George Sarant

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Posts Tagged ‘dollar

STOP THE SHUTDOWN AND DON’T DEFAULT

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It is time to end the federal government impasse. One of the cardinal rules of strategy is to avoid getting involved in a war you can’t win. That is where the Republicans find themselves now. There are principled people who insist that they hold the line, but they are missing a far brighter, bigger picture. I am not suggesting that Harry Reid and the Senate Democrats, as well as the administration are not more at fault, but rather that occasionally a tactical retreat in battle leads to victory in the greater war. Since the Republicans currently do not have the votes to carry the Senate, their focus should be on winning the necessary votes in 2014. Given that the prevailing narrative is stacked against them, contributing to public disapproval, there is no dishonor in a temporary retreat, when a larger gift is waiting in the wings. 

That gift is Obamacare. The rollout has been disastrous, the Affordable Care Act is more unpopular than ever, and public ire is still growing. If it were not for the partial “government shutdown” and threatened default, the leading story in the news would now be the colossal ineptitude of the Obamacare administration. A ridiculously expensive website that doesn’t work, unexpected rising health care costs for individuals, enrollment failure, administrative incompetence, etc. would be dominating the headlines. The only thing preventing that from happening is the continuing drama of the failure of the congress and administration to reach an agreement. Yes the President himself is culpable for refusing to negotiate or discuss anything, where a more skilled politician might at least pretend to consider compromise. Yes the Senate Democrats have moved the goal posts by throwing the sequester into the mix. But being in the right means nothing if the perception of it is not there. Life isn’t fair.

Unfortunately some people are too stupid to recognize when they have a winning hand. The implementation of Obamacare is the gift that will keep on giving through 2014, and perhaps beyond. As one problem after another manifests itself, it may collapse to the point where most people realize it is unworkable. The blame for this will rest squarely on the Democrats, since they forced it through when they had a majority in both houses without any input or a single vote from the other side. That would portend huge losses in the elections next year, because they effectively own Obamacare. Consequently it makes no sense to maintain a scenario where public anger is directed towards congress and the Republicans as long as this stalemate lasts. It is time to put an end to this and get out of the line of fire, and thereby reap the rewards. 

More serious is the prospect of default, which is undermining the dollar and causing deep anxiety in the rest of the world. If the US cannot maintain full faith and credit, if it is no longer perceived as being a rock solid oasis of stability, the damage will be immense, and the international reserve currency role of the dollar will be diminished. Serious damage has already occurred, and it will take some effort to repair and re-establish confidence. On this question the President has to give something, if only to avoid going down in history as the official who presided over a disastrous default that could have been avoided. Any reasonable person can see that averting this ought to have top priority over any other considerations. 

Those trying to make the government more accountable are completely right, but brinksmanship tactics are wrong and will only backfire. Far better to let the administration sink under the weight of its own pretensions and take a sober, longer-term view that is far more likely to produce the desired objectives. 

Written by georgesarant

October 16, 2013 at 11:35 AM

NOT-SO-HIDDEN INFLATION

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The Federal Reserve has now compounded the inflationary scenario discussed previously by printing yet more money, in order to buy $40 billion of mortgage securities per month. This was a political decision, not an economically sound one. As a result our credit rating is starting to be downgraded and the price of commodities- everything from gasoline to food, is increasing. But while prices are already rising the increase is nothing compared to what is to come. 

At the same time interest rates are being driven down to nothing by the government printing press, so savers are actually losing money. The illusion of economic improvement in recent stock market gains is misleading in that it just means more money is going into stocks because interest rates have such a low yield, even though there is significantly greater risk. At this point the “medicine” of the “Quantitative Easing” is becoming poison that will produce galloping inflation down the road unless there is a sharp turn in policy, and even then the challenges are daunting. 

The federal government is currently taking in about $2 trillion in taxes, while spending over $3 trillion a year. This deficit gets added to an ever-increasing debt load that presumably is going to be paid by future generations. Numbers like a trillion are beyond comprehension, but anyone can understand the simple math of the consequences of spending three of something when you only have two. The rising  debt is held by the public and foreign countries like China, which goes along because it finances the export of goods to this and other countries, enabling its economy to continue growing.  

But given that the government is now effectively cheating by debasing the value of the currency, sooner or later lenders will stop lending. However, long before that, interest rates will rise to levels not seen since the 1970s, as lenders must protect themselves against the shrinking value of the currency. Worse, these rates are not being factored in to government projections so that future debt will be larger than anticipated. When there is a 300% increase in the money supply there are bound to be consequences. As rates rise the cost of borrowing will also increase, with disastrous results. First, the interest cost to the government to cover all this debt will become unbearable, given that much of it is short-term borrowing that constantly has to be refinanced at the rate prevailing at the time.  Second, the real estate market will crash even further as the cost of mortgage interest becomes impossibly high. Third, foreign investors will pull their money out as the value of the dollar plummets in relation to other currencies. 

The only way the government will be able to sustain itself is by printing more money, so that the money it pays back is worth less than the funds it borrowed. But if the dollar is worth less, it can only mean that things will cost more and more and incomes will not keep pace with the surging rate of inflation. I’m not even talking about a hyper-inflationary doomsday scenario or total collapse, for even an increase of interest rates to a moderate level of say, 7% will leave the government in dire straits, in terms of maintaining payments of the debt load it is carrying forward.  Furthermore, none of this includes additional state and local debt. On a personal level, the only way you can stay ahead of this turmoil with your own funds is by putting them in appreciable assets that provide an inflation hedge.

These things will become obvious by next year, and will accelerate in the years ahead, unless there is a drastic change of direction in Washington. It will require an iron political will to correct, as the necessary steps are bound to be painful and highly unpopular, across the board. It will require deep cuts in spending, reform of entitlement programs, and revision of the tax code. There may be a steep political price paid for acting responsibly, at least in the short term. But that is the only way to save this country, and for that matter the world, at this point. Hopefully we will have the leadership and political courage to ameliorate this situation while it is still possible.  Think about this when you vote in November. 

Written by georgesarant

September 16, 2012 at 9:40 PM

FUNNY MONEY

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Every day the dollar continues to decline against other currencies. There are some who think this is good because it increases exports, but there are downsides as well. The government is pursuing a weak dollar strategy to the long-term detriment of the country as well as the rest of the world. The decline is caused by increasing debt and a balance of payments deficit. This is before the government goes further in the red with health care and other spending schemes that will only exacerbate the situation.

A weak dollar is not in anyone’s interest. First it means a decline in living standards relative to the rest of the world, second imports and travel become more costly, third it generates currency instability throughout the world, and fourth it makes each one of us lose wealth because our assets and income are worth less. This is what usually happens with high inflation, which we don’t have yet, but is almost inevitable down the road if deficits continue to pile up.

This is the classic state solution to debt- inflate the currency so that dollar debt holdings are worth less and easier to pay off. This does not just screw the Chinese who are holding massive amounts of dollar debt, but any citizen who has savings or lives on a fixed income. This is beneath the dignity of the United States, but under the present course it will happen. This will end the dollar’s reign as the world’s reserve currency because its stability cannot be counted on. We will lose many of the advantages that come with reserve status, and it will represent an overall decline in American strength and influence.

A strong, stable dollar is in everyone’s interests. We need a reliable and predictable standard of value that we can trust in. Unfortunately the government has an ongoing interest in inflating currency because it is easier than the pain involved in cutting spending and reducing debt. But once the world loses faith in the dollar the government will be reduced to the constraints usually born by third world countries. So it is that the President of the United States this week was the recipient of humiliating lectures on fiscal responsibility from Asian countries.

Written by georgesarant

November 18, 2009 at 12:09 AM

Posted in economy, government, international

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