People Power – What Now?

Richard Salbato 11-08-2010

I believed and wrote that November 2, 2010 would be one of the best days of my life. And in fact the Constitutional Conservatives (Tea Party) created the greatest change on Washington since the 1938 and the largest Republican majority in 135 years.

I also wrote that there would be enough election money, union workers, and fraud by Democrats to hold the Senate. When you consider how on-the-money the many poll companies were throughout the nations, why did they miss the three of four Senate races that Democrats won?

All in all I should be very happy, but for some reason I am not. The Catholic vote went from 55% for Obama socialism to 55% against. I suppose that is good but a true Catholic would be 100% against.

Not Happy Yet

There is two reasons I am not happy. The first is the talk in Washington by the Republican leaders. They are talking about the Bush tax cuts and a yearly balanced budget. These will not save America. Me must do like England and cut the Federal budget by 40% right now, including SSI, Medicare, and Fannie May and Freddie Mac. Our debt will bankrupt America if this is not done.

The next thing that worries me is what happened the day after the November 2^nd Election. The Federal Reserve announced that it would print un-backed dollars and use them to buy our debt.

Our interest in this is that it makes our money worth 10% less overnight. It is like a 10% tax on everything we own and will make in the future. Overnight it drove up the price of Gold by 30%, and everything else went up in price 15-30%: wheat, corn, beef, coffee, orange juice, and all beans.

The price of corn is so high now that pork and beef ranches are killing their stock early so that they do not have to feed them. This will hold the price of meet for now but then the shortage will drive it up 300% or more.

Worse that that, this printing of dollars has angered all other countries. China, Germany, Brazil and even the World Bank lashed out at America and threaten a trade war. This Saturday there will be a G20 meeting and everyone will be talking about what they will do about this. It is possible they will devalue their moneys, and even stop buying any American bonds.

If this happens my prediction of an American Bankruptcy could happen in months instead of years. For those of you who do not think this is possible you do not understand true science.

Entropy

The concept of entropy is one of the most useful terms for understanding just about everything. While it has its origins in natural law – thermodynamics, specifically – the concept holds true pretty much across all closed systems. In the simplest of terms, every closed system will ultimately degrade toward a state of maximum entropy (destruction).

The current political system of the U.S. as a convenient example. When American democracy was first shoved out of the nest by the founding fathers, it was new, fresh, and energetic. It took the world’s breath away at its boldness and unlimited promise, and set the wheels turning on tangible change across much of the world.

It was, perhaps, because of his own understanding of natural law that Thomas Jefferson was heard to remark, “The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants. It is its natural manure.”

The fact that any closed system, no matter how well constructed, will degrade. To expect the United States of America to avoid this fate is to expect the impossible.

America has survived because we have renewed the system from time to time. However, for the past 80 years we have gone farther and farther away from our core principles until I will take a major correction to correct it and it may be too late. WE THE PEOPLE have woken up but is it too late.

The past Congress has not passed a budget and this must be done. In June we will have to raise the DEBT LIMIT and if we do not, the government will shut down. I do not think we should. The government has shut down before and all non essential government workers went home and were not paid. I think some states should go bankrupt like California and we should let it happen. This is the only way to correct the problems that exist in these systems. In fact I do not see a complete American bankruptcy as the end of the world.

In fact we have to save America now or overthrow it later, and start fresh. There is no other choices. The only way I know to save it now is to adopt the LINE ITEM VOTE in congress. Just cons;idering the budget that we must vote on, we would then have to look at every department of government and see if we really need them. I could cut 78 departments out of the Fed., including the departments of education, agriculture, environment, and energy.

A line item vote would see that although congressmen only are paid $175,000 a year, they have unlimited office budgets of millions of dollars that they raid. A line item vote would see departments that no one knows what they do.

Most Important Idea to Reduce Debt and Government The Line Item Vote

Notes”

1. Ron Paul on the Federal Reserve

(Reuters) - Republican Representative Ron Paul on Thursday said he will push to examine the Federal Reserve's monetary policy decisions if he takes control of the congressional subcommittee that oversees the central bank as expected in January.

"I think they're way too independent. They just shouldn't have this power," Paul, a longtime Fed critic, said in an interview with Reuters. "Up until recently it has been modest but now it's totally out of control."

Paul is currently the top Republican on the House of Representatives subcommittee that oversees domestic monetary policy, and is likely to head the panel when Republicans take control of the chamber in January.

That could create a giant headache for the Fed, which earlier this year fended off an effort headed by Paul to open up its internal deliberations on interest rates and monetary easing to congressional scrutiny.

Paul, who has written a book called "End the Fed," has been a fierce critic of the central bank's efforts to boost the economy through monetary policy.

"It's an outrage, what is happening, and the Congress more or less has not said much about it," he said.

Paul said his subcommittee would also push to examine the country's gold reserves and highlight the views of economists who believe that economic downturns are caused by bad monetary policy, not the vagaries of the free market.

Global organizations like the International Monetary Fund also will come under scrutiny, he said.

"Eventually we're going to have monetary reform. I do not believe the dollar can be the reserve standard of the world," said Paul, who has called for returning the United States to a currency backed by gold or silver.

Many economists say that the Fed's decisive actions during the 2008 financial crisis prevented the deep recession that followed from turning into a depression. But grassroots outrage over the bank bailouts and other Fed actions helped propel many Republican candidates to victory in Tuesday's congressional elections -- including Paul's son, Rand Paul, who will represent Kentucky in the Senate.

"With a lot of new members coming and the problems getting worse rather better, there's going to be a lot more people who are going to be looking for answers," Paul said.

2. Dollar Crash

Dollar at Risk of Crashing, Triggering Inflation: Strategist

Federal Reserve policies have put the US dollar the risk of crashing, which will hammer consumers through higher prices, strategist Axel Merk told CNBC.

Investors should brace for a much weaker dollar [.DXY 76.515 0.635 (+0.84%) ] by diversifying out of the greenback and into currencies of other countries, said Merk, chairman and chief investment officer of Merk Investments, of Portland, Maine.

the Fed said it will be embarking on a program to buy $600 billion in Treasurys.

Consumers should prepare for oil prices to soar to $147 a barrel and gas at the pump to more than $4 a gallon.

Asian exporters will raise prices. So we will have a cost-push inflation. We're not going to get wages to go up. We'll get the price at the gas pump to go up instead.

We'll have a dollar that may crash in that process. The issue here is that (Fed Chairman Ben) Bernanke wants to have a weaker dollar.

Cash is no longer safe. What central banks do, they diversify to baskets of currencies.

Meanwhile, the price of US crude oil jumped $2.5 a barrel to $87. It is up 20pc since markets first concluded in early September that 'QE2' was a done deal.

This amounts to a tax on US consumers, transferring US income to Mid-East petro-powers. Copper has behaved in much the same way. So have sugar, soya, and cotton.

The dollar plunged yet again. That may have been the Fed's the unstated purpose. If so, Washington has angered the world's rising powers and prompted a reaction with far-reaching strategic consequences.

3. Reaction of the world to Federal Reserve

Li Deshui from Beijing's Economic Commission said a string of Asian states share China's "deep bitterness" over dollar debasement, and are examining ways of teaming up to insulate themselves from the tsunami of US liquidity. Thailand said its central bank is already in talks with neighbours to devise a joint protection policy.

Brazil's central bank chief Henrique Mereilles said the US move had created "excessive dollar liquidity which we are absorbing," forcing his country to restrict inflows. Mexico's finance minister warned of "more bubbles."

These countries cannot easily shield themselves from the inflationary effect of QE2 by raising interest rates since this leads to further "carry trade" inflows in search of yield. They are being forced to eye capital controls, with ominous implications for the interwoven global system.

In London and Frankfurt the verdict was just as harsh. "In our view, this is one of the greatest policy mistakes in the Fed's history," said Toby Nangle from Baring Asset Management.

4. Is the Fed Right or Wrong

"The Fed is gambling that the so-called 'portfolio balance channel effect' – pushing money out of government bonds and into other assets – will lift risk asset prices. The gamble is that this boosts profits and wages, rather than simply prices. We remain unconvinced. How will a liquidity solution correct a solvency problem?" he said.

"A policy error," said Ulrich Leuchtmann from Commerzbank. The wording of the Fed statement is "potentially dangerous" because it leaves the door open to a further flood of Treasury purchases if unemployment stays high. "It is a bottomless pit," he said.

Of course, it is precisely this open door that has so juiced risk trades, from Australian dollar futures, to silver contracts, and junk bonds. Goldman Sachs thinks QE2 will ultimately reach $2 trillion, with no exit until 2015. Such moral hazard is irresistible. It is the Bernanke 'super-put'.

Yet the reluctance of investors to leap back into the US Treasury market as they did after QE1 is revealing. The 30-year segment of the Treasury market is too small to matter, but symbolism does matter. Vigilantes sniff stealth default. "If long bond investors continue to throw their collective toys out of the cot, it risks upending the Fed's policy," said Michael Derk from FXPro.

Mr Bernanke is targeting maturities of 5 to 10 years with purchases of Treasuries. These bonds have behaved better: 10-year yields fell 14 points on Thursday to 2.48pc. However, Mark Ostwald from Monument Securities said foreign funds may take advantage of QE2 to dump their holdings on the Fed, rotating the money emerging markets rather than US assets.

Bond funds are already restive. Pimco's Bill Gross says the great bull market in bonds is over, denigrating Fed policy as the greatest "ponzi scheme" in history. Warren Buffett has chimed in too, warning that anybody buying bonds at this stage is "making a big mistake",

Fed chair Ben Bernanke uses the term 'credit easing' to describe his strategy because the goal is to lower borrowing costs. If he fails to achieve this over coming months - because investors balk - the policy will backfire.

No clear rationale for fresh QE can be found in orthodox monetarism. Data from the St Louis Federal Reserve show that M2 money supply stopped contracting in the early summer and has since been expanding at an accelerating rate, topping 9pc over the last four-week bloc.

The Fed has used the 'Taylor Rule' on output gaps as a theoretical justification for QE, but Stanford Professor John Taylor has more or less said his theories have been hijacked. "I don't think (QE) will do much good, and I also worry about the harm down the road," he said.

It has not been lost on markets that the Fed's purchases of $900bn of Treasuries by June (with reinvested funds from mortgage debt) covers the Treasury's deficit over the same period. The slipperly slope towards 'monetization' of public debt beckons.

Global investors mostly accepted that the motive for QE1 was emergency liquidity, and that stimulus would later be withdrawn. But there are growing suspicions that QE2 is Treasury funding in disguise.

If they start to act on this suspicion, they could push rates higher instead of lower, and overwhelm the Bernanke stimulus. That would precipitate an ugly chain of events for the US.

5. Retaliation

Brazil ready to retaliate for US move in ‘currency war’

Brazil, the country that fired the gun on the so-called “currency wars”, is girding itself for further battle.

Brazilian officials from the president down have slammed the Federal Reserve’s decision to depress US interest rates by buying billions of dollars of government bonds, warning that it could lead to retaliatory measures.

In depth: Currency wars - Oct-26

The currency wars explained - Oct-20

Thailand thrives in currency squalls - Nov-03

Ms Rousseff added: “The last time there was a series of competitive devaluations. . . it ended in world war two.”

Brazil has been an early casualty in the currency wars, as the real has risen by 39 per cent against the dollar since the start of 2009, prompting fears it will hollow out Brazil’s industrial base by making manufactured exports uncompetitive. Data released on Thursday showed September industrial output was 2 per cent lower than in March.

“Brazilian industry is well and truly stuck in a rut, due in part to the recent strength of the real,” Capital Economics, a London-based research firm, said in a note to clients on Thursday.

“[The Fed’s decision] is cause for concern. These are policies that impoverish those around them and end up prompting retaliatory measures,” Brazil’s foreign trade secretary, Welber Barral, said separately.

With local benchmark interest rates at 10.75 per cent – the G20’s highest after stripping out 5 per cent inflation – international capital has flooded into Brazil. To curb that, the country has imposed a 6 per cent tax on bond inflows, but with limited effect so far.

Emerging market fund managers say the tax, paid on point of entry, has had some impact on short-term bond investors – but not on long bonds held to maturity which, after netting off the tax, still provide a yield of about 11 per cent.

“That’s higher than you can get anywhere else, especially for an investment- grade credit,” said Kieran Curtis, emerging markets fund manager at Aviva Investors who manages £1.3bn of emerging bonds.

Economists agree that one reason why Brazilian interest rates are so high is loose fiscal policy. Federal government spending has grown by 18 per cent this year. Ms Rousseff has pledged to trim government spending, although there are doubts that she will be able to push through cuts.

6. Fed’s Money Printing

Unbridled printing of dollars is the biggest risk to the global economy, an adviser to the Chinese central bank said in comments published on Thursday, a day after the Federal Reserve unveiled a new round of monetary easing.

The Federal Reserve launched a fresh effort on Wednesday to support the struggling U.S. economy, committing to buy $600 billion in government bonds despite concerns the programme could do more harm than good. [ID:nN03163902]

7. China

China must set up a firewall via currency policy and capital controls to cushion itself from external shocks, said Xia Bin said in a commentary piece in the Financial News, a Chinese-language newspaper managed by the central bank.

"As long as the world exercises no restraint in issuing global currencies such as the dollar -- and this is not easy -- then the occurrence of another crisis is inevitable, as quite a few wise Westerners lament," he said.

"We must keep a clear mind. We must not lead the world in financial regulation, nor simply follow the deeds of mature economies. We must think 'what is good for us'," he said.

China already has a regime of tight capital controls in place, limiting its vulnerability to the wave of liquidity that analysts say U.S. easing could push towards emerging markets.

By closely managing the yuan's exchange rate, Beijing has also been able to blunt appreciation pressure in the face of a weakening dollar.

8. Germany

German Economy Minister Rainer Bruederle said on Thursday he was concerned at U.S. efforts to stimulate growth by injecting liquidity into its struggling economy.

Bruederle also said there was some truth to the criticism that the United States was influencing the dollar's exchange rate with monetary policy and voiced concern about increased protectionism in different forms around the world.

9. Fixing Social Security

The original Social Security Act looks nothing like the version we now live under.  The original program was only supposed to tax the first $3,000 in earnings with employers and employees both paying 1% of this figure into the program.  And with 16 payees to every recipient the program was viable and effective for a generation, perhaps two.

But in the late 1970's the birth rate had plummeted, life expectancy had soared and Social Security taxes were inadequate for the demand placed on the system by benefits recipients.  So Congress did what they do in such situations--they raised taxes!

Today, individuals and employers each pay 6% on the first $108,000 in income.  But not in Galveston, Matagorda and Brazoria Counties in Texas!  For the original Social Security Act also included a provision for local governments, including cities and counties, to opt out of the Social Security system. In 1980 the County officially opted out of SSA and the new plan went live on January 1, 1981. 

County retirees 2-3 times what the SSA pays and participants are able to leave their assets in the plan to survivors.  They also receive disability and life insurance under the plan.  In fact, the surviving spouse of one Commissioner who passed away in the late 1990's received over $250,000 between her husband's plan contributions and his life insurance benefits.

Many other Counties including Houston's Harris County began looking into joining this system or at least creating their own.  However, in 1983 Congress voted to eliminate the opt out option and increased Social Security tax rates.

Also, the insurance provisions in Galveston County's plan show that private plans can be implemented as a part of private retirement accounts to provide the benefits seniors need at the end of their lives that will be more customized to each individual than a "one size fits all" government program.

10. Ryan’s Express (Tax System)

Wisconsin Congressman Paul Ryan, ranking member of the Committee on the Budget

Ryan is a representative who appears to take his job – overseeing the federal budget –  seriously. In 2008, he introduced legislation called “A Roadmap for America’s Future.” It died, so he’s reintroducing it this year. It’s also breathtakingly visionary. In one fell swoop, Ryan takes on taxes, health care, Social Security, and the federal deficit, and fixes them all. He puts the government on the road to solvency, something no other plan comes close to achieving.

And he does it while slashing taxes. Anyone want to file on a postcard? If the Roadmap were adopted, you could. Single filers would pay 10% on income up to $50,000 ($100,000 for joint filers) and 25% thereafter, with a generous standard deduction and personal exemption. That’s it, no loopholes, deductions, credits, or exclusions. But, in what must have been a delicious lighter moment, he decided to allow those who love the present system to continue using it if they want to.

Beyond income taxes, he also cuts corporate taxes, eliminates taxes on interest, dividends, and capital gains, and abolishes the death tax.

We don’t have space to go into all the aspects of the proposal, but interested readers can get a capsule version of the plan here. 

the CBO’s most conservative projections for continuing along the current path lead to unsustainable deficit levels and bankruptcy for the country. debt will spike sharply upward in 2015, rising – relentlessly and unstoppably – to over 700% of GDP in 2080. Of course, the economy will be destroyed and government forced to default long before then.

If you’re in the mood to wade through all the details today, here’s a link to the CBO report on the Ryan proposal.