Via: Market-Ticker h/t orlingrabbe.com
Federal financial fascism on the march: a federal government backstop to the states and localities is being contemplated. Sooner or later America’s fiscal policies will cause a sell-off of the dollar, at which time it will be probably unbearably tempting to trick up some international chaos in the form of some sort of war or terrorist event to drive investors back to the good old greenback. In this context Paul Krugman’s lecturing of the Chinese on currency valuations (who took us off the gold standard, Paul?) is truly bellicose. See Krugman in China for this story.
In the context of our working hypothesis that the American social contract is broken and heading toward a crisis in about ten years, the implications of federalization of state and local debt (“financial fascism”) are these: the states and localities are invited into moral hazard, just like Fannie and Freddie, as the article points out; the Constitution is further abrogated, as the states are strong-armed into obeying the federal government; the potential for vastly misguided macro policies at the national level is elevated and macro volatility increased (the Founders seemed to understand that sparsely connected networks are more stable than densely connected ones); ultimately, even after we’ve tried to scare the world into greenbacks, the BRICs, Euroland and Japan will figure out a way to go around us, and we will run up a good inflation to depreciate the debt while the BRICs are taking it out of our hide in currency devaluation; and without further change in the income distribution (see Debt and income inequality for some graphs suggesting that the real reason for our current collapse of effective demand is that income inequality has become so great most people simply don’t have enough money to spend to support recent levels of output)—that is to say, without a fundamental renegotiation of the American social contract such as occurred miraculously during World War II, that America a generation from now will be a banana republic with a tiny ruling class who will send their children to the right schools to get the right jobs in the right businesses and government agencies with the high pay that will be denied to the vast majority of working stiffs, who will be locked out of this calcification of the American dream in a class system that will be effectively feudal. There will be lords and ladies, and serfs serving them, is the way it will feel. Sound familiar? Could get much worse.
How might a new social contract come about, when our elected representatives lie to us so easily (“Yes we can!”), so powerless themselves to change the status quo? (I credit President Obama with making health care his top priority, as the bottom half are going need help as the depression matures.) How we truly change America is the question for the next decade. Think about it, and please don’t hesitate let us know your thoughts. For background see this and this.
Warning: United States Credit Risk
Through the first seven months of the fiscal year, the federal deficit has mounted up to a record $802.3 billion, compared with $153.5 billion at the same time last year. Income-tax receipts are down nearly 31% for the fiscal year so far.
People who are not making money - who are either unemployed or if self-employed are not profitable - don't pay taxes.
Ramping spending into such a situation is idiotic. It is similar to you losing your job and going on a spending spree, running your credit cards to the moon before they are cut off.
You may rest assured that they WILL be cut off if you continue this behavior for very long.
Perhaps Japan is warning us of an impending cut-off?
Japan has been a major buyer of US government bonds, helping the US finance its Federal budget deficits.
But, he added, it would continue to buy bonds only if they were denominated in yen - the so-called samurai bonds.
We have not issued any so-called "samurai" bonds. They should be better-called "Seppuku Bonds", because that is what they will do to The United States if we ever issue them.
To be fair, Japan's Democratic Party has poor prospects in their upcoming elections. But should they actually gain enough sway to change policy, things get very interesting very fast for The United States, and not in a good way - more in a "Chinese Curse" sort of way.
See, in order to have a hyper-inflationary collapse of an economy, such as Weimar Germany, you must have debt denominated in some currency other than your own. Iceland, for example, blew up in no small part due to a decent amount of their debt being denominated in other than their native currency. Borrowers in Eastern Europe have discovered recently the danger of home mortgages written in Swiss Francs.
Such foreign-denominated debt seems to foreign borrowers to be "more fair" in that it places the risk of currency devaluation on the nation that undergoes it. But what is often missed is that currencies don't always change value due to the actions of just one nation - that is, Japan's Yen could strengthen due to the actions of Japan, just as the the dollar could weaken due to the actions of The United States.
The insidious (and dangerous) reality of such a circumstance is that it creates a perverse incentive for the nation buying the debt denominated in its own currency to take actions that strengthen their currency, because doing so increases the value of the note they hold! That is, they can increase your indebtedness by practicing fiscal restraint in their nation.
To permit such an event to occur is akin to walking around with a loaded pistol in your mouth with the slide gripped between your teeth, offering the grip end to anyone who walks by.
That is not a recipe for a long, healthy life.
Speaking of The United States doing dumb things that could destroy the nation, we've got this:
Fox Biz is reporting that the House Financial Services Committee is set to take up legislation this week that would establish a federal backstop for all Municipal bonds and muni insurance.
This would, of course, represent another massive expansion of the government's guarantees and turn all states into Fannie and Freddy.
Oh no, this bill is much worse than that.
Does anyone remember the "Drive 55" game the government played back during the energy "crisis"? The threat was simple: either pass a 55mph speed limit for all roads, including those that were not interstate and thus not under federal jurisdiction in any way, shape or form, or lose all federal highway funding.
So what is this really about? Let's be clear: It is about The Federal Government attempting to finalize the full federalization of every state in the union, removing any and all remaining sovereignty.
This sort of action is a blatant and outrageous attempt to rewrite The Constitution without actually doing so, by making the states subservient to The Federal Government's demands under threat of having their heroin supply interrupted.
This must not stand; those states that have passed or are considering resolutions declaring their rights under The Constitution must immediately upgrade those "resolutions" to laws, and be prepared to back them up with whatever is necessary.
Our Republic was designed with relatively strong states and a relatively weak Federal Government for a reason.
Simply put, it is more difficult to corrupt a government that is closer to the people. An example can be found here:
The Washington Post reported last month on more than $150 million in federal funds that Murtha directed to the airport, which has six arriving and departing flights per day. Among the improvements, Murtha directed the Pentagon to give the airport a new, $8 million, state-of-the-art radar tower that has not been used since it was built in 2004, and $30 million for a new runway and tarmac so the airport could handle large military planes and become an emergency military base in case of crisis.
Now if The State Government wants to appropriate $180 million in state tax revenues for improvements based on those funds bringing more than $180 million in benefit to the state, so be it.
But when The Federal Government appropriates these funds they can take them from people 2,500 miles away, who have no use for the project and derive no benefit from it.
Another example of the same sort of outrage comes in the laws for state-chartered banks in many states that prohibit a state bank from accepting a deposit while that bank has a negative net equity position - that is, while it is insolvent.
There is no such law at the federal level, which is part and parcel of why we are in this economic mess and why over a trillion dollars, including $180 billion "passed through" AIG, was literally stolen from each and every American.
The Federal Government must not be allowed to insert its talons into each and every state's funding mechanisms.
If it does, we will no longer be a union of states; the separation of states and their governments will quite literally disappear, and our nation will have been irretrievably damaged, no longer conforming to The Constitution as set forth by The Founders more than 200 years ago.
And you can bet that "Seppuku Bonds" will, subsequent to that act, once The Federal Government has placed the noose around the neck of the several states, be issued.
The clock for our republic is running out.
Disclosure: Can I short The United States?
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