TREASURY DEBT SALES SHOWING SLOW SIGNS OF A " LEAK IN THE DAM" WITH WORLD INVESTORS EASING UP ON BUYING-WHY BUY NOW IF YIELDS UP LATER!

Free markets have a funny way of adjusting to all situations. They take into account realities and guess at the future.

In the case of our TREASURY and its necessary sales of TRILLIONS in NOTES and BONDS to finance the future spending and deficits, the potential is clear that these will be sales at a pace never done before.

Think about it this way...if you have funds to invest, do you want a higher interest rate later, or a low interest now?

Answer: higher rate!

Thus in the longer term, everyone knows that the USA has to borrow enormous amounts and will compete for the money in any economic recovery with PRIVATE business which will be offering interest rates that are better.

The interest rates will climb due to the irresponsible spending and this will hurt the economy, businesses of every size and consumers as well.

No matter what is being told to the news media, do not lose sight of the future facts; the government HAS TO borrow a lot of money that will be looking to be invested into the best and highest yield.

Today, Treasuries fell for a second day after the government’s record $39 billion auction of five-year notes drew a higher-than-forecast yield, renewing concern the deluge of U.S. debt being sold will overwhelm investor demand.

The notes drew a yield of 2.689 percent, compared with a forecast of 2.635 percent in a survey of eight of the Federal Reserve’s primary dealers. Indirect bidders, a class of investors that includes foreign central banks bought 36.7 percent of the notes, down from 62.8 percent of the securities at the June sale, the highest since December 2004.

“You’re starting to see customers pull back from the market,” said Thomas L. di Galoma, head of U.S. rates trading at Guggenheim Capital Markets LLC, a New-York based brokerage for institutional investors. “It’s been a fundamental shift in central bank buying.”

The yield on the benchmark 10-year note rose two basis points to 3.72 percent at 1:16 p.m. in New York. The yield climbed to 3.76 percent on July 27, the highest level since June 22.

The existing five-year note yield rose eight basis points to 2.68 percent, after dropping as low as 2.55 percent.

The sale is the biggest offering of the notes since the Treasury began issuing five-year notes in 1953, according to the Department’s Bureau of the Public Debt. Last month’s $37 billion sale of the securities was the previous record.

Bid-To-Cover

The bid-to-cover ratio, which gauges demand by comparing total bids with amount of securities offered was 1.92, compared with an average of 2.2 at the last 10 auctions. It was the third of four auctions totaling $115 billion that is the largest amount of so-called coupon securities sold in a single week.

At the June 24 auction, the notes drew a yield of 2.7 percent, the highest since October. The so-called bid-to-cover ratio was 2.58 last month, the highest since October 2007. The average indirect bid for the past 10 auctions is 36.8 percent.

The five-year note sale will be followed by a $28 billion offering of seven-year securities tomorrow. The government sold $42 billion of two-year debt yesterday and $6 billion of 20-year Treasury Inflation Protected Securities on July 27.

The U.S. raised $1.02 trillion this year selling Treasury securities to help finance a recovery from the recession, government data show. In its next round of auctions, the U.S. will sell three-, 10- and 30-year securities on three consecutive days beginning Aug. 11. WATCH OUT FOR THOSE YIELDS AS INDICATORS.

Revised Estimate

Goldman Sachs Group Inc. said the U.S. will sell about $2.9 trillion of debt in the two years ending September 2010, cutting its estimate for Treasury auctions by 28 percent, as the economy improves (oh yeah).

President Barack Obama will sell a net $1.9 trillion of debt in the current fiscal year that ends Sept. 30, Goldman said in its report late yesterday. In March it forecast $2.7 trillion. Goldman, also a primary dealer, trimmed its projection for sales the next fiscal year to $1 trillion from $1.35 trillion.

Forecasters say the U.S. federal deficit will be $1.725 trillion for this fiscal year and $1.4 trillion in the following 12 months.

I say no way, it will be way bigger due to all the government mandates, taxes and forced programs all of which will bring in less revenue to the Treasury than forecast.

‘Certainly a Concern’

Two-year notes fell yesterday after the debt sold at a higher-than-forecast yield. Indirect bidders bought 33 percent of the notes, compared with 68.7 percent at the June auction, the most in at least six years.

“The lack of indirect bid was certainly a concern for the front-end,” said Dan Orlando, head of U.S. government bond trading at primary dealer Deutsche Bank Securities Inc. in New York.

The difference in yield, or spread, between two- and 10- year notes fell to as low as 2.53 percentage points, the narrowest in two weeks.

The Fed has bought $222.719 billion in U.S. debt since its purchases began on March 25. The central bank the Fed is scheduled to buy notes due from May 2012 to November 2013.

Treasuries lost 0.5 percent this month, compared with a 0.3 percent advance for German government bonds, according to Merrill Lynch & Co. indexes.

The financial crisis, which started with the collapse of the U.S. property market in 2007, has triggered $1.52 trillion of writedowns and credit losses at banks and other institutions and sent the global economy into its first recession since World War II. The government and the Fed have spent, lent or committed more than $12 trillion in a bid to revive the economy and credit markets.

Scary times ahead.

CAN THE US TREASURY DEFAULT ON ITS DEBT?-YOU BET IT CAN, BUT THAT WILL CAUSE A GREAT RISE IN INFLATION AND DUMPING OF THE DOLLAR

The headlines are scary. Standard and Poor's warns that UK gilts (British Treasury bonds) may lose their AAA rating and indicates that U.S. government bonds may also be downgraded. Bill Gross, PIMCO's "bond king," says emphatically that the U.S. will eventually lose its AAA rating.

What does all this mean? Is it possible for the U.S. government to default on its own debt?

Technically, the answer is "no." The government can always print the money to pay its obligations. But from an economic standpoint, the answer is "yes," since printing money causes inflation and pays off bondholders with depreciated dollars.

The Debt Mechanism

All U.S. treasury debt is denominated in dollars, and except for the less than 10 percent that are "inflation-protected bonds," all bonds are promises to pay a specified number of dollars on given dates. Dollars are created when our central bank, the Federal Reserve, either buys securities in the open market or lends to banks against their loans and other assets. Although Congress imposes a ceiling on the debt issued by the federal government, the Federal Reserve has no effective constraints on the amount of money it can create.

It was not always this way this way. Before 1933, the Federal Reserve could only print dollars in proportion to how much gold the government held -- the so-called gold standard. During the Great Depression, one country after another, including the U.S., left the gold standard and moved to a fiat money standard. Under this monetary arrangement, the government decrees by law (fiat) that its money (Federal Reserve notes in the U.S.) is legal tender for all transactions. There is no gold, silver, or other commodity backing the money.

In a fiat money standard, money only retains its worth because the government limits its supply. The government can limit its supply if it has other sources of revenue, such as taxes or borrowings, to cover its expenditures. But if those other sources dry up, the government may effectively borrow from the Fed, and this would result in large increases in money and rapid inflation.

There is much debate among conservatives about whether the government's decision to leave the gold standard was correct. I, like the majority of economists, believe that it was a good move. If we were still on a gold standard, it would not have been possible for the Federal Reserve to back up money market funds and other bank deposits last September when the credit crisis hit. The resulting run on banks and flight to liquidity would have likely sparked a far worse financial crisis than we experienced. But the flexibility of a fiat money standard must be weighted against its bias towards inflation.

Default Under a Fiat Standard

Although under a fiat money standard government money must be accepted as a means of payment, there is no law that says what that money is worth when it is paid. If too many dollars are issued relative to demand, inflation must result. In that case the bondholder gets shortchanged not because of a government default on its bonds but because of the loss of purchasing power of the dollars paid. (Some countries impose price controls in a futile attempt to assure their own currency won't depreciate in value. Except for limited periods during wartime, such controls have always failed.)

There is one type of Treasury bond that could theoretically default, and that is Treasury-Inflation Protected Securities, or TIPS. Since TIPS compensate bondholders for inflation by increasing the coupon payments and final principal payment by the cumulative rise in prices, the bondholder suffers no decline in purchasing power during inflation. In contrast to standard nominal bonds, TIPS cannot be inflated away, and this leaves open the theoretical possibility that the government could not marshal enough resources to pay interest and principal on these bonds. TIPs for the U.S. government are similar to issuing foreign currency bonds. Any attempt to pay them off by increasing the money supply will cause inflation, depreciate the dollar, and increase the government's dollar indebtedness.

Of course, just because the government can always technically fulfill its debt obligations does not mean that it always will. Since a large proportion of U.S. government bonds are owned by foreign investors, the government could decide that it will only default on those bonds owned by foreigners. The Russian government defaulted on its foreign-owned bonds in 1998, while still honoring domestic bonds. But such selective default would be met by wholesale dumping of dollar assets, sending the dollar crashing on international markets. Given the huge volume of goods the U.S. imports, a plunging dollar means inflation would skyrocket and render such a policy counterproductive.

Our Current Situation

Since the credit crisis began, the Federal Reserve has more than doubled the supply of its own money, and government deficits are running into the trillions of dollars. Many believe this will inevitably lead to rapid inflation.

But such a conclusion is premature. The Fed has increased the supply of money in response to the tremendous increase in the demand for such money caused by the liquidity crisis. And government borrowing is just offsetting the sharp increase in consumer saving caused by the declining value of assets and tighter credit.

I believe that the government's current economic response is right. But the government must be on guard. Once confidence returns, the Fed must pull back the money it loaned and the government must bring deficits under control. This will inevitably mean raising interest rates, and the latest increase in long-term treasury rates is a clear signal that the bond market sees this happening soon. If, by the second half of this year, the economy turns around, the Fed will have to start raising the Fed Funds rate and restrict liquidity. Otherwise the government will effectively default on its obligations -- not by missing its payments but by making those payments in a depreciating currency.

Jeremy Siegel, Ph.D.

GOVERNMENT DEBT IS NOW $546,000 PER HOUSEHOLD IN AMERICA-EXCEEDS ALL INDIVIDUAL DEBTS SUCH AS MORTAGE LOANS, CAR LOANS AND CREDIT CARDS

You wanted change, and you got change alright, just look at the staggering figures for the US government debt that appears to not only be out of control, it is being added to weekly though new programs and yet un-announced programs!

And the President was criticizing taxpayers for living it up?

Taxpayers are on the hook for an extra $55,000 a household to cover rising federal commitments made just in the past year for retirement benefits, the national debt and other government promises, a USA TODAY analysis shows.

The 12% rise in red ink in 2008 stems from an explosion of federal borrowing during the recession, plus an aging population driving up the costs of Medicare and Social Security.

That's the biggest leap in the long-term burden on taxpayers since a Medicare prescription drug benefit was added in 2003.

The latest increase raises federal obligations to a record $546,668 per household in 2008, according to the USA TODAY analysis. That's quadruple what the average U.S. household owes for all mortgages, car loans, credit cards and other debt combined.

"We have a huge implicit mortgage on every household in America — except, unlike a real mortgage, it's not backed up by a house," says David Walker, former U.S. comptroller general, the government's top auditor.

USA TODAY used federal data to compute all government liabilities, from Treasury bonds to Medicare to military pensions.

Bottom line: The government took on $6.8 trillion in new obligations in 2008, pushing the total owed to a record $63.8 trillion.

The numbers measure what's needed today — set aside in a lump sum, earning interest — to pay benefits that won't be covered by future taxes.

Congress can reduce or increase the burden by changing laws that determine taxes and benefits for programs such as Medicare and Social Security.

Rep. Jim Cooper, D-Tenn., says exploding debt has focused attention on the government's financial challenges. "More and more, people are worried about our fiscal future," he says.

Key federal obligations:

• Social Security. It will grow by 1 million to 2 million beneficiaries a year from 2008 through 2032, up from 500,000 a year in the 1990s, its actuaries say. Average benefit: $12,089 in 2008.

• Medicare. More than 1 million a year will enroll starting in 2011 when the first Baby Boomer turns 65. Average 2008 benefit: $11,018.

•Retirement programs. Congress has not set aside money to pay military and civil servant pensions or health care for retirees. These unfunded obligations have increased an average of $300 billion a year since 2003 and now stand at $5.3 trillion.

And sadly, this is just the beginning of an unprecedented and unsustainable fiscal disaster that will haunt the country into the next few decades. There is simply no way to pay off this debt.

Look at it this way. If the government was a "consumer" and had this much debt, it would no longer qualify for any loans. So what it will do instead is that it will keep writing the checks with money that it does not have and expects to keep borrowing from the world's investors. Why would an investor buy more of these US bonds or NOTES, if it was clearly evident that they would only be repaid in dollars which would have significantly less value?

Someone in Washington D.C., needs to take that ECONOMICS 101 course to understand the impending catastrophic hyper inflation that all these actions will create.

Think back to the WIEMAR Republic, when the currency became worthless (due to similar problems and hyper inflation), and it took a wheelbarrow full of money to buy a loaf of bread?

Dr. Ellen Hodgson Brown
Featured Writer
Dandelion Salad
webofdebt.com
May 20, 2009

“It was horrible. Horrible! Like lightning it struck. No one was prepared. The shelves in the grocery stores were empty.You could buy nothing with your paper money.

– Harvard University law professor Friedrich Kessler on on the Weimar Republic hyperinflation (1993 interview)

Some worried commentators are predicting a massive hyperinflation of the sort suffered by Weimar Germany in 1923, when a wheelbarrow full of paper money could barely buy a loaf of bread. An April 29 editorial in the San Francisco Examiner warned:

“With an unprecedented deficit that’s approaching $2 trillion, [the President’s 2010] budget proposal is a surefire prescription for hyperinflation. So every senator and representative who votes for this monster $3.6 trillion budget will be endorsing a spending spree that could very well turn America into the next Weimar Republic.”1

In an investment newsletter called Money Morning on April 9, Martin Hutchinson pointed to disturbing parallels between current government monetary policy and Weimar Germany’s, when 50% of government spending was being funded by seigniorage – merely printing money.2 However, there is something puzzling in his data. He indicates that the British government is already funding more of its budget by seigniorage than Weimar Germany did at the height of its massive hyperinflation; yet the pound is still holding its own, under circumstances said to have caused the complete destruction of the German mark. Something else must have been responsible for the mark’s collapse besides mere money-printing to meet the government’s budget, but what? And are we threatened by the same risk today? Let’s take a closer look at the data.

History Repeats Itself – or Does It?

In his well-researched article, Hutchinson notes that Weimar Germany had been suffering from inflation ever since World War I; but it was in the two year period between 1921 and 1923 that the true “Weimar hyperinflation” occurred. By the time it had ended in November 1923, the mark was worth only one-trillionth of what it had been worth back in 1914. Hutchinson goes on:

“The current policy mix reflects those of Germany during the period between 1919 and 1923. The Weimar government was unwilling to raise taxes to fund post-war reconstruction and war-reparations payments, and so it ran large budget deficits. It kept interest rates far below inflation, expanding money supply rapidly and raising 50% of government spending through seigniorage (printing money and living off the profits from issuing it). . . .

“The really chilling parallel is that the United States, Britain and Japan have now taken to funding their budget deficits through seigniorage. In the United States, the Fed is buying $300 billion worth of U.S. Treasury bonds (T-bonds) over a six-month period, a rate of $600 billion per annum, 15% of federal spending of $4 trillion. In Britain, the Bank of England (BOE) is buying 75 billion pounds of gilts [the British equivalent of U.S. Treasury bonds] over three months. That’s 300 billion pounds per annum, 65% of British government spending of 454 billion pounds. Thus, while the United States is approaching Weimar German policy (50% of spending) quite rapidly, Britain has already overtaken it!”

And that is where the data gets confusing. If Britain is already meeting a larger percentage of its budget deficit by seigniorage than Germany did at the height of its hyperinflation, why is the pound now worth about as much on foreign exchange markets as it was nine years ago, under circumstances said to have driven the mark to a trillionth of its former value in the same period, and most of this in only two years? Meanwhile, the U.S. dollar has actually gotten stronger relative to other currencies since the policy was begun last year of massive “quantitative easing” (today’s euphemism for seigniorage).3 Central banks rather than governments are now doing the printing, but the effect on the money supply should be the same as in the government money-printing schemes of old. The government debt bought by the central banks is never actually paid off but is just rolled over from year to year; and once the new money is in the money supply, it stays there, diluting the value of the currency. So why haven’t our currencies already collapsed to a trillionth of their former value, as happened in Weimar Germany? Indeed, if it were a simple question of supply and demand, a government would have to print a trillion times its earlier money supply to drop its currency by a factor of a trillion; and even the German government isn’t charged with having done that. Something else must have been going on in the Weimar Republic, but what?

Schacht Lets the Cat Out of the Bag

Light is thrown on this mystery by the later writings of Hjalmar Schacht, the currency commissioner for the Weimar Republic. The facts are explored at length in The Lost Science of Money by Stephen Zarlenga, who writes that in Schacht’s 1967 book The Magic of Money, he “let the cat out of the bag, writing in German, with some truly remarkable admissions that shatter the ‘accepted wisdom’ the financial community has promulgated on the German hyperinflation.” What actually drove the wartime inflation into hyperinflation, said Schacht, was speculation by foreign investors, who would bet on the mark’s decreasing value by selling it short.

Short selling is a technique used by investors to try to profit from an asset’s falling price. It involves borrowing the asset and selling it, with the understanding that the asset must later be bought back and returned to the original owner. The speculator is gambling that the price will have dropped in the meantime and he can pocket the difference. Short selling of the German mark was made possible because private banks made massive amounts of currency available for borrowing, marks that were created on demand and lent to investors, returning a profitable interest to the banks.

At first, the speculation was fed by the Reichsbank (the German central bank), which had recently been privatized. But when the Reichsbank could no longer keep up with the voracious demand for marks, other private banks were allowed to create them out of nothing and lend them at interest as well.4

A Story with an Ironic Twist

If Schacht is to be believed, not only did the government not cause the hyperinflation but it was the government that got the situation under control. The Reichsbank was put under strict regulation, and prompt corrective measures were taken to eliminate foreign speculation by eliminating easy access to loans of bank-created money.

More interesting is a little-known sequel to this tale. What allowed Germany to get back on its feet in the 1930s was the very thing today’s commentators are blaming for bringing it down in the 1920s – money issued by seigniorage by the government. Economist Henry C. K. Liu calls this form of financing “sovereign credit.” He writes of Germany’s remarkable transformation:

“The Nazis came to power in Germany in 1933, at a time when its economy was in total collapse, with ruinous war-reparation obligations and zero prospects for foreign investment or credit. Yet through an independent monetary policy of sovereign credit and a full-employment public-works program, the Third Reich was able to turn a bankrupt Germany, stripped of overseas colonies it could exploit, into the strongest economy in Europe within four years, even before armament spending began.”5

While Hitler clearly deserves the opprobrium heaped on him for his later atrocities, he was enormously popular with his own people, at least for a time. This was evidently because he rescued Germany from the throes of a worldwide depression – and he did it through a plan of public works paid for with currency generated by the government itself. Projects were first earmarked for funding, including flood control, repair of public buildings and private residences, and construction of new buildings, roads, bridges, canals, and port facilities. The projected cost of the various programs was fixed at one billion units of the national currency. One billion non-inflationary bills of exchange called Labor Treasury Certificates were then issued against this cost. Millions of people were put to work on these projects, and the workers were paid with the Treasury Certificates. The workers then spent the certificates on goods and services, creating more jobs for more people. These certificates were not actually debt-free but were issued as bonds, and the government paid interest on them to the bearers. But the certificates circulated as money and were renewable indefinitely, making them a de facto currency; and they avoided the need to borrow from international lenders or to pay off international debts.6 The Treasury Certificates did not trade on foreign currency markets, so they were beyond the reach of the currency speculators. They could not be sold short because there was no one to sell them to, so they retained their value.

Within two years, Germany’s unemployment problem had been solved and the country was back on its feet. It had a solid, stable currency, and no inflation, at a time when millions of people in the United States and other Western countries were still out of work and living on welfare. Germany even managed to restore foreign trade, although it was denied foreign credit and was faced with an economic boycott abroad. It did this by using a barter system: equipment and commodities were exchanged directly with other countries, circumventing the international banks. This system of direct exchange occurred without debt and without trade deficits. Although Germany’s economic experiment was short-lived, it left some lasting monuments to its success, including the famous Autobahn, the world’s first extensive superhighway.7

The Lessons of History: Not Always What They Seem

Germany’s scheme for escaping its crippling debt and reinvigorating a moribund economy was clever, but it was not actually original with the Germans. The notion that a government could fund itself by printing and delivering paper receipts for goods and services received was first devised by the American colonists. Benjamin Franklin credited the remarkable growth and abundance in the colonies, at a time when English workers were suffering the impoverished conditions of the Industrial Revolution, to the colonists’ unique system of government-issued money. In the nineteenth century, Senator Henry Clay called this the “American system,” distinguishing it from the “British system” of privately-issued paper banknotes. After the American Revolution, the American system was replaced in the U.S. with banker-created money; but government-issued money was revived during the Civil War, when Abraham Lincoln funded his government with U.S. Notes or “Greenbacks” issued by the Treasury.

The dramatic difference in the results of Germany’s two money-printing experiments was a direct result of the uses to which the money was put. Price inflation results when “demand” (money) increases more than “supply” (goods and services), driving prices up; and in the experiment of the 1930s, new money was created for the purpose of funding productivity, so supply and demand increased together and prices remained stable. Hitler said, “For every mark issued, we required the equivalent of a mark’s worth of work done, or goods produced.” In the hyperinflationary disaster of 1923, on the other hand, money was printed merely to pay off speculators, causing demand to shoot up while supply remained fixed. The result was not just inflation but hyperinflation, since the speculation went wild, triggering rampant tulip-bubble-style mania and panic.

This was also true in Zimbabwe, a dramatic contemporary example of runaway inflation. The crisis dated back to 2001, when Zimbabwe defaulted on its loans and the IMF refused to make the usual accommodations, including refinancing and loan forgiveness. Apparently, the IMF’s intention was to punish the country for political policies of which it disapproved, including land reform measures that involved reclaiming the lands of wealthy landowners. Zimbabwe’s credit was ruined and it could not get loans elsewhere, so the government resorted to issuing its own national currency and using the money to buy U.S. dollars on the foreign-exchange market. These dollars were then used to pay the IMF and regain the country’s credit rating.8 According to a statement by the Zimbabwe central bank, the hyperinflation was caused by speculators who manipulated the foreign-exchange market, charging exorbitant rates for U.S. dollars, causing a drastic devaluation of the Zimbabwe currency.

The government’s real mistake, however, may have been in playing the IMF’s game at all. Rather than using its national currency to buy foreign fiat money to pay foreign lenders, it could have followed the lead of Abraham Lincoln and the American colonists and issued its own currency to pay for the production of goods and services for its own people. Inflation would then have been avoided, because supply would have kept up with demand; and the currency would have served the local economy rather than being siphoned off by speculators.

The Real Weimar Threat and How It Can Be Avoided

Is the United States, then, out of the hyperinflationary woods with its “quantitative easing” scheme? Maybe, maybe not. To the extent that the newly-created money will be used for real economic development and growth, funding by seigniorage is not likely to inflate prices, because supply and demand will rise together. Using quantitative easing to fund infrastructure and other productive projects, as in President Obama’s stimulus package, could invigorate the economy as promised, producing the sort of abundance reported by Benjamin Franklin in America’s flourishing early years.

There is, however, something else going on today that is disturbingly similar to what triggered the 1923 hyperinflation. As in Weimar Germany, money creation in the U.S. is now being undertaken by a privately-owned central bank, the Federal Reserve; and it is largely being done to settle speculative bets on the books of private banks, without producing anything of value to the economy. As gold investor James Sinclair warned nearly two years ago:

“[T]he real problem is a trembling $20 trillion mountain of over the counter credit and default derivatives. Think deeply about the Weimar Republic case study because every day it looks more and more like a repeat in cause and effect . . . .”9

The $12.9 billion in bailout funds funneled through AIG to pay Goldman Sachs for its highly speculative credit default swaps is just one egregious example.10 To the extent that the money generated by “quantitative easing” is being sucked into the black hole of paying off these speculative derivative bets, we could indeed be on the Weimar road and there is real cause for alarm. We have been led to believe that we must prop up a zombie Wall Street banking behemoth because without it we would have no credit system, but that is not true. There is another viable alternative, and it may prove to be our only viable alternative. Main Street can beat Wall Street at its own game by forming publicly-owned banks that issue the full faith and credit of the United States not for private speculative profit but as a public service, for the benefit of the United States and its people.11

Ellen Brown developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and “the money trust.” She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her earlier books focused on the pharmaceutical cartel that gets its power from “the money trust.” Her eleven books include Forbidden Medicine, Nature’s Pharmacy (co-authored with Dr. Lynne Walker), and The Key to Ultimate Health (co-authored with Dr. Richard Hansen). Her websites are www.webofdebt.com and www.ellenbrown.com.

1. “Examiner Editorial: Get Ready for Obama’s Coming Hyperinflation,” San Francisco Examiner, April 29, 2009.
2. Martin Hutchinson, “Is It 1932 – or 1923?”, Money Morning (April 9, 2009).
3. See Monthly Average Graphs, x-rate.com.
4. Stephen Zarlenga, The Lost Science of Money (Valatie, New York: American Monetary Institute, 2002), pages 590-600; S. Zarlenga, “Germany’s 1923 Hyperinflation: A ‘Private’ Affair,” Barnes Review (July-August 1999).

MIXED SIGNALS-DON'T SPEND, SAVE-NO SPEND DON'T SAVE; DOES THE GOVERNMENT KNOW WHAT IT'S DOING?

In a speech this week summarizing his administration’s economic policies, President Obama grossly overstated the support these policies enjoy by claiming, “economists on the left and right agree that the last thing the government should do during a recession is cut back on spending.” There are a great many economists who were surprised to learn that, apparently, they now agree with the President.

Reading straight from the Keynesian playbook, Obama justified the creation of multi-trillion dollar deficits by asserting that the government must fill the spending void left by the contraction of consumer and business spending. As one of those mythical economists who do not agree with the President, I argue that it is precisely this type of boneheaded thinking that got us into this mess, and it’s the reason we are now headed for an inflationary depression.

We do not need, nor should we attempt, to replace lost demand. As Obama himself pointed out in the same speech, Americans have been borrowing and spending too much money. These actions created artificial demand, underpinned by the illusion of real wealth in overvalued stock and real estate markets. Given his intelligence and rhetorical training, it is hard to fathom how President Obama cannot notice the inherent contradiction in his argument.

While Obama commended millions of American families for making the hard choices to reduce spending, pay down debt and replenish savings, he later outlined the government’s intention to spend every American household deeper into debt, thereby undermining all the good that personal austerity would have otherwise produced.

Obama also made the clear-eyed observation that the foundation of our economy was unsound and that a sturdier one needed to be laid. To do this, he even asserted that we need to import less and export more. This has been one of my fundamental points. Our economy is unsound precisely because it is built on a foundation of consumer debt. Instead of spending for today, we need to invest for tomorrow. However, we cannot save more unless we spend less. Production requires capital, which only comes into existence when resources are not consumed.

However, by interfering with this process, Obama prevents the very transformation he acknowledges must take place. When the government spends what individuals save, private investment is crowded out. Society is deprived of the benefits such savings would otherwise have brought about. How can we lay a solid foundation if the government takes away all our cement?

This brings up an oft-repeated, but oft-forgotten, point: government does not have any money of its own. It only has what it takes from the rest of us. If individuals repay their debts, but their government takes on additional debt, we are all simply swimming against the tide. All forward progress is lost as private debt is replaced by public debt, which must be repaid by private individuals. Whatever gains individuals hope to achieve are negated by the higher taxes or increased inflation necessary to repay their share of a larger national debt.

Obama claims that much of the additional debt is not going to finance consumption, but rather “critical investment.” This is a vain hope. In the first place, much of what he categorizes as investment, such as additional spending on education, is not investment at all. Yes, an educated workforce is important, but throwing more government money at education will do nothing to achieve this goal. Spending money on education and calling it an investment squanders resources that otherwise would have financed real investments. In the second place, to the extent some government money is invested, those investments will likely be less efficient than those the private sector might otherwise have financed. There is absolutely no evidence that governments have the foresight or incentives to make investments that facilitate real economic growth. “Five year plans” didn’t work in the Soviet Union and they won’t work here. If the government simply builds bridges to nowhere, society gains nothing.

If we are going to rebuild our economy on a solid foundation, the market, not the government, needs to draw the plans. When private citizens invest their own capital, those who invest wisely are rewarded with profits, while those who do not are punished with losses. Bad investments are therefore abandoned, with capital reallocated to more successful ventures. Conversely, when governments invest money, these checks and balances do not exist. There is nothing to correct bad investments, as losses are endlessly subsidized by taxpayers. In fact, the more a government plan fails, the more it tends to be funded in the hope that additional resources will finally achieve success. Obama himself proves this by allocating still more funds to government-run schools and student loan subsidies. Other examples, such as Amtrak, the New York MTA, the U.S. Postal Service, Fannie/Freddie, and countless others, prove this process is never-ending – until perhaps the bureaucracy collapses under its own weight.

When it comes to government making tough choices, Obama talks a good game, but refuses to actually make any. However, once the dollar finally begins its collapse, he will have no choice but to match his rhetoric with action. It’s unfortunate that we cannot make these tough choices on our own terms, rather than waiting for our creditors to force our hand.

NORMAL PEOPLE CUT BACK ON SPENDING WHEN TIMES ARE TOUGH; GOVERNMENT CAN NOT FIGURE THIS OUT, AND WHEN BROKE, SPENDS MORE!

When someone (a normal person) loses a job, or gets a salary cut, they spend less.

People learn to turn down the lights, cut out unnecessary expenses, cancel the milk delivery and the lawn service, cut back on driving, and take the kids out of private school or buy at lower prices grocery stores using more coupons, and watch for sales specials at retailers, shopping only for great deals.

But what does our government do when times get tough?

You guessed it, it does the opposite, it spends and spends, and increases its spending.

It has that luxury, it takes YOUR money however to do all that extra spending. It "needs to do that", is their excuse in Washington. The pols need to take your money, for your own good and spend it on projects you do not want or others that will have absolutely no impact on your local area or you, in particular.

It is done for the "common good".

"We will emerge from this recession, a stronger country," is was said.

Now how exactly does that work?

We do not have any funds to spend, we cut back on everything personally, but the government takes our money that we have not yet earned, gives the debt to our children and their children, and we become stronger?

While all this is being done, the government increases the taxes paid by the job creators in our country, small business, and those 10% of the population that pays most of the taxes in the country and this is supposed to allow us to emerge stronger than ever?

This must be one of those fantasy movies (instead of the stark reality we face), in which no matter what is done in the course of the movie, the ending is fantastic, and all problems are solved in the course of 90 minutes.

This will not be the case here, as our system of free enterprise work differently. It actually works by allowing failure to occur. it is sort of like burning the under-brush in an overgrown forest or prairie. When the old stuff burns, new beautiful greenery grows back instantly.

I saw that many times as the farmers or ranchers followed this process, and green grasses and colorful wild flowers took the place of the old growth.

That is exactly what happens in a free economy.

Common sense will tell you that when things are constricting, one does NOT spend more to incur more debt; one cuts back the spending to get things stabilized.

If you lived on $5,000 a month, now you adjust to live on $4,000 a month or whatever the new available amount is going to now be. You do not go out and decide that now, you will spend $6,000 a month to improve your financial position.

The government has actually used this logic, and nobody seems to understand this nonsense!

Oh, I forgot, the government, unlike we in the real world, never pays back its debts, it just raises the allowable debt ceiling, giving itself unlimited spending while we all have to live within our means.

In a speech this week summarizing his administration’s economic policies, President Obama grossly overstated the support these policies enjoy by claiming, “economists on the left and right agree that the last thing the government should do during a recession is cut back on spending.” There are a great many economists who were surprised to learn that, apparently, they now agree with the President.

Reading straight from the Keynesian playbook, Obama justified the creation of multi-trillion dollar deficits by asserting that the government must fill the spending void left by the contraction of consumer and business spending. As one of those mythical economists who do not agree with the President, I argue that it is precisely this type of boneheaded thinking that got us into this mess, and it’s the reason we are now headed for an inflationary depression.

We do not need, nor should we attempt, to replace lost demand. As Obama himself pointed out in the same speech, Americans have been borrowing and spending too much money. These actions created artificial demand, underpinned by the illusion of real wealth in overvalued stock and real estate markets. Given his intelligence and rhetorical training, it is hard to fathom how President Obama cannot notice the inherent contradiction in his argument.

While Obama commended millions of American families for making the hard choices to reduce spending, pay down debt and replenish savings, he later outlined the government’s intention to spend every American household deeper into debt, thereby undermining all the good that personal austerity would have otherwise produced.

Obama also made the clear-eyed observation that the foundation of our economy was unsound and that a sturdier one needed to be laid. To do this, he even asserted that we need to import less and export more. This has been one of my fundamental points. Our economy is unsound precisely because it is built on a foundation of consumer debt. Instead of spending for today, we need to invest for tomorrow. However, we cannot save more unless we spend less. Production requires capital, which only comes into existence when resources are not consumed.

However, by interfering with this process, Obama prevents the very transformation he acknowledges must take place. When the government spends what individuals save, private investment is crowded out. Society is deprived of the benefits such savings would otherwise have brought about. How can we lay a solid foundation if the government takes away all our cement?

This brings up an oft-repeated, but oft-forgotten, point: government does not have any money of its own. It only has what it takes from the rest of us. If individuals repay their debts, but their government takes on additional debt, we are all simply swimming against the tide. All forward progress is lost as private debt is replaced by public debt, which must be repaid by private individuals. Whatever gains individuals hope to achieve are negated by the higher taxes or increased inflation necessary to repay their share of a larger national debt.

Obama claims that much of the additional debt is not going to finance consumption, but rather “critical investment.” This is a vain hope. In the first place, much of what he categorizes as investment, such as additional spending on education, is not investment at all. Yes, an educated workforce is important, but throwing more government money at education will do nothing to achieve this goal. Spending money on education and calling it an investment squanders resources that otherwise would have financed real investments. In the second place, to the extent some government money is invested, those investments will likely be less efficient than those the private sector might otherwise have financed. There is absolutely no evidence that governments have the foresight or incentives to make investments that facilitate real economic growth. “Five year plans” didn’t work in the Soviet Union and they won’t work here. If the government simply builds bridges to nowhere, society gains nothing.

If we are going to rebuild our economy on a solid foundation, the market, not the government, needs to draw the plans. When private citizens invest their own capital, those who invest wisely are rewarded with profits, while those who do not are punished with losses. Bad investments are therefore abandoned, with capital reallocated to more successful ventures. Conversely, when governments invest money, these checks and balances do not exist. There is nothing to correct bad investments, as losses are endlessly subsidized by taxpayers. In fact, the more a government plan fails, the more it tends to be funded in the hope that additional resources will finally achieve success. Obama himself proves this by allocating still more funds to government-run schools and student loan subsidies. Other examples, such as Amtrak, the New York MTA, the U.S. Postal Service, Fannie/Freddie, and countless others, prove this process is never-ending – until perhaps the bureaucracy collapses under its own weight.

When it comes to government making tough choices, Obama talks a good game, but refuses to actually make any. However, once the dollar finally begins its collapse, he will have no choice but to match his rhetoric with action. It’s unfortunate that we cannot make these tough choices on our own terms, rather than waiting for our creditors to force our hand.

Peter Shiff, economist, author.

DEADBEAT COUNTRY (ALMOST)…..USA

DEADBEAT COUNTRY (ALMOST)…..USA

What if you had a banker or another creditor who did not really like you, but you owed him $1.3 TRILLION dollars?

What if you however, want or desperately need more and more money to be borrowed from this person?

Under those circumstances, could you say and do anything you want and risk getting this person angry?

But, what if this person had run out of money to lend you any more money to support your apparently lavish lifestyle which obviously requires more and more borrowings from him?

WELL FOLKS THE LENDER IN THIS CASE IS CHINA AND JAPAN, AND THE NEEDY DEADBEAT IS THE GOOD OLE USA.

The USA needs money to support its “lifestyle”, but its biggest creditors are running out of money to buy TREASURY securities, since their economies are not generating the cash surpluses any more, which could then be used to buy more of the securities.
Is that simple to understand?

What if then, instead of buying more debt, the creditors simply say that they need the money back?

Think about that, what happens when you do not have the money to pay back YOUR creditor….your FICO score suffers, and you pay exorbitant interest rates!

Then another thing happens….as consumers and businesses of every type try to borrow money they will be competing for the available money with the government!
So far, it does not sound like a recovery is coming, does it?