 13%, or almost twice the current
levels.  This means that home sale prices are going to
fall dramatically, because people cannot qualify for
nearly as large a mortgage at those rates as they can
at six or seven percent.

And of course, as adjustable rate mortgages ratchet
up, people find that they cannot pay their mortgages,
even as the falling home values make it impossible to
get out from under a now upside-down mortgage.  (If
you are one of those folks that got suckered into an
ARM... FIX THE RATE *NOW*!)

Irresponsible and clueless types who talk about
wonderful "tax cuts" hyped by the present
misAdministration seem to be in denial that:

 1.  There are TWO ways for the government to take
money out of your pocket.  The first is to tax you
(literally taking dollars from you) and the second is
for them to simply quietly devalue the money that you
have in your pocket.  The result is nearly the same,
in either case, except for that:

 2.  If they devalue your money (thus resulting in a
NUMERICAL but not VALUE increase in the value of your
stocks and other investments) they then... TAX YOU ON
THE SUPPOSED "CAPITAL GAINS"!!!  And of course, also
the bigger NUMBER means you ratchet into a higher tax
bracket, too.

So they are actually TAXING YOU on a NUMERICAL gain,
representing NO actual increase in value... while they
print money to pay a lot of the government's own
bills, devaluing the currency, AND TAXING THE PUBLIC
DUE TO THE RESULT!  (And of course, meanwhile using
the higher NUMERICAL value for corporate profits
(denominated in dollars!) and stock market "gains"
(denominated in points, which are in fact dollars) to
demonstrate how supposedly the economy is
"thriving"...!)

So who are these "crazy" investors who are loaning the
US government money at a lower interest rate than the
rate of the fall in the value of the dollar?  To cover
this appalling fiscal irresponsibility?  Well, one
HUGE one is... COMMUNIST CHINA!

As anybody who is blithely living beyond their means
eventually finds out, everything looks rosy until the
unhappy day arrives when the bankers decide that
you've reached your credit limit, and turn off the
loan faucet.  Meanwhile, they generally will give you
just as much rope as you want.  Like a condemned man
on the gallows, it's not the fall through the trap
door which kills... it's the abrupt stop when the end
of the rope is reached.

So if we're borrowing money hand over fist, that fact
(combined with the fall in the value of the dollar)
ultimately either FORCES THE HAND of the Fed in
setting interest rates, OR means that we face the
unhappy situation of nobody wanting to continue to
finance our deficit.

And THAT, gentle students, is the situation we are
going to find ourselves in as long as the present
disastrous fiscal mismanagement of the US economy is
allowed to continue.

Perhaps the most frightening things about the coming
fiscal trainwreck are that people are so blind to its
coming, and so much in denial about the pain we're
going to experience while trying to fix (and it will
take DECADES) this massive and appalling mess that the
current misAdministration has driven us into.



Gordon Peterson
http://personal.terabites.com
1977-2007 Thirty year anniversary of local area networking


      
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