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Posted Friday, July 29, 2011, at 9:10 AM

All of this crisis mongering in Washington is mere hyperbole and posturing.

The United States is already in default on its debt and has been in the process of restructuring for the past three years.

What?!?! How can you possibly say that? I've seen the pictures on the debt clock racing forward while reporters are waiting breathlessly for it to come to a stop.

First of all, a solid majority of TV reporters have their jobs because they look good and speak well. It's not that they are particularly deep thinkers. Likewise, it is quite fashionable when a TV reporter is at the network level to shape the story to push one political agenda or the other.

President Bush started the process and President Obama has carried it on with aplomb.

Look at the financial markets at the end of 2007.

Gasoline prices at the end of 2007 were in the upper one-dollar range to two dollars. Now, gasoline is in the upper three-dollar range to four dollars.

The Gold price at the end of 2007 was hovering around $800 an ounce. Now, the price has cross $1,600.

The prices of wood pulp, cotton, grain, copper, steel and all other international commodities have doubled. At the same time, the United States has more than doubled (approximately 115 percent) the number of dollars in circulation.

Gold is not in a bull market; oil is not in a bull market, etc.

Rather, the dollar has been in dramatic bear market. All of these commodities have doubled in price because the value of the dollar has dropped in half.

It has hit the internationally traded commodity markets first, slowly getting into the general American economy, because of how the Federal Reserve and the U.S. Treasury spent the money.

First, they handed the money to giant banking and insurance conglomerates. For practical purposes, they basically had to put the money into financial instruments, including commodity contracts.

The U.S. Stock Market has barely been able to hang onto the 12,000 levels. The U.S. was heading into a deflationary recession and the stock market would have collapsed to the 6,000 levels but for the money poured into the banks and insurance companies and the nature of their business being to invest. It is similar with the second round of handouts to mega corporations.

People who invested in stocks over the last three years have lost 50 percent of their investment without even knowing it.

The people invested in gold and oil who think that they have doubled their money have merely just not lost more than a tiny bit compared to other investors.

As the inflation, as the surplus bundles of cash, make their way out of financial instruments, corporate coffers, and commodities, the inflation will begin to be more acutely felt in all of the goods and services that we buy every day. Wages will not necessarily rise, but the prices of everything will double from where they were in 2007.

The people holding U.S. debt, that means U.S. bonds, already know that and are taking their loss. The governments of China, Russia, England, Japan, Canada, etc., don't buy baby clothes and milk, they buy oil and gold. Oil and gold are traded in dollars. When the dollar denominated bonds are redeemed or traded, they get 50 percent less gold and oil than they would have when they bought the bonds.

Thus, we have defaulted on 50 percent of our national obligations. That includes all of the bonds that grandma has been holding for the past 30 years. As the inflation works into the general economy, everyone who relies on Social Security, pensions, disability payments, welfare, etc., will only get very small raises while everything they buy doubles in price.

Thus, the government will effectively give everyone on the government teat a 50-percent cut.

There will be no default on Aug. 2, no matter what Congress and the President do. We will either have a suddenly balanced budget or we will have legal permission to dig ourselves deeper into debt funded by people who want to lose upwards of 50 percent of their investment. Either way, there will be no default.

Rather, a 50 percent default has already silently taken place. It's already happened. With any luck, a majority of the people in Washington will grow a backbone and stop the destruction now by refusing to increase the spending.

But alas, it takes far less courage to spend more and more and quietly take it away from you through inflation by printing more money.


Comments
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[Show most recent comments first]

I think you made a very insightful analysis.

I think these examples will help drive your inflation points home.

1.) Prior to 1913, a man could walk into a tailor and buy a nice suit with either a 1oz gold coin or a $20 note. Today, you can still buy a man's suit with that gold coin but, the $20 note won't do the trick.

2.) Back in the 70s you could buy a family home for 1000 ounces of gold ($35/oz). Today, you can still buy a very nice home with 1000 oz of gold, but the $35,000???

-- Posted by hgallatin on Fri, Jul 29, 2011, at 7:46 PM

Dear hgallatin,

Thank you for your great point.

In 1972 when President Nixon cut the final ties between the dollar and gold, my father bought a 2,200 square foot two story house with full basement on 1/2 acre for about $29,000.00. The gold price was $35.00 per ounce. That home cost less than 1000 oz of gold.

Today 1000 oz of gold equals 160,000.00. The market value of the home my father bought in 1972 is worth about $145,000.00 today.

Charles

-- Posted by Charles Hear on Sat, Jul 30, 2011, at 6:49 PM

I actually beg to differ. We don't have a spending problem, we have an income problem. Get people back to work or bring our manufacturing jobs back to the United States and the debt will take care of itself in time

If people were working or being paid a living wage, we would not need as many government programs.

I think an employer who has a full time employee who still qualifies for foods stamps should be ashamed.

I understand that a business needs to make a profit, but the owners do not need to make 10X or a 100X times what their employees make

It all boils down to Greed

-- Posted by alwaysopenminded on Mon, Aug 1, 2011, at 8:39 AM

Dear Alwaysopenminded,

If I recall, you are a business owner. I understand your point.

However, in a free market economy, the person who insists in the profit margins you mention while paying slave wages will likely never truly rosper. Such a business will never likely retain a skilled quality workforce.

We do have a jobs problem. The question is, why?

In my opinion, under the best of circumstances, it is difficult for a small business to become successful. As you probably know, about 80 of employees work for small businesses. Rather than making it easier for businesses to start and succeed, the government makes it substantially harder. As a result, business owners have a "hunker down" mentality rather than an expansion and growth mentality

Nevertheless, spending 1.2 trillion dollars on banks, insurance companies, and mega corporations s not the way to stimulate growth. Not that I recommend it, but if the government instead sent every tax payer 20,000.00 and gave nothing to the banks, etc., what would have been the net effect.

The federal government is SUPPOSED to be a limited government of limited powers. Most of the federal spending is not consistent with the Constitution. If we were to get back to what was intended, we would most likely have neither a spending or debt problem.

-- Posted by Charles Hear on Mon, Aug 1, 2011, at 9:27 PM

Charles,

I have been reading your blogs for a few months now. I just wonder where you get your ideas from? I think you are always way off and seem to have no clue of real life, or do you post these to try and get people upset?

-- Posted by Colts stink on Fri, Aug 5, 2011, at 8:15 AM

Dear Colts stink,

Thank you very much for your comment. I am sure that there are plenty of other people who wonder the same thing. As my personal background and my sources don't make good reading, I generally don't write about it. However, since you seem to have asked your question in earnest, I will give it a serious (potentially boring) answer.

While I genuinely enjoy having a vigorous debate or a lively discussion, I try to resist being provocative for its own sake. Rather, I prefer to write about provocative issues at the national or international level that are not normally covered by the Brazil Times. I consider my column to be an editorial type piece where I give my comments and opinions on events and issues.

At the risk of being long winded, I was not born to privilege. My father was an engineer who worked for RCA. My mother was an artist who became an art teacher who taught in the public school system for approximately 35 years.

My grandfather dropped out of highschool in 10th grade to work so he could pay the rent his father charged him to live at home. He learned to blow glass and put himself through engineering school at night.

My grandfather was an adult during the Great Depression. During World War Two, he invented the first material to turn light into electricity as part of a top secret weapons development project which helped the England win The Battle of Britain. Because of that invention, my grandfathers wage was raised from $14.00 per week to $34.00 per week and he was awarded a medal for his contributions to the war effort in engineering. He taught me how to follow the stock and commodity markets when I was twelve.

Virtually every day I read the economic news from several Websites that publish the free on line editions of various news letters and editorials. My favorites are:

The Mogambo Guru (Richard Daughty - recently retired from writing)

Franklin Sanders

Adrian Ash

Doug Casey

Chris Webber

Eric J. Fry

The Hard Asset Investor

Money Morning

The Gold Report

The Daily Reckoning

Bill Bonner

Dan Denning

Julian Phillips

Richard Zimmerman

Reuters London

Reuters Paris

(and many more)

For general news I typically read articles from free on line editions of, or links to:

The Brazil Times

The Washington Times

The Financial Times

The Associated Press

The NY Times

Real Clear Politics

Breitbart

CNN.com

Foxnews.com

Worldnet Daily

The Economst

Newsmax

(and occasionally others)

My general world view is as a conservative with libertarian tendencies and a broad sense of humor. While Kansan economic theory (what our President follows) is based on a few kernels of truth, I believe the best way to understand human interaction is from the Austrian school of economics; Hayek, Mises, and Hazlitt.

-- Posted by Charles Hear on Fri, Aug 5, 2011, at 5:54 PM

Charles,

It's refreshing to know there is another student of Austrian economics in Clay County. I always suspected you were. (Your reading list confirms it) If we could find a third we should form a club. I would add to your list Thomas Sowell and Walter E. Williams to the blogs you follow. You can find them on townhall.com. They are very insightful to today's issues.

Anyway, keep fighting the good fight and I'll chime in occasionaly if I can add any substance.

-- Posted by hgallatin on Fri, Aug 5, 2011, at 7:59 PM


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