Airman Ben Comes a Cropper

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machinehead's picture
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Airman Ben Comes a Cropper

In March, 'Airman Ben'  Bernanke -- head space cadet at the Federal Reserve -- announced a plan to buy up to $300 billion of medium-term Treasurys, ostensibly to drive interest rates down. I invite you to review the results, as shown in the chart below. On the day of the annoucement, yields screamed southward from 3.00% to almost 2.50%. Then, in a classic 'news reversal,' they proceeded to rise for five days straight.

Within six weeks, the entire 50-basis-point drop in yields had been retraced. After today's bond market bloodbath, the 10-year T-note yield has actually soared 70 basis points ABOVE its level before the March announcement, to 3.70%. Just look at the chart, if you dare --

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=tnx&sid=...

The moral of this little cautionary tale? Hear me, Bennie:YOU CANNOT DRIVE DOWN YIELDS BY 'BUYING' BONDS WITH PRINTED SCRIP!  That is like trying to drink yourself sober. It sounds quite plausible when you're halfway through a bottle of vodka. But an objective observer (e.g., annoyed spouse) is unlikely to pronounce the experiment successful.

It gets worse. Not only did the Fed's little 'dog eating its own vomit' caper fail, but also the issuer of the original debt -- the Treasury -- has lost its fat income from the Bubble years, and is now scraping by on the equivalent of an unemployment check. I quote from USA Today --

Federal tax revenue plunged 34% in April vs. a year ago, a study released Tuesday by the American Institute for Economic Research says. Six million people lost jobs in the 12 months ended in April. Income tax revenue dropped 44% from a year ago.

 http://www.usatoday.com/money/perfi/taxes/2009-05-26-irs-tax-revenue-down_N.htm

 

However, this horror story is just the burning fuse on a long-tailed event. Recessions do severe damage to the slow-motion Ponzi schemes of Social Security and Medicare. The recessions of 1973-74, 1980 and 1981-82 whacked SocSec so hard that an obscure economist named Alan Greenspan was brought it to 'fix' it in 1983 by increasing FICA taxes. But his half-baked patch barely bought us 20 years, and now we're back in the soup.

Consider my wife's brother, age 60. He was planning to work a few more years at the firm where he had been employed for 27 years. Last Tuesday, they pulled the plug on him. This completely changed his plans. Being vested in the pension plan, he can start receiving payments now. Plus, there's 14 months of unemployment. Shortly after that, he can claim Social Security at 62. Since he can survive on this income, he's unlikely to work again.

Repeat this vignette on a national scale, and SocSec faces permament losses of projected income from middle-aged Boomers, coupled with accelerated claims for retirement payments. Medicare faces similar income losses. So the present yawning deficits have a structural character to them, which will not be fully reversed by a cyclical recovery.

And speaking of recovery, each post-recession recovery of the last five has been slower and weaker than the previous one. This is the result of cumulative malinvestment, caused by the Bubbles and distortions engendered by paper money illusion. The 2003-2007 Bubble, as Dr. Martenson has averred, was hardly a recovery at all. More like a stagnation, masked with a bogus overlay of debt-driven asset inflation.

In conclusion, BOHICA -- Bend Over, Here It Comes Again. With the private sector tapped out, the only AAA borrower in town -- Usgov -- is trying to substitute its debt for the mountains of busted private debt. Even a child can realize that chronic deficits will have the same effect that they've had for the last 60 years -- namely, chronic inflation and currency devaluation. But this time, the debt level relative to GDP, and the tertiary stage which the slow-motion Ponzi schemes of SocSec and Medicare have entered, pose a serious danger of debt issuance going exponential in the next few years.

Rising rates, falling currency, printing scrip to buy your own bonds. It's a lethal syndrome, which economic physicians of a more enlightened era may someday designate as 'Bernanke's lurgy.'

How do you spell relief? As an economic witch doctor of our dark pre-enlightment era, I have but one remedy to offer -- DEVALUE

Goodbye to seignorage and all that. Look up 'droit de seigneur' in Wkipedia and you'll see how much we're losing -- namely, the right to screw foreigners any time we feel like it. Man, it's gonna be hell earning an honest living.

http://en.wikipedia.org/wiki/Droit_de_seigneur

 

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Re: Airman Ben Comes a Cropper

Fantastic post Machine.  Thank you.

I have a question burning a hole in my skull:

Does the Fed announce a new round of monetization to get short-term relief?  It seems to me that the answer is clearly Yes.  I don't see how they can abide higher mortgage rates; that goes against everything they're trying to do.  The whole thing smells to me like the next round is begining.  And I just don't see how we get out of this without near-total monetization. 

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Re: Airman Ben Comes a Cropper

Fantastic read!!!

IMC into a mountain of debt.

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Re: Airman Ben Comes a Cropper

machinehead - really enjoyed your article. 

Rising rates, falling currency, printing scrip to buy your own bonds. It's a lethal syndrome, which economic physicians of a more enlightened era may someday designate as 'Bernanke's lurgy.'

"Printing scrip buy your own bonds" is just as crazy as printing bonds to buy scrip; which is what we had been doing since the Federal Reserve Act of 1913.  We print bonds that pay interest in order to buy our money off the private Fed.  The Fed creates the money without any measurable cost and they provide no backing.   We provide the collateral for the money we buy from them.

It is all a shell game, the greatest fraud ever pulled off.  We have the power to directly create our own money - for free.  We don't have to be enslaved by debt and can end it anytime we want by taking back the control and issuance of our money.  

The looting scheme continues only because "We the People, so far, haven't figured it out. 

Larry

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Re: Airman Ben Comes a Cropper

I see Denninger is on to the same

http://market-ticker.denninger.net/

Can anyone explain a 'bond market disslocation' in terms even I might understand?

Don

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Re: Airman Ben Comes a Cropper

I think in essence, "everyone" works out that US treasuries are no longer a safe investment.

No one buys them anymore ( or will only buy them at a very high interest rate ), and asks for their cash when past ones mature.

At present US govt borrowing 42 cents of every dollar it spends.

It's choice then is :-

1  Only spend what you have. halve pensions for the elderly, halve medical care. etc

2  Print money, every one gets paid, but soon a loaf of bread costs $100...... and you pension is still 300 per week.

Simplified but that is the gist of it.

Cheers Hamish

 

 

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Re: Airman Ben Comes a Cropper

Thanks for posting that, machinehead. What a well thought out article that I can add nothing to other than that.

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Re: Airman Ben Comes a Cropper

Thanks Hamish (I guess you are a bit colder down there - I'll send you some of our sun, we have heaps to spare)

I either don't understand or don't agree with 2. I know inflation draws a large number of definitions from economists but I don't understand how money can inflate unless it is spent on labour. Nothing else does anything in reality. Any amount of money can sit wherever it damn well pleases and even move from computer to computer with nothing real happening. Nothing real changes with ownership. 

I think Denninger has been predicting that this will again be a deflationary depression but others are certain that inflation will come about eventually. Then some say that some things will inflate while others deflate. I can only comprehend it in terms of work. The person pumping oil must get some believable reward to continue pumping. Same with the person planting crops or making bread for sale. While an economy is contracting there is less work being done so work is not being rewarded more. If there is more work to do then I can understand inflation taking hold as more people work and need more money to get the same value from it relatively.

Don

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Re: Airman Ben Comes a Cropper

This morning on Drudge Report, there's a link to an article in the U.K. Telegraph by Ambrose Evans-Pritchard. It seems the Chinese are just as disturbed about 'printing scrip to buy bonds' as Crash Course graduates are --

Richard Fisher, president of the Dallas Federal Reserve Bank, said: "Senior officials of the Chinese government grilled me about whether or not we are going to monetise the actions of our legislature."

"I must have been asked about that a hundred times in China. I was asked at every single meeting about our purchases of Treasuries. That seemed to be the principal preoccupation of those that were invested with their surpluses mostly in the United States," he told the Wall Street Journal.

Mr Fisher, the Fed's leading hawk, was a fierce opponent of the original decision to buy Treasury debt, fearing that it would lead to a blurring of the line between fiscal and monetary policy – and could all too easily degenerate into Argentine-style financing of uncontrolled spending.

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5379285...

'Argentine-style financing' -- heh heh. What this means in practical terms is that the Argentine peso which was worth one dollar in 2001 is now worth 27 cents. The Chinese rightly view Airman Ben's broad-daylight monetization as no different from what Zimbabwe is doing. Thus Ben's other nickname, Zimbenwe.

Interestingly, Fedguv Fisher segues to the same secondary topic as my post did -- the bankruptcy of 'entitlement programs' --

The Oxford-educated Mr Fisher, an outspoken free-marketer and believer in the Schumpeterian process of "creative destruction", has been running a fervent campaign to alert Americans to the "very big hole" in unfunded pension and health-care liabilities built up by a careless political class over the years.

"We at the Dallas Fed believe the total is over $99 trillion," he said in February.

"This situation is of your own creation. When you berate your representatives or senators or presidents for the mess we are in, you are really berating yourself. You elect them," he said.

Now I'm with you on the $99 trillion, Rich. But you lost me with the 'you elect them' bit. Managed, media-mouthpiece 'democracy' is the ultimate tool for discretionary soft control by elites. To blame the voters for electing Tweedledum or Tweedledee, both of whom support the Federal Reserve status quo, is to blame crime victims for letting themselves get robbed.

The only available sanction against these licensed counterfeiters is the one outlined in an old handwritten parchment document dated 4th July 1776. It was a hanging offense then, by the way, and still is. Your money or your life!

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Re: Airman Ben Comes a Cropper

Well, I wouldn't have thought it possible, Machinehead, but indeed, you've done it . . . . . . you've turned economic analysis into literature that's not only readable, but that positively draws the reader on.  I am not a lover of economics . . . . . . . I study it to the degree that I must, in order to preserve wealth and understand what's coming down the pike.  For me, that process is usually unpleasant work that makes me feel self-righteously satisfied that I've sacrificed my time doing something I detest, for the good of my family . . . . . . . and now you've ruined that self-negation for me by writing in such a clear, witty, and engaging manner that I could not muster an ounce of sacrificial self-pity for having to read your essay. . . . . . . . Well done, indeed!

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Re: Airman Ben Comes a Cropper

I agree with c1oudfire MachineHead, hope you don't mind I've began putting your stuff on the Daily Digest. Take care

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Re: Airman Ben Comes a Cropper

Excellent posts Machinehead.  Thank you for those.

$99 trillion?  $50 trillion?  Whatever the number it cannot be repaid.  The government is now talking about a national VAT tax as a means of raising revenue:

Thinking the unthinkable

With budget deficits soaring and President Obama pushing a trillion-dollar-plus expansion of health coverage, some Washington policymakers are taking a fresh look at a money-making idea long considered politically taboo: a national sales tax.

Common around the world, including in Europe, such a tax -- called a value-added tax, or VAT -- has not been seriously considered in the United States. But advocates say few other options can generate the kind of money the nation will need to avert fiscal calamity.

"Everybody who understands our long-term budget problems understands we're going to need a new source of revenue, and a VAT is an obvious candidate," said Leonard Burman, co-director of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, who testified on Capitol Hill this month about his own VAT plan. "It's common to the rest of the world, and we don't have it."

And in a paper published last month in the Virginia Tax Review, Burman suggests that a 25 percent VAT could do it all: Pay for health-care reform, balance the federal budget and exempt millions of families from the income tax while slashing the top rate to 25 percent. A gallon of milk would jump from $3.69 to $4.61, and a $5,000 bathroom renovation would suddenly cost $6,250, but the nation's debt would stabilize and everybody could see a doctor.

Oh dear.  Nowhere is the impact on demand considered and the entire WaPo fluff piece offers not a single counter-argument nor any context to complement this horrible piece of thinking.

They point out that 130 countries already have a VAT implying that having 131 should be a small matter of implementation somehow failing to point out the glaring differences that exist between the US and those countries.  What about the fact that the US alone spends more in "defense" than all those other countries combined?  In those other countries the people actually get something for their VAT like free education through college and health care.

While I see the happy talk about a VAT being able to provide that "free" health care, who among us doubts that vast amounts of the VAT 'take' would disappear into the insatiable maw of the war profiteers who seemingly have a complete lock on the DC decision apparatus?  How much of that excess VAT needs to happen simply to pay for past malinvestments and war expenditure borrowings?

And would the VAT replace local property taxes which mainly cover education up through high school and would we then also get free college?  Would state income and sales taxes go away?  We all know that the answers to all of these questions is "no."

Lastly the extent to which the VAT raises more money than today is the extent to which the populace pays more money to the federal government than it does today.  Don't be confused by the increased complexity and all the new moving pieces.  It will not liberate some untapped source of free money.  It would be a massive tax hike.  Those have a well-known function of reducing demand.  Go over to Europe someday and compare the average amount of "stuff" in a European house or apartment with what you'd find in a US equivalent and you'll see that there's a lot less.  That is largely due to VAT.

So the VAT would, largely, be incremental to state taxes already in place and would, undoubtedly decrease demand which would kill the US debt-based economy about as fast as anything I can think of.  Not that having a smaller, less "stuff"based economy is a bad thing - I am in favor actually - it's just that we should be quite clear that every system reinforces some behaviors and punishes others. 

None of these critiques can be found in the WaPo piece and so you know that its purpose was not to illuminate, but to float a trial balloon.

*pop*

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Chris's Post Re: Potential VAT
cmartenson wrote:

Excellent posts Machinehead.  Thank you for those.

$99 trillion?  $50 trillion?  Whatever the number it cannot be repaid.  The government is now talking about a national VAT tax as a means of raising revenue:

Thinking the unthinkable

With budget deficits soaring and President Obama pushing a trillion-dollar-plus expansion of health coverage, some Washington policymakers are taking a fresh look at a money-making idea long considered politically taboo: a national sales tax.

Common around the world, including in Europe, such a tax -- called a value-added tax, or VAT -- has not been seriously considered in the United States. But advocates say few other options can generate the kind of money the nation will need to avert fiscal calamity.

"Everybody who understands our long-term budget problems understands we're going to need a new source of revenue, and a VAT is an obvious candidate," said Leonard Burman, co-director of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, who testified on Capitol Hill this month about his own VAT plan. "It's common to the rest of the world, and we don't have it."

And in a paper published last month in the Virginia Tax Review, Burman suggests that a 25 percent VAT could do it all: Pay for health-care reform, balance the federal budget and exempt millions of families from the income tax while slashing the top rate to 25 percent. A gallon of milk would jump from $3.69 to $4.61, and a $5,000 bathroom renovation would suddenly cost $6,250, but the nation's debt would stabilize and everybody could see a doctor.

Oh dear.  Nowhere is the impact on demand considered, the entire WaPo fluff piece presents not a single counter argument nor any context or data to complement this horrible piece of thinking.

They point out that 130 countries already have a VAT implying that having 131 should be a small matter of implementation somehow failing to point out the glaring differences that exist between the US and those countries.  What about the fact that the US alone spends more in "defense" than all those other countries combined?  In those other countries the people actually get something for their VAT like free education through college and health care.

While I see the happy talk about a VAT being able to provide that "free" health care, who among us doubts that vast amounts of the VAT 'take' would disappear into the insatiable maw of the war profiteers who seemingly have a complete lock on the DC decision apparatus?  How much of that excess VAT needs to happen simply to pay for past malinvestments and war expenditure borrowings?

And would the VAT replace local property taxes which mainly cover education up through high school and would we then also get free college?  Would state income and sales taxes go away?  We all know that the answers to all of these questions is "no."

Lastly the extent to which the VAT raises more money than today is the extent to which the populace pays more money to the federal government than it does today.  Don't be confused by the increased complexity and all the new moving pieces.  It will not liberate some untapped source of free money.  It would be a massive tax hike.  Those have a well-known function of reducing demand.  Go over to Europe someday and compare the average amount of "stuff" in a European house or apartment with what you'd find in a US equivalent and you'll see that there's a lot less.  That is largely due to VAT.

So the VAT would, largely, be incremental to state taxes already in place and would, undoubtedly decrease demand which would kill the US debt-based economy about as fast as anything I can think of.  Not that having a smaller, less "stuff"based economy is a bad thing - I am in favor actually - it's just that we should be quite clear that every system reinforces some behaviors and punishes others. 

None of these critiques can be found in the WaPo piece and so you know that its purpose was not to illuminate, but to float a trial balloon.

*pop*

Hi, Chris;

Maybe I've had my head in the sand, but this strikes me as being huge -- something that everyone should have up on their radar.  I personally would manage the timing of major purchases differently if I saw a VAT looming on the horizon.  Your critique brings up many salient points . . . . . . For the benefit of members who might miss it under its current subject line, would you consider duplicate-posting your analysis in your "In Session" thread, or changing the subject line to something that includes a hint of its discussion of a potential VAT?

 

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Re: Airman Ben Comes a Cropper

"Bohica economy". I like it. Taking the red pill, suppository style! Hope to hear more from you in the future, young man. If the Grey Lady wasn't black and white, and running rivers of red ink, while courting the powers that be, she'd have the hots for you!

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Re: Chris's Post Re: Potential VAT

If I may, I'll chip in from Europe (VAT country). VAT is not just a sales tax, as it is operated in Europe. It is a tax on all goods and services provided by VAT registered persons and companies. This means that as a private consumer (working man with a regular job and not VAT registered) that every bill you have to pay, whether it be from the plumber, telecom provider, photoprint shop or lawyer is increased by around 20% VAT (or whatever rate has been determined for that service/product). The tax is only deductible between VAT registered businesses for items or services deemed as being business transactions.

I'll take myself as an example of a private individual but with a registered small business. As a photographer with mostly commercial clients, say I get a commission to take some shots of a client's new headquarters. I bill the client for the work, say $1,000 and I add 20% VAT to the bill and the client pays $1,200 into my bank account. If I have no business expenses for that quarter, then I give that $200 to the IRS as VAT which requires that I keep a separate VAT administration. If however, I needed to buy a new camera costing $1,000 in that same quarter, then I pay $1,000 shop price and on the specified purchase bill the price of the camera will be given as $834 ex [email protected]%= $166....Total $1,000 which is what I pay the shopkeeper. Now, because that is a purchase for business purposes, I may  deduct the amount of VAT paid from the VAT received for that quarter. Then I give the IRS $200-$134 = $66 that quarter.

If as a private individual, I decide I would like a flat sceen TV costing $1,000 and there's no way I could justify the purchase as a necessary business expense, the VAT included in the purchase price is essentially paid from my personal income after income tax deduction.

In Europe VAT is levied on all things and on top of any imposed duty (alcohol, tobacco and fuel). Basic foodstuffs are zero rated whilst certain items and services are rated at 6% (books, hairdressing and bicycle repair in NL). It's pretty much make it up as you go along.

And because each country within the EU has its own different, standard VAT rate, cross-border business transactions are VAT free when the buyer of the product/services in another country provides the seller with his/her VAT registration code. Confused...you will be.

Needless to say that the cross-border fraud with VAT runs in the many billions/year.

 

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Re: Airman Ben Comes a Cropper

Well, since THPTB so want to gamble with tax payer money why not just do it. Put a billion dollars in a pot and sell raffle tickets to it. The states do it and call it a lottery. We could have a national lottery. What minimum wage employ would not put 10 or 20 bucks in the pot every week to have a chance at winning a billion?

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Re: Airman Ben Comes a Cropper

Dr. Martenson posted this quote above --

' ... Burman suggests that a 25 percent VAT could do it all: Pay for health-care reform, balance the federal budget and exempt millions of families from the income tax while slashing the top rate to 25 percent.'

Have we heard this story before? Let's see ... oh yes, it was 1913 ... when the income tax amendment was passed. Just like Burman, the 'progressives' of the day promised the middle class that they would be exempted from income tax, which would only affect the top 1 percent of income earners. What a deal -- we get free goodies from the government, while our crass moneybags neighbors have to pay for it. It was a banner day for class envy!

Fast forward to 1942, when the exigencies of world war led to working-stiff wage-earners not only paying income tax, but having it withheld from their paychecks before they ever saw it. Today, the progressives of 1913 would be stunned and outraged that even their great-grandkids working low-wage summer jobs have income tax withheld from their meager pay. So the 1913 utopia of having the top 1 percent of earners pay a modest 7 percent income tax has morphed into a nationwide tax dragnet that reaches even into the pockets of the working poor.

But don't take my word for it. Check out the history of state sales taxes, most of the which started as modest 1 or 2 cent levies. I remember my dad, irked at Texas's introduction of its first sales tax, sarcastically saying 'and a penny for the governor' to the cashier when making retail purchases. Now (in Austin) he'd have to say, 'and eight-and-a-quarter cents for the governor.'

Or review state income taxes. New Jersey introduced its first income tax, at a 2.5 percent maximum rate, in 1976. Now the maximum rate is ... wait for it ... 8.97 percent.

And so it goes. stevem doubtless could cite the history of European VAT taxes, which also started at single-digit levels and gradually were hiked as high as they dared -- north of 20 percent in some places.

The 'ratchet effect' guarantees that governments will spend the entire amount of any new tax, becoming dependent upon it. Then when revenue falls during an economic downturn, they will increase it. The Burmans of the world, promising a bright future in which you and I get tax cuts and freebies at some anonymous rich dude's expense, should read up on the 1930s populist Huey Long. Mocking Burman's ilk, ol' Huey jested, 'Don't tax you, don't tax me; tax that feller behind the tree.'  It was ever thus ...

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