California has shown anyone who didn’t already know that Americans (as with citizens of most other countries) are anxious for ever-increasing government benefits, but are unwilling to pay for them directly through taxation.
California is technically (probably not so technically) bankrupt because years ago proposition 13 left it easy to spend money but required a three-quarters vote to raise the money to pay for exotic things, such as teachers, police, water, sewer, fire protection, hospitals, and other wasteful nonsense.
The situation is nearly as bad at the Federal level, needing far more than half the Senators to agree in order to prevent one person from blocking a vote.
Washington politicians do love being in office – they must, because they spend most of their time raising money to use in their next election.
One topic every politician knows will get them voted out of office is to raise taxes.
Some pretend that lowering taxes actually stimulates the economy so much that it makes up for getting less money – we’ve all seen how well that worked during the naughty-naughty’s (2000 through early 2009 – essentially the Bush II administration).
Others mostly admit that taxes will have to be raised, but that we can do it much later when there are more people to pay.
Size Of The The National Debt
This morning, the national debt was $11.292 Trillion dollars, or $36,878 for every man, woman, and child – or about $100,000 per household (and they tell you that you should worry about having an average $10K in credit card debt!!)
Tomorrow it will be about $4 Trillion more.
Given the need to constantly spend more money to keep getting re-elected, joined with the difficulty raising taxes, government has to do one of two things, borrow (and China is now essentially in control of the U.S. debt) or make the existing wealth do more.
We can’t borrow much more – China recently suggested we need a new world currency standard which was just a reminder to the U.S. not to expect any more big loans.
How They Make Our Wealth Go Further
Therefore we must make the national wealth go further – you do that by printing more money.
It works like this, there is a lag time between creating more paper money (or electronic symbols of more money) and everyone recognizing that there isn’t any more “wealth” to back the new money.
During that “sweet spot” (which lasts from months to decades), governments can spend more without raising any alarms.
Eventually, people realize what has happened; that is inflation. In other words, people want more of the paper money for their goods because they realize the paper is worth less.
How They Hide The Problem
All politicians always try to conceal inflation. If you don’t believe me, then explain why consumer inflation is always quoted “without food and energy.” Only a politician would think that people can skip buying food and energy so they don’t need to count it. The claim that they are too “volatile” is just so much bunk. So what if they are volatile? We still have to pay for them!
A few years back, The Fed went so far as to stop the publication of a vital economic tool which demonstrates actual money supply – M3.
The Federal Reserve simply stopped publishing M3, which is the broadest measure of total money as issued by the Fed. It includes checking & savings accounts, cash, time deposits, money market funds, etc.
The people at nowandfutures.com still calculate it. Those who understand economics would do well to read their information just to see if you agree.
So, do we have inflation?
That’s simple to tell. Do food, gasoline, clothing, cars, etc. cost more today than they did two decades ago?
Underlying inflation pressure has been hidden by low-cost Chinese goods from WalMart, and the recent economic crash caused prices to look pretty stable for the past few years, but that’s just because no one can spend, and it will end sooner or later.
Even looking back ten years is enough to see what happens when you hold a major war but don’t put it in the budget.
Yes, houses cost less today than five years ago in some markets, but more than they did 10 years ago, same for oil, food, etc. Remember that these things will go back up again – every politician is fighting one way or another to raise prices of houses and everything else will follow.
Remember The Good Old Days
Long term inflation is much more obvious. I remember when a good sports car cost $3,000 and a loaf of bread (real bread, not just flour coated air) cost 20-cents.
Sure, sure, “the good old days” you laugh, but laughing at the idea doesn’t make it untrue.
Yes, I know, the dollar has been gaining value recently against some currencies, but that is a short term event and just shows how little confidence people have in the money of other countries.
The Good News
Governments everywhere face this problem every few decades and fortunately there is a tried and true way around it without raising taxes.
If you owe a lot of money and can’t raise taxes enough to pay off the loan, make the loan worth less.
A simple analogy will make this clear.
Say you owe $100,000 on your mortgage. The easiest way out of problems is to just owe $50,000 instead. That is part of what always made buying a home so lucrative – over the course of a 30-year mortgage the value of the dollar went down – that’s what actually happened when you thought the value of your property was going up. Some houses go up in value but they are used property which generally loses value. What actually happened was that the value of your dollar went down – it could buy less.
The bills you owe over decades also are worth less.
Governments Devalue The Currency
Governments can do the same thing easily just by making their currency worth less – they can do it by decree and they do it all the time.
People think they aren’t paying taxes but inflation IS tax and it happens no matter what your favorite politician says or does.
The two blatant recent instances in the U.S. were in the 1930’s when FDR raised the value of gold arbitrarily every few weeks – since gold can be used to buy anything else, saying it takes more money to buy gold is the same thing as saying the dollar is worth less.
The U.S. used gold certificates as paper money from 1882 through 1933 exchangeable for gold coins.
The dollar is now what is known by economists as a “fiat” currency, that is, the value is what the government says it is – there is nothing behind it except the word of the government – you DO trust what the government tells you, don’t you?
In 1971 President Nixon took the U.S. off the gold standard by saying that you could no longer trade paper for a fixed amount of gold or silver.
That broke the international Bretton Woods Agreement of 1944.
The Treasury used to hold a lot of silver as well as gold. The silver was sold off long ago at about 99-cents per ounce ($14.35/oz. today), leaving the main repository of hard assets held by the U.S. government (you can’t send land or buildings overseas to pay a debt) the gold in Fort Knox.
The Elephant In The Room
The “official” price of that gold as set by The Federal Reserve is an amazing $42.22/oz.
But don’t try to buy any for that price.
Seriously, is there any more blatant proof that the government lies to citizens than the fact that gold actually sells today for about $950 per oz. while the government says their gold is only worth $42.22/oz.?
For the U.S. government to cut its debt load tomorrow all the Fed has to do is revalue gold at $1,000/ounce, close to the world price, essentially cutting the value of the U.S. dollar held debt by about 20 times.
I’m not predicting this, just pointing out the basics of government finance 101 – of course the devaluation could never happen – China would object.
Unless, of course, there is some special side agreement with China or China rapidly begins to spend its U.S. dollar reserve to buy hard assets such as gold, silver, and uranium mines?