Thursday, November 15, 2012

The deals, fiscal cliff and Weimar

When the Weimar Republic went into a tailspin it was due to outstanding debt (war debt from WWI) that it couldn't repay coupled with a hoarding binge set off by the need to actually feed returning soldiers.  Hoarding of food started the German Mark going on an inflationary spiral as the amount of food dwindled the price of the remaining food skyrocketed.  As costs rose the German government tried to cover that by printing more money, thereby devaluing their currency which then caused foreign debt holders to doubt the value of their debt assets as they were getting paid in money worth less and less because it was not pegged to the gold standard.  When that happened hyper-inflation set in to the point where you had to spend a paycheck when you got it just to get anything of value from your work.

Money is an exchange value of work put in to perceived value for final goods, after all, so when any government starts to print money they are saying: your work is worth less to you because we can't manage the value of the currency.  Because there is an inherent work valuation in finished products delivered to market, when more money is printed the goods are worth more, as well, which is inflation: it is more money trying to chase a set intrinsic value of work investment in goods production and when the currency is devalued then more of it is needed to get that intrinsic value.

When the foreign creditors came knocking the German economy imploded with hyper-inflation as the government tried printing more money to the point where you needed carts and wheelbarrows to get money to a store on the hour you were paid... yes you were paid by the hour at that point and the government had set up rationing of how much you were allowed to get, but that was meaningless when you couldn't buy anything.  Finally the German Mark was worthless and everything ground to a halt in Germany: the banks shut down, the industries imploded and stopped manufacturing, and the agricultural sector only got by if they could barter actual food for work.  Thus you had barter.

Welcome to the land of the US 'fiscal cliff' brought on to you by the debt given to you by the US federal government which went off the gold standard under Richard Nixon!

The US debt by our government is $16 trillion and growing at a phenomenal rate.  The annual deficit, per year, of the federal government is heading north of $1.5 trillion/year.  The Federal Reserve (that set of private banks the US government allows to handle our debt servicing for a fee, lucky them! and the printers of cash) are now inflating the US dollar under the guise of 'Quantative Easing' I, I II and a limitless III, with worthless cash now sitting in reserve to cover the US federal government's spending because, surprise!, no one overseas wants to buy it.  The largest holder of the US federal debt is the Federal Reserve.

What is the 'fiscal cliff'?  The inability of the US federal government to get spending under control and wanting to turn the US economy into the Weimar Republic by being unable to stop the red spread of ink to cover the stuff that can't be covered by taxes.  This was approached just after the prior election cycle and a deal was made to keep the economy going: raise the debt ceiling for more deficit spending in exchange for keeping tax rates where they were under what became the Bush/Obama tax cuts.  Now the debt ceiling is approaching, the deal is about to end and the tax rates are about to skyrocket taking another chunk out of the US economy to go into the federal bottomless pit.  Capital gains taxes will rise from 15% to 20%.  The Alternative Minimum Tax, set up to hit 'the rich' way back when, is not indexed to inflation and will go up to take in about 30 million citizens who are far and away just in the upper middle class to rich category.  Because everyone, to some extent, has money in the equity markets and capital gains are utilized to garner money from the growth of companies, all Americans will suffer.  Once the taxes are in place there will be less incentive to gain money from capital growth and less reason to increase wages and earnings due to the cost of running companies rising due to the Quantative Easing.

The rich get this hit, the poor get this hit, everyone gets this hit.  Income tax goes up in each bracket so the lowest bracket goes up from 10% to 15%, the middle class goes from 33% to 36%,  and the highest bracket  goes up from 35% to about 40%.  Some other cuts expiring are the child tax credit, some higher education expenses tax credits and FICA goes up 2% on every wage earner.  Added tax for Medicare goes up by 3.8% as well as the brandy-new Obamacare. The Estate Tax goes up.  You see?  Fairness!  Everyone suffers.

Net amount gained?  $440 billion

Because of the deal there are also some spending cuts, mostly to the military, which are a figurative 'drop in the bucket'.  The entire US military could drop out of the budget and you would still have over $1 trillion in deficit spending without 'the deal'.  The 99 weeks of unemployment goes back to 26 weeks... and good luck in finding a job, eh?

So while the US economy locks up, there is that other thing coming around again: the debt ceiling.

For the $2 trillion plus $440 billion and change the US government gets in tax revenue, it spends $3.5 trillion per year.   And if you did make the military magically go away as the Left keeps on wanting it to do, you would only have... $3 trillion in spending.  Needless to say there needs to be some military to protect the Nation and we can start shutting down bases wholesale overseas to trim just a bit more out of structural costs.  In other words due to the amount the Obama Administration has asked for in structurally increased spending, the expiring tax cuts would only lower deficit spending from $1.5 trillion to $1.1 trillion per year.

Now what are the major line items that the federal government will have to rack up?  First is servicing that $16 trillion debt:

Debt Service: $250 billion

After that the military.  Now lets take a 20% across the board hit plus a bit more and give every Leftists a wet dream just to paint the rosiest of rosy pictures for them and they can't say I didn't give them what they asked for:

DoD: $400 billion

Say that leaves $1.75 trillion per year!  Say did you know that Social Security (FICA tax) and the Medicare tax don't cover the cost of those programs?  They are both running in the red with SSA cashing out 'special bonds' which will increase the cost of our Debt Service line... but lets say that it doesn't just to keep things simple.  Now you would think that ANY GOVERNMENT should be able to do basic functions on that remaining haul, right?

First up paying up on SSA:

SSA: $880 billion

Ok, you are down to having a total of $870 billion of revenue to spend!  Geeze, can't we get by on that?  Next up are the M&M's, Medicare and Medicaid (sans Obamacare), which aren't bad but aren't all that hot, either:

M&Ms: $800 billion, approx. no one can give exacting figures due to Obamacare cuts and changes

For $70 billion you can now fund the rest of the federal budget.

Now to be fair, Obamacare rightly belongs with the M&Ms, making them the MMO, so lets add in that to get the actual cost change to the system:

MMO: $920 billion (again inexact as NO ONE has an idea of the TRUE COST of Obamacare)

Your $70 billion to spend now goes into a $50 billion deficit, red ink in other words.

The rest of the federal government has not been funded at this point.  Here are some relatively mandatory agencies based on what their functions are (although do regard them with a huge grain of salt as they are summaries and, unfortunately, the actual functions tend to be small parts of a bureaucratic morass):

Homeland Security:  $40 billion

VA:  $61 billion

State Dept: $48 billion

INTEL Community: $0.5 billion

HHS: $78 billion (the overhead cost in personnel and such  to run MMO)

Interior:  $11 billion (but they want to close the parks!!!)

Treasury: $4.7 billion (remember the Federal Reserve is a quasi-governmentally chartered organization, NOT the Treasury)

SSA: $9 billion (the overhead cost of personnel and such to run SSA)

Cost to run these parts that are Constitutionally required (in whole or in part) or to keep discretionary wealth transfer payments going is thus

Cats & Dogs: $255 billion

To fund the C&Ds with Obamacare gets a $305 billion deficit, and without it a $185 billion deficit.

Everything else (EPA, Education, Justice, Labor, HUD, Agriculture, Commerce, Energy, Transportation, Corps. of Engineers, NSF, SBA, all of this stuff) gets zeroed out and eliminated from the US federal government.  The big goose-egg for funding, but the property can be sold off to get a bit of revenue, which doesn't matter a lot, but gets you something.  Also the regulatory behemoth gets it right in the heart and topples over dead as a doornail.

If the agreement made post-2010 is actually kept for taxes and then the debt limit is NOT RAISED, then what to fund in the federal government becomes a very interesting proposition.  Take all the truly mandatory (as in specified in the US Constitution) stuff and you get, in spending:

Debt Service: $250 billion

DoD: $400 billion (unrealistic, but fun to tweak the Left with on their wet dreams)

Cats & Dogs: $255 billion

Absolutely mandatory, by the US Constitution required spending: $0.905 trillion

That isn't bad.

Cost of voluntary spending:

SSA: $880 billion

MMO: $920 billion (again inexact as NO ONE has an idea of the TRUE COST of Obamacare)

Total spending on Entitlements: $1.8 trillion

Total spending: $2.705 trillion (but probably more as these things go)

Total revenue from all sources: $2.44 trillion

Total deficit in 2013:  $300 billion (approx.)

And no other parts of the US federal government left outside the mandatory Cats & Dogs.

This is the sort of math that gets done if you don't raise the debt ceiling: you make hard choices of what to cut, and something else outside of DoD (which I gave the Leftists a wet dream on) and more taxes is the issue as that voluntary or discretionary portion of the budget is set to be the long-term budget buster as no one forecasts those outlays to go DOWN as a structural portion of the budget, but only UP and sharply upwards.  Remember that before Obamacare was factored in you had a $70 billion surplus before you got to other mandatory spending and that other mandatory spending would have given you a deficit of $800 billion without Obamacare.  There is no way to run any of the math on Obamacare and have it come out cost neutral or actually cut the cost of the government because it RAISES the cost of government.  That one CBO report was so rigged, so based on non-adjusted numbers and static (meaning it didn't take into considerations responses to the law) that it was a lie, pure and outright.  It just doesn't work that way.

So if you cap off spending you then have areas you must cut.  You can save a bit trimming at mandatory spending, but that is not the problem in this budget: 'entitlements' are.

Let's say that everything was capped and, say, Obamacare not funded, a bit of trimming at State, HHS (unfunded Obamacare), unnecessary functions at DHS (like the TSA) and Interior (like handing back land to the States to get rid of overhead functions) and you get a deficit neutral budget.  What happens, firstly, is the regulatory overburden from the rest of the government, plus the subsidies to do inefficient things (like corn based ethanol and 'green' energy) go away.  So does DoJ, which includes the FBI, BATFE, and a number of other functions all blow into dust and Eric Holder is out of a job.  Labor goes away as an agency, and so does OSHA and all the federal overhead with it.  The EPA becomes dry gulch of unsustainable regulations no one will enforce at the federal level.  After that the Cost of Living Adjustments for SSA and M&Ms might be frozen for a few years and harsh means testing put in place to get the upper middle class off of the M&Ms.

Basically it is saying to the States: you are on your own.

It also gives a major signal to the credit markets: the US is now serious about paying off its debt and can be considered a secure place to invest as we are no longer in the red at the federal level.

The Federal Reserve to liquidate its worthless cash then starts to jack up interest rates to, say, 25-30% for 4-6 years which has a two-fold effect of making loans for a number of banks nearly impossible to make, but also draws in external capital and cash to start funding companies in the US that are now unshackled from the federal regulatory monster (although the tax problem is a major one, still, that regulatory overburden will allow companies to free up their own capital to invest).  Unemployment goes up for 2-5 years as the job market expands and new entrants try to find positions in it and labor participation rates increase, and this is a GOOD THING, unlike now where labor participation rate is dropping which is a BAD THING.

The worst of all scenarios is just agreeing on anything like the path we are on.

A half-way decent agreement would be one to scrap Obamacare and all the stuff Obama has put in, for an exchange of another debt ceiling limit raise which will also be the LAST time and that will be made clear to everyone.  This gets a couple of years to restructure entitlements, roll back government slowly, and get the Federal Reserve to stop filling up the swimming pool sized punch bowl for us to drown in and pull out the plug on the monetary Debt Star.

The best of all scenarios is for the House to hold out that Obama asked for the cliff in exchange for a one-time ceiling hike, and now that he has gotten all the taxes he wanted, he should be smart enough to figure out how to fund the government with $2.44 trillion.  He asked for it, so give it to him.  If this is what all these bozos got elected on (and that is what the Left is saying for taxes) then the agreement MUST be good.  Hard medicine to go cold turkey on spending, yes.  But it is, after all, what was agreed-upon: the deficit addict goes cold turkey after one last hit on taxes and then balances the budget in one year.  The Left wanted, with a vengeance, the 'Clinton Era Tax Rates' so GIVE IT TO THEM and demand a return to CLINTON ERA SPENDING RATES and the CLINTON SIZE OF GOVERNMENT to boot.  They loved the Clinton era so much, then tell them to bring it ALL BACK on both taxes and spending.   You can formulate your own approach, but the basics are to get spending in line, kill regulations, put the States on their own and let them all know: no bailouts for you.

These idiots Upon The Hill I expect to be the worst of all possible people.



Debt Junkies.

And they HATE that your WORK is worth something to YOU and want to PUNISH you for being PRODUCTIVE.  They want to CONTROL YOUR LIFE from cradle to grave, take all you own and then have you THANK THEM for being so nice to you.

When you hear the words 'Grand Bargain' and it doesn't include any rollback, then you will have your answer if we are going Weimar or not.

No rollback: Weimar.

Rollback and government accountable to citizens: America.

I'm preparing for Weimar.

I am hoping for America, but hope is not a strategy, preparation is and sends a message all its own that is unmistakable.

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