Saturday, July 30, 2011

Hold the Debt Limit Line

The debt limit talks show people for what they are. Political gamesmanship amuses the watchers, I suppose. So whatever President Obama and his supporters choose to pay if there is a halt to the borrowing will reveal character and resolve. Insolvency will not be aided by further borrowing. If you have sold the future, what is there to do?

I think the point here is that the present should not have the power to indebt the future until choices narrow to subsistence and debt service. We are at the crossroads of history and rationality as the choice to default moneylenders or default to the people looms over Washington. So far TV business news has mentioned jitters in the Orient and in Abu Dhabi, presumably due to default worries as the USA legislators grind out a compromise guaranteed to please few.

One thing both sides agree on is the need for entitlement reform. You know, like Social Security, Medicare and Medicaid. The COLA (cost of living allowance) presently in place in Social Security which guarantees a Social Security raise if inflation appears is now to be cut out of Social Security. Since Ben Bernanke's stated policy and objective is to keep inflation at about 2% a year, all Social Security checks are automatically worth 2% less in spending power. In ten years, a Social Security check will decrease in value by 20%. What an easy way to pay off debt! Just make the legal tender of the debt worth less and print more money. Of course, this policy hurts the retired depending on Social Security, but so what? What are these people thinking?

The interest rates might rise if the debt limit is not reached! Smallholders all over the country would celebrate possibly getting something for their CD holdings. Of course inflation erodes further the buying power of the dollars held by the smallholders. The interest rate paid is far less than inflation, so the value of the holding decreases by 2% or more each year due to abysmal interest rates paid, courtesy of the Federal Reserve.

Talk of canceling mortgage interest deductions would forge towards the goal of cutting trillions in deficit spending, they say. So now people looking for a mortgage will have to be told they cannot deduct the cost of the mortgage from your income tax payment. Across the board aimed at homeowners, a handy way to raise cash. It also cuts consumer spending, like other schemes. Cutbacks in Federal spending might be the best way to raise cash you don't have.

I hope our people avoid all the crisis mongering and forge ahead to success in not raising the debt limit. So California has arranged for billions to borrow if the Fed doesn't keep paying them. Sounds like a good idea to me. Self funding for the states. Cutbacks in government jobs are inevitable. And statistics suggest that the trend for the last few years has been to forward the Bush tax cuts on that basis that higher taxes means fewer jobs. I don't think that the data demonstrates that the Bush tax cuts generated any jobs, and indeed presided over massive layoffs and a rise in unemployment and the bailout crisis.

Closing tax loopholes is an interesting option but whose loopholes will be closed? That's when it gets political and choices loop back to who doesn't know what's going on anyway and who does know what is happening and who might give a nice contribution after things are resolved favorably. Closing middle class loopholes won't help the economy. It would cut consumer spending.

Counter by cutting prices, thus more people could buy widgets if they wanted to and more could be sold. But the people making the widgets would get paid less per unit because you are selling them for less....The continuing devaluation of real estate is a true indicator of the economy. It occurred at about a 4% rate last year, close to inflation in fuels and commodities.

More debt will not cure insolvency and avoiding the cutbacks in government spending is futile as the ready cash remains tied in obscure investments that the Plebian could not begin to understand except that the securities markets do not create jobs on the ground making widgets. If you cannot make widgets, you cannot sell them, of course. And if the Chinese make widgets at a quarter the cost of making them here and can ship them for another quarter and still undercut 50% on the dollar, you are out of business because money is tight and people cannot afford to pay more.

Now if the shipping costs rise because fuel costs are gradually rising and the trend is to continue to do so, then shipping costs might outweigh the worth of the goods. Possibly it is not worth shipping some of the Oriental goods due to the cost and the importance of the goods. Do we need to import glass, which is heavy and costs more to ship, when we have glassworks in Ohio and Arkansas and a railroad network for transport? How about keeping our scrap iron here instead of shipping it to the Orient? Smelting it down, refining and making new things would create jobs here and cut down on shipping fuel use.

The more debt there is, the more payments to make and less ready cash after the borrowed lump sum is blown, thus our problem now. Wars already fought, securities already purchased and sold, real estate is deflating and the chickens come home to roost. Politicians indebted the future while some of the old decry the opinions of youth, who must live in the future as it is created now. We must listen to the youth in Congress and bypass name calling and deriding, and remember who voted for what all these years. Accountability is a heavy cloak to wear.

Power is not easily relinquished but age will require it.