Paying Down the Debt

One thing we can say about Mr. Obama and his Congress, and Mr. Trump and his Congress — at least so far — is that they both know how to increase spending and raise the debt by trillions. It is insane and troubling to see that Mr. Obama doubled the debt from 10 to just shy of 20 trillion dollar in just eight years, and equally troubling that Mr. Trump has already reached $21.5 trillion.

There are some differences, of course.  Obama and Jr. Bush agreed on flooding the market with $2 trillion fake dollars and increasing taxes, while Trump lowered taxes and still maintained the climb.  No, neither of those are justifications.  It just goes to show there is one than one way to skin a nation.

How bad it, really?  How can we understand the amount, and what it means?  Over that entire time, our Gross Domestic Product largely equaled our debt.  That means we would need one complete “free” year of  production to pay our creditors.  Or, if you prefer, every man, woman, and child in the US owes a little more than $67,000 in arrears.  Currently, our taxes include about 8% interest payment (over $5,000 per person) every year on the existing debt.

Can we fix it?  Of course, and with no song or dance, Mr. Trump and his Federal Reserve officers have already begun.  It is hard to believe how ignored our current deflation is.  We never, ever see it in the news.  In fact, the Fed reduced the amount of currency substantially.  That is a big deal, especially when you consider that a whole lot of dollars were repatriated by big businesses that simply tied up cash overseas.  Taking them away improves the value of our money.  Our money.  Yours and mine.

That makes every dollar paid worth more, and every dollar spent worth more.  Unfortunately, it also raised our old debts because the number of dollars in debt don’t go down just because the dollar is stronger.

What remains is to stop spending so much on the stuff we throw away, the stuff we get from overseas, stuff we do not need, and the stuff we get nothing for in exchange.  If we do, we can pay down the debt, stop losing in trade imbalances, and buy more with each dollar.

I’m optimistic that we can recover.  It can happen.

 

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Inflation Final

This series has produced less interest than usual, so this post will end it.  The topic goes on and on, but let’s get to the end of the matter.

When money is printed and added to the currency in circulation, it quickly reaches a “real” value.  Even though we have no standard for our currency, the relative ease of obtaining it determines what it is worth.  The result of printing $7 trillion since 2008 is that the entire pool of US currency is worth $7 trillion less.

When banks and investors “lose” money, others “find” it.  None of it vanishes.  Rather, it goes to somewhere out of banking control.  Banks are not built of brick and mortar, they are built on currency.  When the currency supporting a bank falls down, bankers lose their business in the same way a homeowner loses his home when wind or waves wash it away.

Here’s how: when a home sells, money passes from a bank to a bank, usually with interest and over time.  When Mr. Builder gets the money from the bank, he pays his employees, pays for his materials, deliveries, specialists, subcontractors, etc. Most of that money goes from one account to another,  and from there to still others.  The banks never really let go of it.  It comes and goes, with small percentages nipped away with each transaction.

When the customer loses his home, he loses an asset, but the money for that asset is still completely in circulation.  When things work “the way they should,” the money continues flowing through the bank, the customer cries, the bank sells the home to someone else and life goes merrily along for all but the poor folks in default.

When the bubble breaks — whether dotcoms or mortgages — the money is effectively “withdrawn” from the bank in proportion to the loss of the asset and the wild speculative lending of the bank, but the money does not disappear.  It simply goes off on a different quest.  In fact, it has generally been used three or four times before anyone hears the “pop.”

This is the final question for the few who read this far: if assets don’t increase or decrease the money supply, why did the Federal Reserve print $7 trillion new dollars to “bail out” banks for about a trillion in consumers’ lost assets?

And how did they do it without any interest?

Think for yourselves.  It may be worth answering these questions directly if the interest ever increases.

If you are new to this series, it began with Inflation, then Inflation Bubble.  Both are accessible from the lefthand menu.

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Inflation Bubble

Richard Prager pointed out that gold’s rise (http://davedelany.com/inflation) from $34 to $1,200 represents 6.7% annual inflation averaged over 55 years.  In terms of currency, however, that rate has almost doubled since the crash of 2008, with no sign of slowing down.

The so-called “bail out” is our first example.  The money lost when the banks crashed over insane housing practices was not “lost” at all.  It exchanged hands, all right, so where did the money come from, and where did it go?  The answer is, it came from the economy, and it went back into the economy.  Because the banks lost so much, though, it was “replaced” with newly printed linen currency.  The “beneficiaries” of the printed currency are the printers — the Federal Reserve.  Here’s how, in a very real fairy tale:

Mr. Builder built 100 houses in Builderville, selling them for $10,000 each.  The bank financed 100 families to buy those houses, with 20% cash down payment and 10% interest on thirty year mortgages.  A happy little community was born. As the wealth of the nation increased (GDP) by 2% per year, the houses also increased by 2% per year.  In year 3, all 100 $10,000 homes were worth their original amount, plus GDP increase: $10,612.08.

Builderville becomes all the rage.  Nice town.  Nice people.  Two of the families have to sell their homes, though.  Mr. and Mrs. Smith are leaving the community for a better job, and Mr. and Mrs. Brown leave the earth, dead.  The Smiths sell their house to a family from the big city.  They did well and have too much money for their own good, and pay $20,000!  The Brown’s children sell their parents’ home for $15,000 to a buyer who found a loose, wonderful, nothing down, low interest mortgage.  They saw on Zillow that the same house down the street just sold for $20,000!  He and the lender were aware of the “bargain.”

As the Builderville market climbs to $25k and even $30k, people begin taking second mortgages on their now expensive homes.  The Johnsons use $10k in home equity to replace the kitchen, add a deck, and take a nice cruise.  The Jacksons use their equity to add a third bedroom and second bath.  They also buy a new car on credit and a small business of their own.  The banks are happy to do it.  New debt, but “completely covered” by the resale value of their homes!

When the next houses also come up for sale, the prices keep rising.  And then, one day, house 41 goes up for sale for just $22k, and nobody wants it.  It’s a bit more rundown than the average.  It stays on the market and two bids come in for $11k and $12k, but nothing close to the new standard.  The owners need to move, so they finally accept am offer of $12,500.  Though disappointed, that’s not too bad for them.  They were original owners, so they actually made $2,500 from the sale.

The neighbors experience the same thing, however.  When the Johnsons and Jacksons both need to move, they still have the original mortgage, paid down to $6k, and the home equity mortgage, barely paid down to $9,800, but nobody will buy their houses for more than $13,000.  They owe $15,800, and have no way to come up with the extra money.  They must turn the keys over to the bank and declare bankruptcy.

The bank finally sells the Jackson home for $11,000, but after nearly a year on the market, the Johnson home windows are broken, and storm and rain damage take a severe toll.  When a DIY guy offers $5,000, the bank jumps.   Overall, Builderville homes are worth about $12k.  The new buyers who paid $25k, and the original owners who took home equity loans, are in a world of hurt.  Many of them walk away, and Builderville begins to crumble.  Nice neighbors move away.  The homes deteriorate rapidly.

The houses, let’s say, continue to be worth $12k — 20% more than their original price — but a small fortune was lost by the many of the owners and the bank.  Some of the houses must be demolished.

Where did the money come from, and where did it go?  It came from foolish, gullible, and/or naive home buyers but mostly it came from bank customers.  Through outrageous practices, it went to tradesmen, home improvement, lawn maintenance, airlines, beach and mountain resorts, car dealers.  It also went to foolish bankers who literally bankrupted their customers.

So, what happened?  What happened to “save” us from our banks?  There is a very, very interesting answer that might just make you sick.

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Inflation

Most of us think “inflation” means “higher costs.”  We consider the rising price of milk and eggs, a new car, or a house, as inflation.  That common usage can accurately represent what we mean, the truth of inflation is built on something else.  We also pretend that inflation means interests rates.  Under President Carter, we often heard that “double digit inflation” produced loans at 20% interest or more.  Again, it can be used that way, but the truth of inflation is the increase in the “money supply.”  M1 is printed money.  M2 is printed and otherwise circulated money.  M3 includes long term investments that are out of circulation (long term bonds, for instance.)

How much money is there?  Right now, the total M3 money supply is just over $14 trillion, and very similar to M2.  (Virtually no money out of circulation, largely due to few bonds.) When the bubble burst at the end of George W’s administration, M3 was $7.4 trillion.  In the middle of 1998, it was $4.2 trillion.  In the middle of 1988, $2.9 trillion.  That trend continues back to 1963, when the US money supply was $365 billion.

Before that, our money was quite entirely stable, based on gold.  We can look at gold as another measure of inflation.  Assuming a somewhat “fixed” supply, gold had a value directly related to our currency, usually around $30 – $34 per ounce.  In 1963 we went off the gold standard.  Now it changes wildly, but at the moment of writing this, it costs $1,200 per ounce.

What does this mean?  If the value of money is arbitrary, what is it worth?  In the direct aftermath of the 2008 “bursting bubble” Bush and Obama agreed we had to “bail out” banks and other affected businesses.  Lost money, however, never disappeared.  Banks lost it, but it remained in different hands.

England uses a 4th term for money, called M4.  It represents other elements of monetizing transactions, secondary private sales with precious metals and gems, and unusual transaction speed and turnover, meaning the number of times money changes hands in a period of time. (We call that money velocity.)

It took all of this to understand that we had a total of $365,000,000,000 in 1963, and just over $14,000,000,000,000, or more than 38 times as much money today.

Stay tuned on what we can understand from all that, other than One 1963 dollar being worth 2.6 cents today.

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