QE1

QE1 launched on November 25th, 2008 with a Federal Reserve initiated purchase of $500 Billion in mortgage-backed securities with the hope of lowering borrowing costs in order to stimulate the drowning housing market. The fed later bought several hundred billion dollars of securities from troubled entities such as Fannie Mae, Freddie Mac and Federal Home Loan banks.

By buying up assets from private institutions, it lowered the risk those institutions possessed and would theoretically lower the cost of borrowing money.

Finding asset purchases to not be doing enough, the Federal Reserve lowered the key interest rate to .25%.

More troubled-asset buyouts occurred through 2009 and the Fed started to aggressively buy Treasury notes.

QE1 lasted until the end of March 2010 and resulted in 30-year mortgage rates dropping from 6.33% in late 2008 to 5.23% at the end of Q1 2010. $1.25 trillion was invested in asset purchases by the Federal Reserve during QE1.

QE2

QE2 went from November 3rd 2010 to June 30th of 2011.

Bought $600 billion of longer term treasuries by selling off short-term agency assets.

Although some economists had expected the move to keep interest rates low, 30-year fixed mortgage rates actually climbed .5%.

The Maturity Extension Program (aka “Operation Twist”)

By the end of 2012, the Federal Reserve hopes to put downward pressure on long term interest rates by selling a portion of its sizable inventory of long term Treasury bonds in trade for shorter term notes. By selling the longer term notes, it is expected that prices for those bonds will increase, thereby decreasing the yield or interest on them. Operation twist is not quantitative easing as it adds no net money supply due to the trading of one security for another.

Operation Twist started in the fall of 2011 and offers both good and bad news. The bad news is that it doesn’t seem to be doing very much to help the economy. Long term interest rates are at historic lows and the economy is not accelerating. This again points to the fact that borrowing costs are not the major issue holding the economy back.

One thing of note is that the sell-off of long-term Treasuries is exactly opposite of the Fed move in QE2. QE2 was about economic stimulus by lowering risk. Twist is focused on affecting interest rates in order to encourage borrowing. Neither addresses the fundamental issues of over-regulation, over-taxation and a White House opposed to free markets.

QE1 / QE2 Results

The effect on the economy from QE1 and QE2 are heavily-debated. Many experts discuss the inflationary effect that pumping so much money into the economy has while others state that banks actually never turned around and lent the money – it was used to shore up their own reserves so that the financial system did not fundamentally collapse.

While interest rates are at their lowest in recorded history, the housing and commercial real estate markets have yet to see a bounce to the upside. The real estate bubble was caused by banks being forced to loan to those that could not afford it – not by high interest rates. Lowering interest rates didn’t make those folks any more able to take on a mortgage than they were 5 years ago.

Lowering interest rates should also help corporations get funding – if only they wanted it. Large companies are sitting on their money out of distrust of the current administration and oppressive regulation. Making it a tiny bit less expensive to borrow doesn’t allay those concerns. In a recent World Economic Forum report, exactly those concerns were listed as a major reason for downgrading the U.S. economy’s competitive ranking to #7 (from #1 in 2008).

For the experts that claim that the money supply didn’t grow to higher levels during QE1 and QE2.. here’s some real chart data for you. According to the experts at Shadowstats.com (chart right) the supply of currency and coin grew substantially during the months that quantitative easing was occurring. M1 is the measure  of money in circulation and the chart says it all.

The effect of a constantly increasing money supply is inevitably inflation. Defined as “a greater number of dollars searching for a diminished number of goods” inflation occurs due to the declining buying power each dollar represents. Our dollar has its value pinned to our Gross Domestic Product which has been growing at a much slower rate than M1. Price inflation is the only possible outcome.

QE3

Ben Bernanke and his cohorts at the Federal Reserve began meeting again today. The markets are anticipating another round of Treasury buys, asset buyouts and short to long term asset roll-overs to come out of the meeting. All of which is intended to bring long term interest rates down.

Should another round of quantitative easing (QE3) occur, it will certainly continue to inflate the price of non-bond assets and long-term bonds as more investors will walk away from the anemic yields on long term notes. Stocks will continue to see price increases despite a flagging economy which may slow private investment in the economy.

The money pumped into the economy will further increase M1 and decrease buying power for the average consumer. The inflation that all grocery shoppers, electricity users and gasoline buyers have been seeing will continue – even though the government’s measure (which leaves out food and fuel) will continue to show the success of QE with no ill effects.

The real question is why it’s being done? So far, QE has neither bouyed the economy nor re-invigorated it. The housing market is still in shambles and employment is unimproved. With only two months until the election and his chairmanship on the line if President Obama loses, Bernanke may be playing politics with the American economy.

Inflation expectations are for as much as a 5% peak consumer prices in the very near future As Tyler Durden of Zerohedge.com wrote:

CPI remains below 2% but there is a clear lag between the rise in market-implied inflation and it showing up in the unicorn-laden CPI prints – what this means is that given the hubris of the Fed yesterday,market expectations of inflation are inferring CPI could rise to over 5% within the next 3 to 6 months.

President Obama was correct in his estimation. That has not prevented him, however, from increasing the debt by $5,000,000,000,000.00 in less than half the time it took George W. Bush.

Why does it matter? Why all the gloom and doom about ever increasing debt and deficits? The government can just print more money, so why does it matter?

The problem goes to the definition of the word inflation.

in·fla·tion
   [in-fley-shuhn] noun
1. Economics . a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency ( opposed to deflation).

By definition, increasing the money supply (printing money, now called quantitative easing) is inflation. It is inflating the money supply. Anytime the money supply is increased, the value of each dollar is lessened, causing prices to increase.

Suppose instead of dollars, we traded in slices of pizza. You get paid at the end of the week in slices, and when you go to buy gas at the service station, you pay with slices of pizza.

Now consider the term value. Suppose the value of a whole pizza cut into six slices is what a tank of gasoline costs for your car.

= One tank of gas

All of the sudden, suppose the government decides that pizzas will be now cut into eight slices instead of six. You get paid in slices, remember, not pizzas. The value of things has not changed, however. A tank of gas still costs a whole pie, meaning you now have to earn two more slices to fill up your tank.

= One tank of gas

Each slice is smaller now, and buys less. This also means that if you have loaned the government pizza slices, by buying treasury bonds, the slices you get back when you cash in your bonds are worth less than the ones you lent them. With interest rates kept artificially low, as they are now, it may even mean that the slices you get back including interest will buy less than the slices you lent them.

Since the dollar is no longer tied to anything of physical value, like gold, its value is purely arbitrary. It depends only on the total number of dollars in circulation. As our government continues to spend money it doesn’t have, it has to borrow the difference, either by selling treasury bonds to it’s citizens, to other countries or to the federal reserve. In order for the federal reserve to purchase enough debt to keep the country going without interest rates going up and greatly increasing taxes on everyone, it has to print more money. At some point, price inflation will start to increase rapidly, what is known as hyperinflation. Prices will skyrocket as in the case of Brazil in the early 1990′s. At its peak, Brazil’s inflation rate was somewhere around 4,000%.

In America, we are already seeing prices on food and energy rise rapidly. There is no question that a fair portion of the rise in energy prices is due to the decreasing value of the dollar. As energy prices rise so does the cost of everything else, especially food.

This relation to quantitative easing (printing money) and price inflation can be illustrated quite easily by comparing the value of silver to the value of gasoline. In 1907 an ounce of silver would buy about 3 gallons of gasoline. In 1984 gasoline was about $1.20 per gallon and silver sold for about $8.14 per ounce meaning that 1 ounce of silver would buy about 6.8 gallons of gas. Today gasoline sells for about $3.83 per gallon and silver for $30.27 per ounce meaning that 1 ounce of silver today will buy 7.9 gallons of gas.

By the gasoline example we see that if silver were used as money, the cost of a gallon of gas today would actually be less than HALF of what it cost in 1907!

In a report titled “The Realities of Modern Hyperinflation” produced by the International Monetary Fund, authors Carmen M . Reinhart and Miguel A. Savastano point out;

“Chronic high inflation does not necessarily degenerate into hyperinflation. But, in the five countries reviewed here, hyperinflation did ensue, triggered by an uncontrolled expansion in the money supply that was fueled by endemic fiscal imbalances.”

One of the reasons for Ron Paul’s insistence on a return to sound money is to avoid a hyperinflation cycle brought about by an ever expanding money supply. If we continue to spend money that we do not have at the federal level, we are headed for exactly the kind of hyperinflation which is devastating to the poor and middle class. Simply taxing the rich will not fix our debt and deficit problem. The rich only have enough money to keep our government spending at its voracious rate for several months at best, even if we confiscate ALL their money.

Currently all revenue the federal government receives is spent on mandatory programs, social security, medicare, medicaid, food stamps, welfare and debt service. All discretionary spending including defense, is borrowed money. If we do not deal with the entitlement programs we are doomed to an inflationary spiral that will quickly spin out of control.

The IMF report leaves us with seven lessons to remember about hyperinflation.

Policymakers would do well to bear in mind the seven lessons that emerge from this overview of modern hyperinflations.

1. Hyperinflations seldom materialize overnight and are usually preceded by a protracted period of high and variable inflation.
2. Stabilization may take years if fiscal policies are not adjusted appropriately. Even when fiscal adjustment is implemented, it takes time to achieve low inflation, especially when money is used as the nominal anchor.
3. Sharp reductions in fiscal deficits are always a critical element of a stabilization program, regardless of the choice of monetary anchor.
4. Unifying exchange markets and establishing currency convertibility are often essential ingredients of stabilization, irrespective of the choice of main nominal anchor.
5. Output collapses during, and sometimes in the run-up to, hyperinflation. Although stabilization measures cap the implosion in economic activity, there is little evidence to suggest that they kindle a robust rebound in economic activity.
6. Hyperinflations are accompanied by an abrupt reduction in financial intermediation.
7. Stopping a hyperinflation does not restore demand for domestic money and domestic currency assets to the levels that prevailed before the hyperinflation began. Capital returns to the country when high inflation stops, but dollarization and other forms of indexation dominate financial intermediation for many years.

Forty years ago, President Richard Nixon ended the dollar’s tie to gold.

Now, Reuters News has obtained a draft of the Republican party platform that is to be adopted at the Republican National Convention next week.

Reuters reports the following:

The proposal recalls a commission created in 1981 by President Ronald Reagan to consider restoring the convertibility of the dollar into metal. The commission advised against such a move in the end.

“Now, three decades later, as we face the task of cleaning up the wreckage of the current administration’s policies, we propose a similar commission to investigate possible ways to set a fixed value for the dollar,” the platform would say, according to draft language provided to Reuters by a Republican National Committee official who declined to be named.

When asked if these measures were taken in order to earn the support of the delegates awarded to Presidential candidate and Congressman Ron Paul, Rep. co-chair of the platform committee Marsha Blackburn (R-TN) was quoted as saying, ”These were adopted because they are things that Republicans agree on.”

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Image © pepsico.com

If you are a consumer that enjoys Mountain Dew, Pepsi, Lipton Tea, Aquafina Water, or the AMP line of energy drinks; Be prepared to pay 3 to 5% more for your products.

These price increases are directly linked to inflation.

In a memo sent to retailers dated June 29th, 2012, PepsiCo Foodservice’s Senior Vice President Timothy F. Trant stated the following:

Commodity inflation has been very high over the past several years and will continue in the coming year, so internal productivity must be supplemented with price actions in order to continue to deliver the high quality products and services you have come to expect from us.
With that in mind, we are announcing price adjustments that will increase the cost of our products +3-5 percent depending on the brand and package, PBC will honor existing pricing as published through 7/28/12, and these changes will take effect on 7/29/12.

Beginning on July 29th – the day of the Brickyard 400 NASCAR race in Indianapolis – the retail price of your PepsiCo products will be rising.

Which commodities are feeling the inflation?  Could it be corn?  Most of PepsiCo’s products do contain High Fructose Corn Syrup, after all.  Is it the plastics?  Is it the aluminum?

Mr. Trant had not returned our phone call for comment at the time of publishing.  The post will be updated accordingly should we receive comment from Mr. Trant, or another PepsiCo representative.

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The price of fuel is rapidly approaching what Malcolm Gladwell would call the “tipping point”. Diesel fuel hit a peak of $4.72 per gallon in July of 2008. That took a huge toll on the American economy. Housing bubble notwithstanding, the high price of diesel contributed to the economic crash of 2008.

Consider that everything you buy is on at least two trucks before it gets to the store where you purchase it. Not only that, but all of the raw materials used to make whatever you buy are shipped to the manufacturer by truck. Every nickel rise in the cost of diesel fuel adds one penny to the cost of each and every mile of truckload freight. That might not sound like much, but when you think about the number of miles freight is carried in our country, and how many times something is on a truck before it gets into your hands, it is easy to see the extra cost add up. If you watch the price of milk in the grocery store, you will see very quickly that it mirrors closely the cost of diesel fuel at the pump.

What happened in 2008 was that available freight dropped off quickly as diesel fuel approached $5.00 per gallon. With profit margins already slim, companies were forced to pass these added costs on to the consumer. As consumer prices rose to cover transportation costs, customer purchasing dropped. Companies shipped less freight. This caused a temporary excess in available trucks, which put downward pressure on freight rates. Despite the high cost of fuel, carriers were forced to take less for their loads, or park some trucks. This balanced out at the cost of small trucking companies being forced out of business, and drivers losing their jobs; about 200,000 of them by early 2009.

At a time when the nation’s economy is slowly crawling out of a disaster, rising fuel prices pose the most serious threat to our recovery. In 2007 tractor-trailer trucks carried freight a record 184.2 billion miles. By 2009 that figure had dropped to 167.8 billion miles.

Diesel fuel hit its low point of $2.09 per gallon in March of 2009, and we entered a slow recovery. Freight has been steadily increasing since, and trucking companies began hiring again in 2009. By late 2011 hiring was in full steam, and companies are continuing to hire drivers. If fuel rates are sustained at current levels, or if they continue to rise, the same squeeze will happen again, and relatively quickly. The closer diesel fuel gets to $5.00 per gallon, the closer we get to another recession. We have now reached the tipping point for fuel prices, which seems to be about $4.50 per gallon. If we sustain these prices for very long we will see the recently encouraging economic numbers do a rapid about face and the 8.3% unemployment number the President is so proud of will begin to rise.

On February 25th, I posted an article titled  ”Gas Prices: Why Your Outrage Is Misplaced” (found here: http://t-j.cc/ykuhsa), Where I said:

#1 – Gas prices are at the levels they were in the late spring/early summer of 2008. (Graph 1)

#2 – Inflation has spiked tremendously since the same time in 2008 – when gas prices went even higher.  Thus the reason that gas prices dipped in 2008, and have climbed since then in conjunction with the inflation rates. (Graph 2)

#3 - Oil is currently trading about 34% lower than its all time nominal high set in July of 2008 (Graph 3)

#4 - Declining retail inventories will (and have?) help setup the perfect storm for massive price inflation across the board (Graph 4)

Again, Is this outrage justified?  No, because the American people are outraged at the wrong people.  Rather than being outraged at the oil companies and oil producers, the outrage needs to be on those who control the money supply – The Federal Reserve.

Instead of President Obama talking about releasing oil from the US Reserves, he should be talking about – and pressuring Congress for – the need for monetary reform in the United States.

This seemed to arm the Insult Cannon – which was aimed squarely at me.

Why, you ask?  Because I did not blame Barack Obama for high gas prices.  Instead I  blamed the high cost of fuelon the REAL cause for it: inflation and the devaluation of the US Dollar.  Apparently, because I highlighted this truth, I am “an idiot”, as well as “a socialist”, and more inappropriate terms.

Then I guess there are two other names to add to the list of “idiot” and “socialist”: Senator Rand Paul and WXIX Fox 19 anchor Ben Swann.  These two went on television after my article was written to say exactly what I had said.  Hmm….

Here is Ben Swann’s “Reality Check” from February 29th:

http://t-j.cc/xI38O9 (embed code failed, sorry!)

.

And here is Senator Paul on FoxNews Channel from February 28th:

If telling the truth is makes me an “Idiot Socialist”, and being ignorant of the facts makes one a “Smart Capitalist Patriot” … Then this country is in far worse shape than I thought.

–

Is this outrage justified?

Not when you take a few things into consideration.

#1 – Gas prices are at the levels they were in the late spring/early summer of 2008. (Graph 1)

#2 – Inflation has spiked tremendously since the same time in 2008 – when gas prices went even higher.  Thus the reason that gas prices dipped in 2008, and have climbed since then in conjunction with the inflation rates. (Graph 2)

#3 - Oil is currently trading about 34% lower than its all time nominal high set in July of 2008 (Graph 3)

#4 - Declining retail inventories will (and have?) help setup the perfect storm for massive price inflation across the board (Graph 4)

.

Again, Is this outrage justified?  No, because the American people are outraged at the wrong people.  Rather than being outraged at the oil companies and oil producers, the outrage needs to be on those who control the money supply – The Federal Reserve.

Instead of President Obama talking about releasing oil from the US Reserves, he should be talking about – and pressuring Congress for – the need for monetary reform in the United States.

…given the data, that’s where I believe the outrage should be pointed.

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Never mind that America is currently drowning in $15,386,147,538,129  dollars of national debt the minute that total was written down here. The average American can not even compute what a trillion dollars of debt looks like, let alone the repercussions of the U.S debt to GDP ratio exceeding 100% for the first time in history. ( check out the chart in that link)

President Obama wants the American people to believe that he is holding true to his promises he made back in the 2008 campaign that he has refused to raise taxes on the middle class, and therefor he deserves another four years in the White House. He constantly spews the Socialist-designed rhetoric about folks needing to pay their fair share, while denying the fact that almost 50% of Americans pay no income taxes whatsoever. The problem inherent in Obama’s false campaign rhetoric can be found in the truth about the stealth tax increases that will hurt every single working and non-working American starting Jan. 1st, 2013. Isn’t that an amazing coincidence that the bulk of the Obama administration’s middle-class-crushing tax increases and vastly- expensive-to-businesses regulatory policies will go into effect after the 2012 presidential elections?

According to the article, The Coming Crash of 2013, written by Peter Ferrara back in the summer of last year, Americans are going to get a very harsh lesson in the reality of Obama-nomics and feel some very serious financial pain starting in the year 2013. For example:

Already scheduled now under current law in 2013 is the expiration of those Bush tax cuts, which President Obama has refused to renew for single workers making over $200,000 a year, and couples making over $250,000. Also scheduled to go into effect in 2013 under current law are all the tax increases of Obama-care. Together, these job killing tax policies would result in a sharp increase in the tax rates on the nation’s small businesses, job creators, and investors for virtually every major federal tax. (emphasis added)

Many of the hidden tax increases in Obama-care have been put on the shelf during 2011/2012 by the granting of temporary ”special waivers” due to the proven cost increases to businesses that were written right into Obama-care. Those waivers are temporary, and without major changes to the new health care law,  they will result in the tax man coming to collect major tax increases from all businesses small and large due to the tax hikes in Obama-care in… 2013.  For a complete look into the tax increases inherent in Obama-care please see the Comprehensive List of Tax Hikes in Obamacare.

Mr. Ferrara further explains some of the other economy-crushing tax increases implemented by Obama and his Liberal Democrats that are sneaking up on Americans in 2013:

 Taxpayers would see their income tax rates jump by nearly 20%, the capital gains tax rate increase by nearly 60%, the total tax rate on corporate dividends increase by nearly three times, their Medicare payroll tax rate increase by 62%, and the death tax rise from the grave with a 55% rate. This would go way beyond the outdated Obama talking point about returning to the Clinton tax rates, adding up to a top federal tax rate of 44.8% on wage income alone, besides all the tax increases on capital income, on the way up to a 62% top federal tax rate.

Can Americans consider the U.S.A. to be a free Republic when the tax man can lift a whopping 55% of a person’s entire life’s savings [through the estate tax, which is more aptly called the death tax] out of their family wallet simply because a family member has passed away? Yes they can, starting in 2013, unless people wake up to the realities that the Death Tax Man is coming in 2013 and he means business. Meanwhile Congress and Barack Obama have also reduced the revenue of the Social Security program by billions of dollars a year to score reelection points,while also adding to the national debt by refusing to offset the recent tax cut extension. Do Americans not understand what that means to anyone currently, or soon to be relying on SSI checks to survive? How about the young and middle-aged Americans who can look forward to paying into SSI for decades without any chance of ever getting a dime back out of it? That spells taxation without representation, any way you slice it.

Mr. Ferrara further explains the hidden taxes that will drive up the cost of everything due to unconstitutional laws being passed by executive branch fiat under the guise of ”rules changes.” (emphasis added)

Besides this tax tsunami, President Obama is implementing another trillion dollar plus cost burden on the economy through the EPA’s cap and trade tax policy. That is one central feature of President Obama’s war on production of traditional, low cost, energy, shutting down drilling, extraction and pipelines from the northern tip of Alaska, down through Canada, to the energy rich Western states, through Texas, to the Gulf of Mexico. Obama keeps issuing statements that he is opening drilling or permitting or exploration here and there, only to have it shut down by his bureaucracy soon thereafter. All of this will only raise energy prices higher and higher through to 2013, squelching the economy still further.

How many Americans know about the Cross-State Pollution law/money grab/tax hike that was passed by the EPA? That illegally-implemented tax increase on “certain states” went into effect this year. Check it out here.  In that Democratic party/ EPA extremist-mandated new “rule” California, the most polluting [and Democratic party stronghold] state in the country isn’t included in the Cross State Pollution law, as can be seen in the map of affected “certain states” in that article. How tyrannical and ludicrous is that? The  Cross-State pollution tax man  is already implementing that money grab right now in 2012. In 2013, all of the States under that new “rule” will feel the pain, one way or another.

Finally, Mr. Ferrara goes on to question just how an increased $2 trillion dollar tax burden will bear down on all Americans in 2013:

This is just the beginning, however, of President Obama’s re-regulation burden on the economy, which is estimated to be rapidly rising towards $2 trillion, or over $8,000 per employee, in annual costs even before EPA’s calamitous cap and trade really begins. That is close to 10 times the corporate tax burden, and double the individual income tax burden. With another 4,225 federal regulations already in the pipeline, and the new regulatory burdens from Obama and the Dodd-Frank financial regulation bill still to come, how high will that burden be by 2013?

After the tax man gets through grabbing a much bigger share of Americans salaries, savings, and cash on hand  in 2013,  the next biggest thief to reach into their wallets in the very near future, will be The Inflation Man. After all the hidden taxes and regulatory burdens are felt in the wallets of all Americans in 2013, the eventual economic inflation due to the Federal Reserves increased printing of U.S. dollars, [also known as QE2], will hammer American family budgets, as the dollar loses it’s value and therefor buys a lot less than it used to. Do Americans really want Four More Years of Barack Obama’s economy-crippling wealth redistribution, tax increase-inducing, and overbearing regulatory policies?

In part 1 of Obama 2012 Holiday Message: Children vs Parents, President Obama’s Home for the Holidays: Share Why You are Working to Re-elect President Obama campaign video that tells America’s youth to go home and convert their parents into Obama-supporters was detailed.

In part 2 of the Obama 2012 Holiday Message: Children vs Parents we will examine a few examples of a hypothetical holiday conversion between those “stubborn and set in their ways” old parents, their live-in Grandmother, and Tommy’s new generation of hope and change operatives that President Obama has asked to convert them into Obama-supporters.

Part 2: Tommy Attempts to Convert the Family into Obama-Supporters at Christmas Dinner.

Background: Tommy graduated with a Liberal Arts degree back in 2007, yet hasn’t had a job in four years, other than a recent 3-day stint as an Occupy Wall Street protester, where his $5000.00 dollar laptop, his blackberry, his PSP2, and his North Slope ski jacket were stolen. He lives at home with Mom, Dad, and his Grandmother, a retired Nurse. They sat down to Christmas dinner and Tommy steered the conversation towards the 2012 elections, just as Barack Obama’s video suggested. The following is the hypothetical Christmas dinner conversation between Tommy and his family.

After some idle chit-chat, the Christmas dinner talk turned towards politics when Tommy state, “President Obama has given us wonderful things during his Presidency, such as Healthcare reform, ending the war in Iraq, and repealing the Don’t as Don’t Tell ban on gays serving openly in the military. President Obama also killed the terrorist al-Awlaki. He is my generation’s President, and everyone in this house should open their eyes to his great achievements during the past three years, and vote to reelect him in 2012.” As all heads turned towards Tommy, his father replied:

“I,m very glad that you brought up the 2012 elections and President Obama’s accomplishments Tommy, because your Mother and I were just planning our 2012 household budget recently, and we have decided to make a few changes here at home in the coming new year. Change you can believe in, as they say. Change number one for this household in 2012 will be as follows: During the last three years [Of Obama's term as President] our electric bill has increased by $72.00 a month here in Florida, so there will have to be some serious limitations put on your basement living quarter’s allotments of daily electricity. We have installed a new green energy approved electric meter for the basement area in which the amount of time spent on the computer and video gaming will be cut back to a maximum of 2 hours daily. If President Obama continues to wage his war on domestic energy production here in America, there could be more cutbacks on your personal electricity usage in 2012. Use your time wisely. Change number two: With the Obama-care law that says we have to keep you on our health insurance policy until you reach the age of 26, coupled with the huge increases in our healthcare premiums due to the passage of Obama-care, we will have to cancel your car insurance payments to help offset the cost of your healthcare premiums. You see Tommy, we are not like President Obama and the U.S treasury in that we can’t just print more money to pay our bills, because we have to earn our money and spend it wisely to ensure our future survival. If you ask Granny cranky-pants nice enough, maybe she will let you borrow her 1973 Chevette to do your Obama-organizing errands. How about it Granny?”

To which Granny replied: “Well, I,m sure Tommy and I can work something out to let him borrow my Chevette from time to time, because I too have been going over my 2012 fixed-income budget, and have decided that I will have to cut back on certain spending habits if I am to afford the latest Medicare premium increases Obama and the Congress recently announced. My first change will be to downgrade the internet conection I have been needlessly paying for in this house for the last 4 years. I found a deal where I can get basic internet for only $14.99 a month. I asked the lady at the cable company just what is this high-speed internet connection that I am paying $59.99 a month for and why do I need it just to check my emails a few times a month? Turns out she informed that I do not need high-sped internet, as I do not watch movies, play games or pass around reelect Barack Obama videos. Starting Jan 1st, we will have basic internet service which will save me $45.00 a month. Even though Betsy, (my 1973 Chevette) gets 32 miles per gallon, with the sky high prices of gasoline expected to skyrocket again in 2012 thanks to Obama’s anti-U.S. Domestic Energy production policies, I have been struggling just to afford enough gas to get to my monthly doctor’s appointments and church. That $45 dollar a month savings will ensure that I can get to my doctor’s appointments when Obama delivers those skyrocketing energy prices he has promised everyone.”

With all eyes on Tommy, the Christmas dinner table fell eerily quiet as Mom, Dad and Grandma awaited Tommie’s reply. After a few moments of contemplation, Tommy announced: “This is not how a Democracy works and my voice will be heard in this house. I have rights. I am going down to my basement apartment and report this conversation to the OWS General Assembly, after which I will offer up my counter proposals to these unfair Right Wing home budget cuts you all want to impose on me in 2012.”

Mom spoke up for the first time during this Christmas dinner table discussion, as Tommy was sure she would see the Obama-light and take his side in this debate. “Well Tommy, what your Father and Grandma have said here are all based on the simple facts of life. The fact is, a family can not live beyond it’s means if it wants to ensure a safe, secure, and comfortable future. To do this families must tighten their belts in troubled economic times. With the cost of gasoline, food, electricity and everyday necessities skyrocketing today, we must make tough, sensible budget decisions to ensure that we can pay our mortgage to ensure we all have a roof over our heads in 2012 and beyond. Money doesn’t grow on trees Tommy, it has to be earned and spent wisely. Due to the current state of the economy and the price of everything increasing despite the Obama administration telling everyone their is no inflation since he took office, I have decided to go back to work in order to help keep us afloat. As I will not be home 24/7 to do such things as family laundry, cooking, cleaning, grocery shopping,taking care of our dogs, etc. I am working on making some household changes of my own in 2012. We will discuss these changes over New Years dinner, when your brother Grover, the CPA will be joining us to make final plans for our 2012 household budget.”

As Tommy scowled and threw his napkin onto his dinner plate and got up to leave, his father added: “While we all look forward to hearing your OWS-inspired counter-demands Tommy, keep this in mind. This country is a Republic, not a Democracy. When it comes to spending the members of this household’s hard-earned money and keeping our household budget in line, the only votes that will count will be the ones that come from the folks paying the bills around here. We do not have the luxury of spending other people’s hard-earned money and borrowing trillions of dollars on the taxpayer’s bank account to keep a roof over our heads and food on the table. We look forward to hearing what you have to say at the New Years dinner table, where your brother Grover will unveil our new 2012 household budget for all to see.”

In Part 3, Tommy delivers his counter-proposals to the 2012 family household budget plans, his CPA-brother Grover tightens the household budget even further, and Granny chimes in with some shocking revelations about the effects of Obama-care on her personal well-being.

Back: to Part I

The PIIGS (Portugal, Ireland, Italy, Greece and Spain) have been in the news, but the econo-geek phrases being thrown around sometimes make it difficult to know why anyone in the U.S.A should care what happens if Greece, Italy or anyone in the Eurozone goes under.

It matters – greatly.

The entire mess is centered around entitlements and debt. Greece promised a load of social safety nets (government programs intended to do for those who could not do for themselves) to their population without considering the cost or ability to pay said cost. It has come to this point because Greece now owes almost 50% more than the entire Greek economy takes in each year. In economic terms, they are at 149% of debt-to-GDP.

Greece has been in-danger of defaulting on its debt for quite some time. That would be the same as if someone in America suddenly figured out that they were spending too much money and would not be paying their car payment, rent, student loan, and credit cards – EVER. Their debtors have already given them the money. Now, those agencies have little hope of recovering the investment and will have to write-off some or all of that investment. That money.. is gone – forever. Never to be loaned again. Missing from the economy – kaput.

Even the obviously left-slanted Washington Post put together a graphic that illustrates the dire situation that the EU citizenry have allowed their leaders to get them into.

The most obvious way that this matters to housewives, moms, dads, brothers, sisters, cats, dogs and even MSNBC watchers in America is that our ratio is now 99.71% and climbing – we are eerily close to facing the exact same situation as the Greeks. The United States economy will take in an estimated $15.01 trillion dollars[1] while it owes a projected $14.97 trillion [1]. In a matter of months, we may see the point where our own government follows Greece and starts spending more than the entirety of the economy can produce.

The second major issue with a possible Greek default is U.S. financial sector and investor exposure. I know, economist-speak. Basically, American banks and investors have sunk quite a lot of money into the Euro Zone (the European countries that use the Euro as currency). If Greece defaults, a huge portion of those investments will be lost. It will make American banks weak and possibly cause some to become cash-strapped or fail.

The Bailout, the referendum and the retirement

Greece has been bailed out time-after-time by the European Central Bank (ECB) and EU member nations. The most-recent bailout package requires that Greece accept a series of austerity measures. These measures cut government programs and re-privatize government assets and services to get Greece back on the proper financial footing. Unfortunately, the Greek PM belongs to the socialist party and wouldn’t accept them. So he turned to the people.

Greek Prime Minister George Papandreou had last week offered to push the idea of severe cuts to government programs (similar to food stamps, medicare, medicaid, social security, etc) on to the people to decide. Without the reforms, the ECB would not give Greece the money it needs to keep the country going. The vote by the people is called a referendum. It is an Athenian or pure democratic approach to a policy consideration. The problem? The people, when given a choice to raid the treasury or lose an entitlement will .. raid the treasury – an excellent example of why pure democracy fails.

In the end, Papandreou had to rescind his call for a referendum and has now consented to leave the government upon the formation of a new coalition or “unity” government. In other words, he’s been forced to let someone else replace him and re-organize the quarreling masses in the Greek parliament.

Contagion

No, not the movie. If Greece defaults, Italy will surely fall next and Spain may not be far behind.

Just Tuesday, Italian PM Silvio Berlusconi announced that he would step down as soon as a new government could be set up in his country. In Italy, it’s a North vs. South battle that closely parallels the Northern European vs. Southern European differences. The north is heavily commercialized and productive while the south tends to be less so. Spending cuts are necessary in order for Italy to receive badly needed aid from the European Central Bank (ECB). Failing to hold a majority during the recent parliamentary vote, Berlusconi offered his resignation to Italian President Giorgio Napolitano.

Spain has a cash problem as well. Home of the “toma la bolsa” or take the market movement that inspired the Occupy Wall Street protests, Spain has entitlement issues of their own. A population that is used to retiring early, working less and getting taken care of cares not that it is not a sustainable model.

The “So What” of it all

So why does a mother, father, kids or Grandma care if Greece defaults on its debt?

First,  the exposure to Greek debt in EU and American banks is significant. Recovery rates (the percentage of original investment an investor can expect to get back after default) would likely be less than 40%. It could be even less if loans weren’t originated with a currency contingency built in. Those banks then run the risk of becoming under-capitalized and perhaps failing.

If a large number of banks fail or look like they might, one of two things might happen. Either the central banks (ECB, Fed, IMF, etc) start propping them up with liquidity (bank bailout 2.0) or they fail and there could be a run on the banks to pull out assets – which would cause a more widespread liquidity crunch and a death spiral for the financial sector and the economy overall.

If banks are under-capitalized, loans will be impossible to get for businesses and consumers. Just like after the 2008-2009 U.S. financial mess, banks will tighten lending rules, revoke lines-of-credit and preserve capital.

Lastly – inflation – a lot of it. Eventually the central banks and governments will try to alleviate the liquidity crisis by pushing more cash into the system through bailouts, stimulus, quantitative easing or issuance of a devalued currency. Depending on the amount of “help” given, it could cause prices on everything to skyrocket.

To control the massive inflation that results, interest rates will be rapidly raised which will make borrowing much more expensive. Manufacturers that borrow will have much higher debt service costs and that will be passed on to consumers through higher prices. Prices up + weaker currency = strained family and business budgets.

That will put the economy into full reverse as families, banks and businesses tighten their belts to weather the storm.

Now imagine how things magnify if Italy then defaults, or Ireland, or Portugal or Spain or …

Sources:
[1] http://www.usdebtclock.org/

September wheat dropped twenty two and a half cents per bushel to $6.57 and corn dropped 0.17 to $6.86 a bushel. Oats and soybeans also took significant drops as the entire set of major grain futures took a nosedive.

Beef and pork futures also slid lower, but why?

Petroleum products dear friend – that’s why. Across the board Oil, Natural Gas, gasoline, all of them dropped. Usually when commodities sink it’s due to a strengthening dollar. Not this time.

If all commodities futures were falling, a weakening greenback might be to blame, but gold is having no trouble reaching new highs. Closing at 1760+ on Monday, gold is showing all the strength of a temporary safe refuge for money that investors can’t put elsewhere.

Food, grain, oil and fuel are falling because the speculators have seen the same reports the rest of the universe has – the second recession is here. Upon expected dwindling demand, prices will fall.

Gold is NOT seeing anything close to a slowing demand curve. It is precisely where many are moving their money in anticipation of what will almost certainly come next – another round of money printing.

While food may drop short-term, Americans are in for more quantitative easing (a.k.a. federal reserve printing money) which will further devalue the dollar and require more greenbacks to purchase the very goods that are currently on a downward price trajectory.

This is a temporary descending blip. Food and energy will become more expensive as the dollar becomes diluted by further irresponsible printing and that’s what all those gold buyers already seem to know.

Of the 2,186 ACCA members surveyed between 16 May and 6 June 2011, only 26% reported increased confidence, down from 28% three months ago, with 57% saying that economic conditions are either deteriorating or stagnating, up from 51% only three months ago.

While the rocketing inflation of the first quarter of 2011 was not repeated in the second three months, a greater proportion of those surveyed, 54% – up from 51% in the last quarter – reported an increase in operating costs. This is double the number of respondents who mentioned inflation two years ago.

The survey shows that rising costs are not just confined to the fastest-growing economies.

While best performing markets Malaysia and Pakistan are leading the inflation league table, rising costs were also cited by 45% of respondents in Western Europe, which has been affected by the continent’s debt crisis, still sits at the bottom of the ranking in terms of business confidence and economic optimism.

The survey shows that businesses are becoming increasingly unable to respond to the inflationary challenge through cost-cutting.

Around 30% of respondents expect their governments to get spending decisions right in the medium-term, but 16.5% expect dangerous levels of over- or under-spending and this group has been growing every quarter since late 2009.

Access to finance has been tightening globally for the past six months, and this appears to be the case for both growth capital and short-term liquidity. This, combined with rising costs, now appears to be leading to an increase in the number of respondents who fear that customers (31%) or suppliers (15%) might go out of business, as well as those reporting problems with late payment (31%).

Despite these worrying trends, confidence figures among finance professionals have not yet dipped to a situation where they believe there will be a renewed downturn.

For the past two years, professionals in Africa and the Asia-Pacific region have been consistently more optimistic than their colleagues elsewhere about the state of the economic recovery, and this resulted in high levels of confidence in their own organisations.

In this survey, however, confidence is surprisingly low in both regions, with Asia-Pacific recording a net loss of confidence for the first time in two years. Hong Kong and Malaysia seem to be particularly affected, while Singapore has bucked the trend by recording further confidence gains.

While the gloom in the Far East reflects the fallout from the disaster in Japan, flagging confidence in Africa is mostly a lagged effect of the slowdown elsewhere. The GECS results show that the impact of a drop in activity in OECD countries has for the last few months been trickling down the supply chain, first to the Asia-Pacific region and then to Africa.

However, unlike the previous quarter, most of the pressure on access to finance appears to be concentrated on Asia-Pacific and the Middle East.

Under these challenging conditions, profitable value-added opportunities of most types have become scarcer and the investment environment has deteriorated slightly, especially in terms of financing and business support. Still, investment itself has remained flat and the outlook for employment and investment in staff has even improved slightly. This is almost certainly related to the slow recovery in new orders.

Report author Manos Schizas, senior policy adviser with ACCA, said: “There are a number of concerns in the latest report, including that the loss of momentum in Asia and Africa has become particularly pronounced in the last few months. The limits of austerity are also being explored in Western Europe and a renewed tightening of credit and cashflow conditions could be on the cards, even as new orders and employment are beginning to recover.

“If these new trends – coupled with high inflation and low investment – persist we would expect to see further instability in the near future, which will present more challenges for all sectors professional accountants whether they work in practice or industry in the second half of 2011.”

Central and Eastern Europe buoyed by stable fundamentals as the rest of Europe deteriorates

For the time being, the region appears to be riding out the storm of the European fiscal crisis, even though respondents’ confidence in their own organisations and their faith in the global recovery are slowly being eroded. About 45% of respondents in the region (down from 50%) feel that global economic conditions are improving or about to do so, but only 26% reported confidence gains (virtually unchanged from 27% in the last quarter).

Business revenues, access to finance and cashflow conditions are now increasingly stable, which has prompted a rise in capital spending in the region. That said, the outlook for employment and investment in staff is still negative. Respondents are reporting more opportunities to profit from innovation and customer insights and fewer opportunities to cut costs or encourage efficiencies through the supply chain.

Respondents in the region expect government spending to grow moderately over the next five years, a prospect that now appears more sustainable than when the question was posed in previous surveys. Only about 8% expect their national governments to over-spend dangerously in the medium term, down from 14% in the previous quarter.

The office of Majority Leader Eric Cantor (R-Va.) said Friday the House would take up a resolution introduced by anti-war Rep. Dennis Kucinich (D-Ohio) that directs the president to remove U.S. armed forces from Libya. The liberal Democrat is acting under authority of the  1973 War Powers Resolution, which enables legislators to force a vote on troop withdrawal measures under certain conditions.

For those of you who have forgotten about the controversial U.S. war action taken against the government of Libya, here is a reminder of just how this illegal action was started, and then obscured by the cloud of the NATO umbrella. The powers that be may  call it a “kinetic military action”, a world peace action, a move to install “Democracy”, or any other cutesy names that are based on the denial of the reality that the Libyan war action is simply an illegal war action against another country. A war action taken against a country that has not attacked any NATO country, as the NATO charter states that it was originally formed to protect against.  Just because the U.S. is now hiding behind the moniker “NATO” does not make this war action legal, or right.

The measure is not expected to pass, but a significant number of votes in favor could send a sobering message to the White House, which has struggled to win congressional support for the military intervention in Libya. Both Republican and Democratic leaders criticized Obama for a lack of consultation with Congress in the run-up to the military deployment, and the House has ignored his request for a resolution supporting the mission.

This bill appears to be nothing more than campaign rhetoric designed to waste time, when we consider the fact that there is almost zero chance of it passing. America still has no budget for over 2 years running now, with no resolution in sight, we will hit the debt ceiling again soon, our national debt has now surpassed the $14.5 trillion dollar mark, unemployment is still stubbornly high, as is the price of gasoline, and inflation that most officials in our government refuse to acknowledge,  is crushing the poor and Seniors on a fixed income , yet the wizards in D.C. want to attempt to make a statement by wasting time on this bill? Seems like common sense would tell them to start impeachment proceedings against Barack Obama if they truly  feel he is in violation of the 1973 War Power Act, instead of holding meaningless votes to send him a message. It is time to take a serious stand against the abuse of executive powers and the ignoring of Congressional authority in America today, yet it appears that our representatives in Congress lack the backbone and fortitude to take the necessary stand against Barack Obama’s bully pulpit. House leadership tried to make another statement concerning the illegal U.S. participation in the Libyan war, again from the Hill.com article:

The House last week overwhelmingly voted to add amendments to a Defense authorization bill to bar the president from deploying ground troops to Libya and stating explicitly that Congress was not, as part of the legislation, authorizing the military mission.

One example is the second F-35 engine program, which two administrations have wanted to terminate for several years, only to see Congress keep it alive.

Once again we see just why these types of votes are deemed meaningless. The military does not need or want the expensive second engine for the F-35 fighter jet, yet Congress keeps on demanding it be put into the spending bill again. Can you say the words Lobbyists and wasteful eamarks?  How about attempted vote-buying? No matter how many times the military says they do not want the super-expensive F-35 second engine program, some tyrants in Congress keep on pushing for it. How will we ever cut spending with this type of corruption going on? The answer to that is we will never be able to cut spending until we are bankrupt, period.

This takes us back to the illegal war in Libya and how much it is costing America to install an undefined fake Democracy there. The initial bombing cost us hundreds of millions of dollars. Who gave Obama permission to spend that money? Who tried to stop it? What is it costing us today? What is the mission in Libya? All of these questions go unanswered, while the American public is told to simply sit down, shut up and foot the bill for an illegal Libyan war. Is this what Democracy looks like?

Recently, Glenn Beck explained his theory on the major realignment of world powers recently, and just who will rule in the near future. The four main “players” are:

1 -George Soros and his media and financial empire.

2 – Russia – They are expanding their influence with Iran, Turkey, Venezuela and even their longtime arch-enemy, China. Military rebuilding, Nuclear sales . Building oil and gas pipelines to Europe. What happened to Europe’s green energy plans? The fact is, they need oil and gas, and Russia will sell it to them.

3 – China – Over a billion people to feed, and they are buying up major amounts of gold and rare minerals in possible anticipation of the crashing of the U.S. dollar.  Technology advancements.

4 – Islam- OIL

Will Glenn Beck be proven correct again here? Watch in the following FoxNews video how George Soros states that, “China has to be brought into the New World Order.” Video courtesy of FoxNews.com

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