"If" or "When?"

Well, I figure it is about time we talk about the economy. I mean, we've only been dealing with a declining economy since December of 2007, or so we were told. And it doesn't appear to be getting much better. Can we agree to that? Doesn't matter, your opinion is not valid here. My blog. MY BLOG!

Let's recap a few things I have already covered in previous posts. The Federal Reserve is neither Federal (government) nor does it have a "reserve" in the strictest of senses. Basically, in 1913, President Woodrow Wilson was convinced that the Federal Reserve was the answer to keeping the economy on track and avoid further depressions. Their track record ... is worse than drunken Mario Cart. They have failed to accomplish their original purpose. And despite having literal control over our money, they report to nobody as no audit has ever been conducted on their business deals. Yet, since its inception, the value of the US currency has dropped precipitously. You already know this; in the 1980s I could buy 4 candy bars for a dollar, today, I can buy one and have a little change left over for ... nothing.

There are some mitigating circumstances that need to be taken into consideration. First, during the Great Depression, in 1933 Congress passed a law stating private ownership of gold (besides collectibles) was thereby illegal. (It was confiscated at $20 an ounce, then resold at $35 an ounce shortly thereafter. Classic governmental price fixing.) In that era, you could still pay for and buy things with gold up until that law passed.

It should be pointed out that the US Constitution specifically states that our currency is to based/backed on Gold and Silver. In 1868 a Supreme Court decision allowed paper currency as long as it was backed by gold. (see previous link) No mention of non-gold backed paper currency whatsoever was permitted. As a matter of fact, our governments first paper currency, before the Constitution was even penned, failed under massive inflation. So I imagine they were leery about paper currencies.

Then came the Bretton Woods accords in 1944, which was put together to insure currencies by having their value relative to the value of gold. The argument was that due to economic discrimination and trade warfare, such calamities as World War 2 were inevitable. They would go on to form other entities of note; the IMF and World Bank. The Bretton Wood ideology finally failed when Nixon did two things; he legalized citizens' rights to own gold bullion again, but delinked the dollar to the gold standard completely. Now, last I heard, the US had 10,000 tons of gold as back-up (between Ft. Knox and the NY Federal Reserve, which doesn't own all its gold), but our money is not backed by gold, nor silver, nor anything for that matter. It's called fiat money, and I think this wiki description states it best: state-issued money which is neither legally convertible to any other thing, nor fixed in value in terms of any objective standard.

Does that instill a lot of confidence into the all-mighty dollar for you?

We pretty much know what happened after that, a recession happened in the 1970's were inflation was rampart. My parents told me they bought a Datsun 210 @ 24% interest during that saga. They took on a new job just to pay for the interest on that vehicle.

Here's what happened when the dollar was permenantly removed from the gold standard: the Federal Reserve became a credit card with an unlimited loan amount. All our gold in reserves were no longer associated with actual paper money -- they were independent of each other, and now whenever the government needed money, it could literally make more and not have to offset the costs with precious metal, or with anything for that matter. It's fiat money, baby! It's worth what the government says it's worth.

We've been paying off this national debt since before WW2. During WW2, the national debt soared to 119% of our total economic output. That was okay, because we were a good industrial nation with lots of potential and, coincidentally, the winners of the war. Innovation and business surged over the next few decades, and we pushed that debt down to 40% of our economic capabilities. Then, at the end of the 70's, it started to grow again. We would sell US Treasury notes to offset the yearly deficits because as a country we have a AAA debt rating.

As you know, it has been growing exponentially since then. I'm not going to point fingers, as every president since FDR has "inherited" a mountain of national debt. Oh, and yes, Clinton did balance the budget one year, but that excess wasn't put towards the national debt. And technically, he didn't balance anything, but had a surplus in taxation.

Okay, we are done with the recap. The above is a visceral explanation as the whole process is more complicated and time consuming. What is important to note is that where we are at right now took a few acts of power to achieve, and has not been good for our nation as a whole. Now lets talk about imminent failure.

The baby-boomers are setting to retire, huge throes of them. And over the last 40 years, politicians have been robbing them of this day. There is not enough money in Social Security nor MediCare to take care of them all. And FICA, that taxation removed from their check every payday since they first started working, was supposed to be putting that money away for their retirement. It doesn't exit. This is part of what people talk about when they say we owe this national debt to ourselves. Yep, we sure do. And guess what, that money is gone! Somewhere in the neighborhood of 9 trillion dollars of our total debt is missing that was supposed to support these boomers through retirement and to the grave. Where are we going to get that money?

Same goes for MediCare, this government agency will be completely bankrupt in a few short years already, with Social Security nipping at its heels. There is no remedy for this save for people will have to go without. Sorry, this huge scam is coming to a close and it will crush us unless the boomers continue working to their grave and buy personal insurance, unless they took the initiative to invest along the way.

Just a couple of days ago, there was a headline about raising the debt ceiling to almost 14 trillion. They raised the debt ceiling back in December as well. The reason they have to do this is that if we surpass our ceiling, it will raise the interest rates on our outstanding loans, which are about 12 trillion right now. Basically, we would lose our AAA rating. But buy raising it, we buy into the unlimited money supply ideology that Congress gets drunk off.

We all know the current administration put up a 1.4 trillion dollar deficit for `09. I hear it'll be close to the same for this year, with perhaps another stimulus on the way. If so, then this new debt ceiling may last to the end of the year. Even if it does, our GDP is about 14 trillion when not in a recession. Or in other words, it'll be like post WW2 with our debt being over 100% of our total economic output.

The difference, however, is that we are not the same nation as before. In fact, we export our jobs over seas, and we build less than 10% of what we used to at the end of the 1940s. And, our currency is worth less, and we have over 10% of the workforce drawing unemployment. Which means not only are they not paying taxes, they are taking money away from the government (no offense to anyone, I was unemployed a year ago as well).

Here's the next problem; the States of America are 77 billion dollars in the red, and California is over 20 billion behind on the budget. The "governator" just asked for a Federal Bailout and was rebuffed. The 8th largest economy in the world is in the tank. What happens if the Feds say 'yes' to the bailout? How many more states will ask for money as well? Where will this money come from? Less and less countries are interested in buying US Treasure bonds, and I don't blame them. In part, the rest of the world has less money to spend, but also, they just watched us sell 1.4 trillion in Treasury bonds, and less than 400 billion were bought. The rest of the money was printed off.

This time last year gas was $40 a barrel, under $2.00 a gallon at the pump. Global demand had taken a nose dive. One year later, and we have a 50% increase in price at the pump. For what? Save reason gold surged past $900, 1000 & 1100 dollars an ounce last year. The value of your dollar is dropping dramatically because of inflation so the price of gold rises accordingly. Inflation hasn't hit everywhere, and that is because the oil industry is always ahead of the game, and gold is nobody's fool. The reason you have not seen huge inflation increases elsewhere is because the banks are sitting on that excess money, unsure whether to loan it out, our wait for Obama's next Marxist move. (Of note, today Obama mentions tightening the grip on banks, and the Dow drops over 200 points.) Once that money does hit the streets, you will notice a lot more. And it is important to remember that inflation is the invisible tax that you never see. You earn 1.00, but by the end of the month when you get paid, it is worth .90 cents.

So going back to California, if the Federal government does not bail them out, they will be fiscally insolvent and bankruptcy will ensue. This will adversely affect the Federal government's pockets, because, again, 8th largest economy in the world supporting the largest economy in the world. It will create a nightmare, one that will exacerbate this frail economy. So bail them out. Then New York, proposing a $1 billion tax on their already excessively taxed populace, may want a bailout as well. Then Michigan. Then New Jersey, and so on and so forth. If that does happen, more money will need to be printed off. If we don't bail them out, states could declare bankruptcy which will affect the US government's bottom line, causing them to have less money overall as well, and increase the deficit. Either scenario is extremely risky.

What of external issues? Oh, you mean like the country Greece that is hedging toward financial disaster? Yep, same issue as California. Greece is at 113% of its GDP and heading to 120% soon. It is part of the European Union and therefore, allowed a bailout by the other Euro countries, but to do so would mean they have to assume Greece's debt, which would devalue the Euro (good for the dollar...). But if they don't, then Greece doesn't have to pay its debts through bankruptcy, and those other nations will be out of the money they invested. If that happens, then maybe Spain, another country is financial dire straights, will follow suit and absolve themselves from debt. What do you think will happen next? Another country declares bankruptcy? Why not. Fresh start!

The problem in part is that we are all inter-connected and even though Luxembourg is a small country, it has nearly 2 trillion in debt. And if tiny Luxembourg fell, then Greece, then Spain, and on down the line, this economic world is over. Undeveloped nations can get away with declaring bankruptcy (such as Mexico in the `80s and Argentina in `01), but well-established countries cannot, under any circumstances, be allowed to fail -- too big to fail! But only because the dominoes start to topple after that, but, as I stated above, to save them greatly devalues their respective currencies, causes inflation, and affects everyone regardless of whether you actually live in the country.

Some have argued that China will save us, but the guy who predicted the fall of Enron, and made money off it, has similarly predicted the same for China. But also, if the US fails, China will as well, since we are their money bags, besides holding over $1 trillion of our debt -- thank you China. But if China fails, this would have adverse effects as well. Oh, and Japan will probably fail as they are at 170% of their GDP.

What could save us from this? Bring back the gold standard for one. Balance the budget would be another. Caps on government spending, re-employment, voting conservatively... Just saying. Obama did announce he is putting forth a commission to help him cut spending. Like any of this will ever happen (not real pessimism, I do have hope).

So I've given to very real reasons that certain economic catastrophe is going to happen; either internally or externally, besides the inevitable inflation and baby-boomer demise. Do you go off and buy gold now? No. At +$1100 an ounce, it simply is not worth it because historically, silver has maintained a 1/16 price of gold, yet silver is around $18 an ounce, so there is a huge price disparity between the two precious metals which leads me to conclude that even gold is in its own bubble currently. That, or silver is way under priced and in that case, go buy some. I actually went to buy silver bars last Saturday, but strangely, they only accept cash!

Why buy precious metals when we should focus on survival? Because, in the event of total global meltdown, bartering will be paramount. And if you need medication, or a tank of gas, they may not be willing to trade two cans of pitted black olives for you. You can buy 1 ounce silver bars for under $20. That's a good start for bartering. If not, maybe you will not mind giving up that wedding band. But once that is gone, then what?

Fellow readers, I've waxed on a bit much. My point is this: I may be wrong which is totally acceptable to me, and we still have time to rectify this, but I exhort you to be prepared on three fronts. Food. Protection. Bartering. And it wouldn't hurt to say your prayers.