Tuesday, September 13, 2011

What's It Going To Take?

I was chatting with a colleague yesterday who was talking about the tax rates and various aspects of taxation as means of raising revenues or stimulating the economy.  I threw napalm on that discussion by pointing out that splitting hairs over the marginal rate isn't going to do anything.  If we completely eliminated the Department of Defense - which happens to be the largest employer in the world - we would still be running a spending deficit funding everything else.

Later yesterday I was having a heated debate about fiscal policy with someone who is one of the brightest, most well-read people I have ever known, including some highly decorated professors at the University of Chicago.  This person also happens to be a Keynesian/quasi-socialist who believes that the Government can fix things.  It seems impossible to be well-read in general, and about history in particular, and still be a Keynesian, doesn't it?

At any rate, the second person remarked that the Government needs to raise taxes to pay for its spending and that we need to sharply reduce defense spending.   I agree 150% with the latter.  However, I pointed out the bulk of economic growth since we went off the gold standard in 1971 has come from the Fed increasing the money supply and from massive debt accumulation, both private and public.  I also pointed out that studying the effect of changes in tax policy are very difficult because changes in the marginal tax rates are always piggybacked with more loopholes for those who can afford to have the loopholes legislated.  Moreover, just increasing the rate of taxation will primarily affect the shrinking middle class and further depress consumer spending. 

A good example of the uselessness of looking at tax policy would be a quick review of the huge reduction in taxation implemented by Reagan.  The economy did indeed take off in the 1980's after this tax cut.  However, the Reagan tax cuts were accompanied by a massive increase in the money supply and an even more massive increase in private and Government debt accumulation.   So you tell me - did the tax cuts stimulate the economy or did reckless monetary and debt-issuance standards create a "boom?"  Recall that the first two of many financial bubbles were spawned in the 1980's:  junk bonds and real estate/mortgage finance.

As this chart below shows, compiled from data available on the St. Louis Federal Reserve Bank website - which is a fabulous source of data - THE primary drivers of GDP growth have been the unbelievable growth in the amount of both public and private debt outstanding:

This chart shows GDP growth, Government tax revenues and expenditures, money supply and total Government/private sector debt outstanding, where private sector is corporations and individuals.  The red line is the M2 measure of money supply and the bottom two lines are Government receipts/expenditures.

I would actually argue that because debt is created using Fed monetary reserves as its "fractional" basis, that the amount of debt outstanding is actually a "de facto" component of the money supply.  The pieces of paper called "debt" actually circulate in the economy and create the same expenditure effect as do the pieces of paper called U.S. currency.   The only difference between debt and equity (equity is cash in this example) is that debt contains the legal promise to "retract," or repay, the amount borrowed, whereas equity (cash) would have no such legal obligation.  HOWEVER, as we have seen, this legal obligation often gets either restructured and reduced or transferred from the private sector to the Government (i.e. socialized).  Therefore, since this debt never seems to get paid back, except in small amounts by individuals, it functions as a money supply surrogate. 

I'm sure pure Keynesians like Krugman would try to slash my view with fancy arguments.  But put to the test of reality, something of which people like Krugman have NO experience or knowledge of, my view is correct.

As you can see from the chart above, tax receipts (based on the rate of taxation) have almost no correlation with changes in the GDP after 1971 - and really after the U.S. starting bastardizing the Bretton Woods agreement in the 1950's by issuing more debt to foreign creditors than it had gold to back to that debt.

One more chart of note is the one below that shows just the rate in Federal spending and rate of growth in Federal revenues (tax receipts) since 1971:

(click on chart to enlarge)

As you can see the rate of Government spending in excess of revenues has been increasing at a parabolic rate.  I don't want to discuss whether or not the rate of taxation is good or bad for the economy.  But the first graph shows that it is likely irrelevant in a system that is substantially dependent on debt accumulation for its source of "growth."  The second chart shows that in the context of Government spending deficits, the spending side of the equation is the true source of the massive problem with our fiscal policies.

And just for the record, Paul Samuelson, the true icon of Keynesian pornography and the author of the world's best-selling Keynesian academic textbook on macroeconomics, commented in the 1960's that Social Security is a big Ponzi scheme but that it could last forever because he assumed infinite economic growth:  LINK  - (for the record, my macro economic course in college did not use Samuelson's book nor did the professor pay any heed to the Keynesian Fallacy). 

So the REAL problem is the overall level of debt that has accumulated at all levels our system. As the first chart shows, it now requires $5 of borrowing by both the Government and private sector combined to generate a $1 of economic growth.  And in reality that Government-reported $1 of growth is overstated by corrupted data manipulation (that this is true is largely accepted by almost everyone except those who work for the Government or CNBC or Wall Street).

The golden truth is that not only has the accumulated amount of debt become impossible to repay by relying on some kind of real economic growth miracle, but the consequences of rectifying this situation are truly horrific if you think about what it will take and what the implications are for the borrow-and-spend-what-you-can-never-pay-back American way of life...

Got gold?


  1. Your argument that debt functions as money was echoed by no other than Bernanke himself, when he said that QE was not money printing. It only exchanges debt, which is already in the system, for cash.

  2. Why raise taxes? I disagree. I say raise interest rates. Short term pain albeit, but this will fix many problems.

    And castrate the Ben Bernank too.

  3. The dollar, or "cash" as it is called, is the original financial derivative. It is a derivative of gold, the universal monetary ASSET in the form of paper DEBT. Credit is DEBT, an asset when repaid, a liability in default.

    As for Ron Paul (in response to a comment in the previous post) does anyone really believe that he can single handedly defeat the paper CON system which steals from savers / producers by virtue of what their labor is remitted in, and transfers the true value of that labor to the banking class to satiate it's greed, in collusion with the classe politique to satiate it's system of empty promises for votes?

    There is only one thing big enough and powerful enough to do that, and when Fort Knox is audited what will be measured, will be found "wanting".

  4. The thing what many don’t get … if you want to buy a holiday or anything over the net/ credit card / any distance buying it won’t be ever possible to do any purchase using any metals, PM or even copper/steel etc. People can never use PM for any financial transaction nowadays. You can save any metal and keep as savings, but more than 90 percent of all financial operations will always be done via pure concept/digits/ etc. Although what I said is an axiom, but I am sure many will still argue. Well, you can’t be serious thinking people will pay silver Eagles even in restaurants or the latter will be almost completely empty and will have to close.

  5. (Dave)

    The best thing to do is to keep as much cash as you can in metal. You can always easily sell the metal to get cash if you need cash

    When the fiat system collapses, your brokerage account will worthless except to the exten that you can get delivery of your physical stock certs. Naked shorting will blow a lot of that up!

    I disagree on your last thing. I bet over the next couple of years we will start to see a lot of local merchants accept metal in exchange for goods/services. There's a food store in SoCal already that does this.

  6. But most (more than 90 percent) will be done via cards/cheques/paper/digits. Do you think you will purchase an air flight ticket for PMs or order books, furniture, etc using silver/gold/platinum? You can't even pay 50 grams of any PM to people as a month's earnings as with 3,5 billion of people you would need more PMs than you can have of all of them - about 12 times 5 billion Oz = 60 billion Oz for 1 year wages. You don't have all Pms together in such an amount. So, good luck with that line. Unrealistic. Or do you propose to pay 1 gram of silver a month as a wage? You might still have a problem by the way. It is good to be realistic and then critisize current system!

  7. For Sept 12 2011 Total Public Debt
    Subject to Limit 14,642,991
    Statutory Debt Limit 14,694,000
    Act of August 2, 2011, permanently increased the statutory debt limit
    to $14,694 billion.
    This bud is for you Dave.Its saying loud and clear that the U$ as of Sept 12 2011 is $52b dollars away from there newly set Aug 2 2011 Debt limit of $14692T. All this in a little over as month.There still $pending like drunken Sailors.LOL! Will they ever learn? Anyway its a site to watch,because main stream generic media is not going to tell us.

  8. The only way to get out of this mess is to close all Central banks which include the Fed, Bank of England and the B.I.S.

    Countries should issue their own debt free money based on some sort of bi-metal standard.

    All of the interest paid to the "private" Central Banking gangsters should be claimed back since 1913.

    The only problem with the above is that Lincoln and Kennedy were shot trying this.

  9. One by one... others will follow....

    A value investor bets on gold

    A. We now have over 7% of the fund's assets in gold, and it's all in the form of bullion. We feel that owning gold bullion is ultimately safer and cheaper than gold mining stocks. Owning gold is a way to express our mistrust of policymakers, be they in the U.S., Europe, Japan, or even China. Over the past few months, when you see the idiotic political debates in America regarding the debt ceiling, when you see the cacophony in Europe -- it makes you want to own gold.

    But my final thought on gold is that we are value investors, after all, so why would we want to own something that has gone up sevenfold since July 2001? And I think the paradox with gold is that even though the price has gone up so much, it is still under-owned.


  10. Dylan Grice Deconstructs The "Perpetual Ponzi Machine" Of Global Finance, Sees Gold At $10,000 In A World Of Dishonesty

    Believe it or not, for all this talk of honesty and dishonesty I’m not
    actually passing any judgment on the ethics of this state of affairs.
    The simple fact is that as a species we’re liars.


  11. Can't see people actually using physical PMs as currency, not is todays world; too many interactions, JIT manufacturing, the need for distant transactions. Digital is the way to go ... however there's no reason the currency can't be backed by PMs.

    Look at GoldMoney.com as a possible example.
    I suggest that as a model we emulate on a vast scale.

    If it ever does come to physical being used ... then likely we'd be in a world of trouble. For it means things will have melted down, probably billions perished from starvation, war,chaos and world commerce brought to a trickle. At that point business would be mostly local in nature I imagine, oil of course being scarce at that point.

    We'd be in MadMax and BarterTown mode.
    Passing coins back and forth would be suitable in that scenario.