Americanly Yours

A few weeks back, several of my friends and I exchanged arguments over email.  I wanted to pull a quote from a response of one of my friends and use it to talk about interest rates.

“. . . TBILLS at the lowest rates ever!  We can print money for nearly no intrest [sic]. . .”

I think that this is a common misconception among people.  Yes, the FED has a target rate of 0-1/4% for the Federal Funds Rate, but this rate is only the rate that banks charge each other for overnight loans.  This is not the rate for US Government bonds which are issued to fund government debt.  In fact, US government bonds have a much higher interest rate than the overnight fed funds rate.  Government bonds are largely traded on the open market which means that they are priced through supply and demand.  The current rate on a 10 year bond (about 3%) can be found here.

We have a large national debt that is growing every day.  Of the money that we owe, our debt to China is over $1,000,000,000,000 [$1 trillion].  To continue to fund ambitious “stimulus” bills, government bailouts, and large social welfare programs like medicare and the coming socialized health care scheme, we will have to continue to borrow funds from American citizens and foreign nations.

As we increase our money supply, our money becomes worth less.  As we increase our borrowing, we have to pay higher interest rates in order to entice countries and private citizens to loan money to us.  Both of these things are happening at the same time, and happening during a global recession.  This leads me to believe that interest rates on government bonds will be rising (if no one wants to loan us money and we want to keep running a deficit, we have to raise interest rates).

We have more than doubled our money supply in the last year!  If you dont believe me, see the chart below, or click here.

But, things dont end there.  China’s Premier, Wen Jiabao recently expressed worry about the value of the dollar.  He said “Of course we are concerned about the safety of our assets. To be honest, I’m a little bit worried.”  Apparently, there is even debate within China about whether or not to continue to invest so heavily in American bonds. And of course, this is coming at a time when China is dealing with their own economic problems.  China needs to have high levels of annual economic growth in order to pacify their increasingly restless (and violent) rural populations.

China just announced a stimulus of their own totaling over $500 billion.  The money being spent on that stimulus is money that cannot be loaned to the American government.

One thing that very few people are aware of is that President Obama’s anticipated budgets for his 8 years as president (assuming that he wins a second term) have the national debt doubling to over $20,000,000,000,000 [$20 trillion]!  In order to finance these massive budget deficits, we have to borrow this money from someone.  If China turns off the loans, it is going to be very hard to find the money to continue to fund massive national programs, while fighting two wars and bailing out American industries.  China has us right where they want us… and they know it.

Americanly Yours,

Phred Barnet

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Hundreds of people came out to protest the bailouts on Friday in front of the Georgia State Capitol despite the torrential rainfall.  It was a beautiful sight to see the steps of the capitol completely filled with people voicing their opposition to this wasteful spending.  I read in the Christian Science Monitor that over 1000 protesters showed up at a similar event in St. Louis.

Hopefully these events will continue to be held and the momentum will keep building until our government listens to its citizens.  Please pledge to join the cause by clicking the button on the right.

Americanly Yours,

Phred Barnet

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This past weekend, President Obama announced that he wanted to cut the deficit in half by the end of his first term in 2013.  You would think that this would make a deficit hawk like me happy.  It would–if it werent so misleading.

President Obama says that he wants to cut the $1,300,000,000,000 [$1.3 trillion] deficit that he inherited from President Bush down to a deficit of $533,000,000,000 [$533 billion] by 2013.  While this seems like a tough goal that will cut spending, this will actually result in increased spending.  The reason for this is simple:  the present massive deficit is an aberration from the normal, including hundreds of billions of dollars in spending that was supposed to be one time spending.  For example, included in the $1,300,000,000,000 [$1.3 trillion] deficit is the $700,000,000,000 [$700 billion] spent on the bank bailout, the additional billions spent on the bailouts of Bear Stearns and AIG, and last years stimulus plan that sent most Americans a $600 check.

In fact 2008’s deficit was $438,000,000,000 [$438 billion] a massive number, but a number that is dwarfed by the $1,300,000,000,000 [$1.3 trillion] deficit that is to be expected in 2009.  The vast majority of this money was supposed to be for one time things.  In fact, without adding the increased spending from the “one time items,” the deficit for 2009 looks a lot like the deficit for 2008.

President Obama’s 2013 budget deficit figure still represents an increase of over 21% from 2008’s number.  This “cut” looks more like an increase to me.

And Mr. Obama’s own numbers still admit that he will have a deficit of over $1,000,000,000,000 [$1 trillion in both 2010 and 2011].  No numbers were given by his office for 2012’s predictions, but lets give him the benefit of the doubt and assume that 2012’s deficit equals 2013’s deficit of $533,000,000,000 [$533 billion].  This means an increase in the national debt of at least $3,000,000,000,000 [$3 trillion]–equal to $10,000 per American.  I think the numbers will be much higher.

More on that later.

Americanly Yours,

Phred Barnet

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A year ago, America was completely different than it is now.  In the last year, the government has nationalized the banking industry, taken over the worlds largest insurer (wasting well over $100 billion in the process), and taken control of two iconic car companies.  Last week, Congress agreed to a plan that will cost nearly $800 billion.  Between actions by Congress and the Obama administration, as much as $3 trillion was pledged to government bailouts last week! This amounts to 21.7% of American GDP (US GDP is 13.7 trillion).  This new spending is more than government’s entire 2008 budget of just under $3 trillion.  Every penny of this money is being financed with debt.  This will raise the size of the national debt substantially.  Our national debt currently stands at roughly $10.7 trillion.  If we add another $3 trillion to the debt, our debt will increase by 28% and will be roughly equal to our GDP!

Of course, even Mr. Obama has admitted that there is no guarantee that these plans will work.  Even more interesting, he has said that these plans will have little effect before 2010.  This is particularly interesting because the non-partisan CBO recently estimated that the recession will supposedly be over in mid 2009 even if these “stimulus” plans werent passed, meaning that Mr. Obama’s plans wouldnt even begin working until after the economy has already started to heal itself.

But, lets pretend that Mr. Obama’s boldest predictions are correct and that this plan will create 4 million new jobs (although he says it will create or save 3-4 million jobs).  Let us also assume that each of these jobs is a high paying job of $100,000 a year and that these jobs are permanent jobs that will never go away in the future, regardless of future circumstances.  According to both H&R Block’s tax calculator and the Heritage Foundation’s much simpler tax calculator, a single person earning $100,000 pays $19,472 in Federal taxes.  So, the 4 million jobs that we are pretending this plan will create will return $77.888 billion in taxes per year to the federal government.  Excluding any interest (which will likely be a hefty sum and will go countries like China), it will take the government about 35.5 years to recoup the money!

If, however, this plan still creates 4 million jobs but these jobs pay $50,000 per year instead of $100,000, the government will collect $6,606 in taxes per person totaling $26.424 billion in taxes per year.   Under these circumstances, it will take the government 113.5 years to recoup the money!

However, I made a little Excel spreadsheet assuming that the government would have to pay 3% interest on these new loans.  This is a generous assumption, considering that the average rate on treasury bills has been much higher.  I used both of the above jobs assumptions in my calculations and found that the government will actually never be able to recoup this money if interest is factored in! Check it out for yourself.

Americanly Yours,

Phred Barnet

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The following story isnt true.  It is more of a “political joke” of sorts.

When Nikita Khrushchev was forced out of power in the Soviet Union he left his successor (Leonid Brezhnev) with two letters.  He told his successor to open the first letter when he came to his first major crisis and follow the instructions.   He was told that following the instructions would get him through the crisis.   He was also told that when a second major crisis stuck, he should open the second letter from Khrushchev and follow its instructions.

The inevitable crisis happened and Brezhnev became worried that the crisis could cause him to be removed from power.   He opened Khrushchev’s first letter which said “Blame everything on me.  The only way that you can stay in power is to blame everything on my poor leadership and announce that you have to reverse my policies in order to save the State.”

So, Brezhnev followed the instructions in the letter and things in the Soviet Union got better for a while.   However, after a few more years, the economy began to stagnate and Brezhnev once again became worried that he would lose power.  He realized that the advice from Khrushchev’s first letter had saved him once and that maybe it could do so again.

Brezhnev opened the second letter and it read “Sit down and write two letters.”

As I said above, this is not a true story.  It is however, a useful lesson on political survival.

I would argue that President Obama began reading his first letter during the campaign when he blamed everything wrong in the world on President Bush.  He has continued to beat up on President Bush’s record in a constant attempt to convince the public that the current crisis is not his fault.

He will likely continue to read from this letter for several years.

For example, if the situation in Iraq continues to improve and we can pull our troops out, Mr. Obama will undoubtedly take all of the credit, despite the fact that President Bush’s controversial Surge plan was a complete success and has effectively won us the war.  If on the other hand, the situation in Iraq deteriorates and we either do not leave within Mr. Obama’s promised 16 months or we end up leaving in disgrace, there can be no doubt that President Obama will blame Mr. Bush.

Similarly, if the economy turns around in the next year or two, Mr. Obama will take all of the credit.  If however, the situation worsens, the economy continues to contract, and unemployment approaches or reaches double digits, President Obama will claim that he inherited this mess.  In his speech last night President Obama said “I can’t tell you for sure that everything in this plan will work exactly as we hope, but I can tell you with complete confidence that a failure to act will only deepen this crisis as well as the pain felt by millions of Americans.  My administration inherited a deficit of over $1 trillion, but because we also inherited the most profound economic emergency since the Great Depression, doing a little or nothing at all will result in even greater deficits, even greater job loss, even greater loss of income, and even greater loss of confidence.” This was effectively Mr. Obama hedging his bet:  if the economy turns around, he can take credit, but if it doesnt work, he will say that things are still better than they would have been if the bill wasnt passed and besides, it is still President Bush’s fault.

This is why President Obama still sounds like his is running for President, rather than holding the office.  It is safe to say that President Obama was not elected to office based any past accomplishments that he had.   He was also not elected based on any future plans that he had.  Rather, he was elected because the American public was (and still is) fed up with President Bush.  The fact that Mr. Obama was elected President is really only an externality of the perceived failure of the Bush Administration.  Mr. Obama really didnt run against John McCain; he really ran against President Bush. How many times did you hear Mr. Obama refer to “8 years of failed policies?”   Because Mr. Obama was elected as an opposition candidate–a reactive candidate rather than a proactive candidate– he is likely to continue this course of acton.  Expect him to continue to beat up on President Bush’s record.  Furthermore, you can expect him to denounce Republicans who vote against his programs (in a manner that will probably become much more hostile in the near future).

The problem is that Mr. Obama cannot continue on this course for too long.  The American people are fickle and grow tired of things quickly.  Remember that when the War in Iraq started Bush (who was cheered on to war by the American public as well as the media) had an approval rating of near 70%.  At some point, the American public will grow tired of hearing Mr. Obama blame all of the country’s problems on the previous administration–especially if things get worse.  The people want solutions and when President Obama realizes that he cannot deliver them, he may have to reach for that second letter.

Americanly Yours,

Phred Barnet

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