Friday night brought us disappointing news, much like indulging in another slice of cheesecake. We had anticipated a government shutdown, relishing the thought of numerous bureaucrats at a loss come Monday. Instead, President Obama declared what he referred to as “the largest annual spending cut in history.”
Yet, we find this claim questionable. A quick calculation reveals that the $38 billion cut represents only about 1 percent of the projected $3.8 trillion total spending for the 2011 fiscal year. In simpler terms, it feels more like a facade.
Former U.S. Comptroller General David Walker recently remarked that debates centered around such negligible cuts are “like arguing about the bar tab on the Titanic.” There’s no denying that America’s ship is colliding with an iceberg and steadily taking on water. The hull might very well buckle before May 16th.
According to Treasury Secretary Timothy Geithner, that’s the date when the federal government will exhaust its funds unless Congress raises the debt ceiling. In a January 6, 2011 letter to Congress, Geithner noted…
Historically Verifiable Policies
“I am writing in response to your request for an estimate by the Treasury Department of when the statutory debt limit will be reached, and for a description of the consequences of a default by the United States.
“The Treasury Department now estimates that the debt limit will be reached as early as March 31, 2011, and most likely between that date and May 16, 2011.
“Never in our history has Congress failed to raise the debt limit when necessary. Failure to do so would result in a default by the United States. Such a default would impose a significant and lasting tax burden on all Americans and lead to the loss of millions of jobs. Even a brief or limited default could have devastating economic repercussions lasting decades…”
The implications of a U.S. debt default are indeed dire. However, what Geithner won’t acknowledge is that the U.S. isn’t on the verge of a traditional default—simply not paying its debts. Instead, by raising the debt ceiling, we are setting the stage for a different kind of default.
Bill Gross argues that the default won’t manifest “in conventional ways, but by essentially robbing savers through less visible yet historically reliable policies—such as inflation, currency devaluation, and low or negative real interest rates.”
The Powers of Nature
Anyone who has taken a moment to reflect on the monetary practices currently at play understands that these historically verifiable policies have been flourishing like blossoms in spring for quite a while. It’s no surprise then that lenders are seeking higher returns from the Treasury.
Since March 16th, yields on 10-Year Treasury Notes have surged by 11 percent. Last week, oil reached over $113 a barrel, while gold hit $1,475 an ounce. To add to that, gas prices in International City surged to $4.10 per gallon for the lowest grade. What’s going on?
When Ralph Waldo Emerson stated, “Everything in Nature contains all the powers of Nature,” we doubt he envisioned surging gas prices or the potential for them to escalate further. Rather, he likely implied that in nature, order must be maintained. Gas prices have to rise until demand is curtailed.
The Federal Reserve appears to believe that climbing gas prices signify an improving economy, fueled by increased activity. While that may hold some truth, we suspect the ongoing unrest in the Middle East plays a significant role. More fundamentally, rising gas prices reflect the hundreds of billions in digital monetary credits being created against a relatively limited supply of resources.
We hope the Fed manages to trim a few percentage points off the unemployment rate soon. If not, Bernanke’s liquidity trap charts may lead to disastrous actions—like QE3. This could unleash nature’s powers in a truly chaotic form.
Sincerely,
MN Gordon
for Economic Prism