Category Archives: Inflation

SP Lowers the U.S. Debt Rating

The Standards and Poor rating service has downgraded the U.S. Federal Government’s bonds to AA+ status. This action long overdue does not go far enough.

To understand the meaning of this, we should first understand the meaning of the S&P ratings.

The ratings indicate several things:
1) The likelihood of a default – the debtor failing to make interest payments owed to the people who purchased the bonds.

2) The likelihood that the bond holders will recover some of their losses after a default.

3) How quickly the debtor’s financial condition could deteriorate causing them to slide into default.

In the pdf explaining their rating system, S&P has a very interesting table showing the default rate associated with organizations based on their classification. As one would expect, in the past thirty years no AAA organization has defaulted, nor has any organization that is rated AA+.

In their press release explaining the downgrade, S&P makes the following points:

• The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.
• More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.
• Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.
• The outlook on the long-term rating is negative. We could lower the long-term rating to ‘AA’ within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case
• The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short ofwhat, in our view, would be necessary to stabilize the government’smedium-term debt dynamics.
• More broadly, the downgrade reflects our view that the effectiveness,stability, and predictability of American policy making and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned anegative outlook to the rating on April 18, 2011.
• Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics anytime soon.
• The outlook on the long-term rating is negative. We could lower thelong-term rating to ‘AA’ within the next two years if we see that lessr eduction in spending than agreed to, higher interest rates, or newfiscal pressures during the period result in a higher general governmentdebt trajectory than we currently assume in our base case.

In essence, the S&P rating agency is implying that since the recent debate about raising the debt ceiling was immaturely handled, they are now more pessimistic than they were this spring. This strikes me as and excuse to give plausible deniability to the accusation that for years they have been rating the U.S. government much more favorably than is appropriate by any objective manner.

The fact is that over the past few decades, the U.S. government’s long-term fiscal condition has been steadily eroding, and the legislature has shown no willingness to seriously tackle the issue.  Unsurprisingly any legislator who broaches the topic of reducing any of the major sources of spending, medicare, social security, millitary spending,  corporate subsidies, etc risks being voted out of office by an electorate whipped into a frenzy about an attack on the elderly, the poor, our allies, etc.

The rating agencies, having been granted a monopoly on ratings by the U.S. government, have been loath to bite the hand that feeds them, to risk the wrath of the legislature by frankly describing the terrible financial outlook for the U.S. government. At this point the AAA rating has become a joke; there is no way that the U.S. government can pay back the loans. There is no ideological chasm between the Republicans and the Democrats.  Both parties support massive welfare spending, high taxes, and massive plundering of the productive bits of the economy.  I am increasingly of the opinion that the debt fight was a kabuki theatre engaged in by the Democrats and the Republican leadership in order to end the Tea Party threat to the metastasizing state.  The Teaparty were the grownups announcing that the party has to stop, and the political parties’ leadership were the petulant teenagers plotting to keep things going a little longer.

At this point U.S. government bonds are a very bad thing to buy. The interest the U.S. government is offering is pathetically low.  Inevitably, to attract buyers, the government will have to raise the interest rate. Once they do this, prices in the secondary market for the older low-yield bonds will collapse.  The interest payments needed to service the outstanding debt will increase, and the U.S. government will be in even worse financial shape.  It’s possible that the Federal Reserve will buy the bonds itself, using newly printed dollars, much like the central bank of Zimbabwe.

Unfortunately too many retirees have invested in U.S. government bonds, expecting that the income from the bonds would provide a reliable, dependable source of income. Either they will be screwed by the inevitable default, or they will find their income’s purchasing power destroyed by inflation.

I am an anarcho-capitalist living just west of Boston Massachussetts. I am married, have two children, and am trying to start my own computer consulting company.

A Brief Constitutional Lesson for Congresscritters… Particularly those from Kentucky…

United States Constitution
Article 1, Section 7


All bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills.

The issuance of debt is a revenue raising measure. The “debt ceiling” is, in fact, legislation initiated in the House of Representatives, which authorizes the executive branch to issue debt through the treasury (and by extension the federal reserve), up to a specific limit.

This “debt ceiling” and authorization of debt issuance; allows the executive branch to raise revenue in a constitutionally legitimate way; because the revenue is raised under the auspices of specific authorization by the house or representatives.

Neither the Senate, nor the House, acting separately or together; has the authority or ability to delegate this exclusive power of the house, to any other entity, including the president. In fact, it would be a clear violation of the principle of separation of powers to do so.

That is all.

I am a cynically romantic optimistic pessimist. I am neither liberal, nor conservative. I am a (somewhat disgruntled) muscular minarchist… something like a constructive anarchist.

Basically what that means, is that I believe, all things being equal, responsible adults should be able to do whatever the hell they want to do, so long as nobody’s getting hurt, who isn’t paying extra

The Inflation Won’t Come From The Fed

Everyone knows the Fed is pushing Quantitative Easing. By that, it means that when America is having trouble selling T-bills at advantageous interest rates, the Fed prints up some money to keep demand. It buys the bonds with newly-printed money. The recent run was $600B or so, and the Fed’s current balance sheet holds about $2.7T in assets (that they can choose to hold as long as they find prudent — since they print the money to keep them and/or roll them over).

But what if I told you that there was another $11T of outstanding US dollars* out there in the world, and that everyone except the US has a say in whether they are circulated. In fact, that those dollars are sitting on foreign soil is a very good thing for the US and has been for decades, but it’s not assured it will last forever. As I said WAAAY back in 2007:

As I’ve pointed out in the past, the dollar’s status as a reserve currency has largely allowed America to inflate with very little visible burden on our own citizens. We create worthless money, use it to buy durable goods from other countries, and watch as they hold that money or reinvest it in the sinkhole that are Treasury bonds. It’s a credit card on the world, and we can print whatever we need to pay it off…

…as long as they don’t wise up. If they do, suddenly that money might come back to us, and we’ll feel the results of the inflation we’ve engaged upon.

Inflation benefits those who see the money first — in this case, Americans who used that money to buy durable goods from overseas. It has the least benefit for those who see the money last. To date, that has been forex reserves, sovereign wealth funds, etc. But should those foreign nations decide they no longer want to hold US dollars, they’ll spend them right back into circulation — and they’ll eventually want us to sell them goods in exchange for those dollars.

If that happens, the inflation comes full circle and we feel it right here at home — without the Fed ever releasing the $2.7T they have on their balance sheet.

We’ve spent the last four decades, ever since Nixon “closed the gold window”, sending dollars abroad to other nations who stick them under their mattresses. This has been the persistent trade deficit we’ve held. Sure, some of those dollars came back to be lent to our own government to finance even MORE spending that didn’t come from the American people, but much of them quite literally got shoved under the mattress.

What happens if they want to spend those dollars? Well, dollar-denominated assets and goods produced in the US will rise in price. Oil, gold, silver, food (produced in the US), etc. Look at gold, for example: In the last year, gold has increased in dollar terms by over 32%, but by less than 8% in Swiss francs. USD vs other currencies show similar (but smaller) gaps. What can explain this? Well, if nothing else, that big buyers like China and India are using their dollar surplus, rather than their reserves in other currencies, to buy gold.

Where’s the endgame if this dollar-spending widens? Well, eventually those dollars are sold to people who don’t want to buy goods from China or US T-Bills: they want to buy US exports or US assets. That sounds good, of course; everyone likes exports! But is it good? Restate it this way: a durable good (i.e. product of American workers’ output) needs to be produced to leave our shores, and it increases the circulating money supply in the USA. The good we produce here is enjoyed elsewhere, while the increased money supply makes our own goods at home more expensive.

We change from trading our paper for other nations’ hard work to trading our hard work for our own paper back.

The endgame is the end of trade deficits, where we work harder as a nation to supply the rest of the world with goods in exchange for a lower standard of living here. That doesn’t sound good to me at all.

America has enjoyed a very privileged position in the world, and that position has only been possible from two things: other nations have trusted us and they’ve had no other options. The first is eroding to the point where they’re looking for the second. If we want to continue enjoying our position in the world, we need to convince the rest of the world that holding the US Dollar as a reserve currency benefits them — and neither trillion Dollar deficits as far as the eye can see or quantitative easing accomplish that.

When the inflation comes, it’s not going to be the Fed printing money — it’s going to be other nations sending us the money printed over four decades and expecting to buy something with it.
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Quote Of The Day

I posted yesterday about Bernard von Nothaus of the Liberty Dollar being convicted. I definitely think the fact support a guilty verdict on the charge of “issuing and passing Liberty Dollar coins intended for use as current money”, but some of the others seem quite a bit ridiculous, such as “conspiracy against the United States”. I think this was more fraudulent than conspiratorial…

…but it appears that the US Attorney doesn’t agree. She seems to think this is a lot more important than the rest of us… And what she says here [on the FBI press release, no less] is chilling:

“Attempts to undermine the legitimate currency of this country are simply a unique form of domestic terrorism,” U.S. Attorney Tompkins said in announcing the verdict. “While these forms of anti-government activities do not involve violence, they are every bit as insidious and represent a clear and present danger to the economic stability of this country,” she added. “We are determined to meet these threats through infiltration, disruption, and dismantling of organizations which seek to challenge the legitimacy of our democratic form of government.”

Really, Anne? Really? You’re going to throw around terms like “domestic terrorism” over this? For as much as I disagree with what von Nothaus was doing — profiting off of those who feel your fiat currency, backed by nothing more than a promise, is on the verge of a potential collapse — he wouldn’t have such a big market to sell to if the Fed wasn’t doing everything in its power to undermine the legitimacy of the US Dollar every day.

Every day the government’s inflationary policies erode the value of the US Dollar, stealing the wealth of people who have worked their butts off to earn those Dollars. While I think what von Nothaus was doing was fraudulent, I think I’m beginning to agree with those who have used the old adage to explain why you chose to go after him: “Don’t steal. The government hates competition.”

Liberty Dollar Founder Reportedly Convicted

Hard to believe it was over three years ago, but may of us in the libertarian movement will remember the seizure of the Liberty Dollar holdings/equipment/etc. For those new to the movement, the Liberty Dollar was a metal-backed currency presented as an alternative to traditional fiat currencies, but unlike Gold/Silver Eagles, or Krugerrands, or gold/silver bullion, was actually intended to be used and spent and traded as money in exchange for goods. It attracted the attention of libertarians and goldbugs, and earned a bit of national visibility when it set to release Ron Paul versions of one of the popular gold coins.

Let me state, first and foremost, that I am not a fan of the Federal Reserve, or of fiat money. I fully support the right of the people of the US to use and circulate alternative currencies. I enjoy the fact that some of those currencies would be backed by precious metals. But I incurred quite a firestorm of comments here after the raid, when I explained that I thought the government was right. While I support alternative currencies, and would love the Liberty Dollar to have been one, I claimed it was NOT an alternative currency:

A competing currency must not be interchangeable with FRN’s, which is the fiction that the Liberty Dollar creators try to uphold. Thus, the ALD becomes a method for them to sell silver at a profit while their associates or merchants work to defraud businesses by offering silver worth less (in FRN terms) for goods that are priced in FRN terms. At each level, it appears to have a cut of profit, as all multi-level marketing schemes do, and at the bottom of the scale, those who receive ALD’s as a “face value” equivalent to FRN’s are being shafted.

The Liberty Dollar does not seem to live up to what is bills itself as. If it were a true competing currency, merchants would price goods in ALD terms higher than in FRN terms, in order to receive identical value for their wares. If it were a true competing currency, the “exchange rate” between ALD’s and FRN’s would float, rather than be defined by the Liberty Dollar creators. I previously have written favorably about the Liberty Dollar, but given new information, I have changed my mind. It does not fit the bill of an alternative currency; it is a scam.

After three years of legal wrangling, it was announced today that the founder of the Liberty Dollar, Bernard von Nothaus, has been convicted on all four counts.

The crux of the government’s case rests pretty much on this, care of Coin World magazine [emphasis added]:

The federal government alleges that Von NotHaus, with three other defendants, worked together to violate the law by making Liberty Dollars the government characterizes as “coins” of silver “intended for use as current money” and “in resemblance of genuine coins of the United States …”

U.S. Assistant Prosecutor Craig Morenao, in opening statements, said the government would set out to prove that von NotHaus deliberately told people to give Liberty Dollars as change for Federal Reserve notes, in direct violation of laws that specifically prohibit the use of passing originally designed coins as current money.

It seems pretty clear that this is not counterfeiting in the *traditional* sense, where you try to copy the direct design. But given that everything I had seen from the website, marketing materials, etc suggested that the ALD should be spent at parity with federal reserve notes, and given to vendors in place of or given to consumers as change in place of federal reserve notes is problematic. Creating a currency to be spent alongside in competition with the US Dollar is one thing — creating a currency to be spent as a US Dollar equivalent is another.

I feel moderately bad for those who got sucked in to the Liberty Dollar system. But overall, I feel worse for anyone who would have the goal to create a *true* alternative currency, because the actions of Bernard von Nothaus have given the very concept a bad name, and imbued the idea of alternative currencies with fear of government prosecution. All this for what was just a scam to get rich fleecing people who distrust government fiat money.

Hat Tip: Reason

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