“The real goal should be reduced government spending, rather than balanced budgets achieved by ever rising tax rates to cover ever rising spending.” —Thomas Sowell
Destroying Your Wealth
The US government is destroying your wealth. The US now owes $18 trillion to banks, so the Federal Reserve is printing money to devalue the currency; this makes it easier for America to pay off its debt. This is also a form of theft. By inflating the currency, the US government is stealing from its creditors. But, rather than object, and insist Uncle Sam rein in inflationary practices, the banks follow the path of least resistance by increasing fees on consumers. This means Americans are paying hidden taxes to Uncle Sam in the form of banking fees, in order to pay off debt; this converts the theft being perpetrated from a theft of US creditors to a theft of American taxpayers instead.
So, What Is Inflation, and Why Is It Theft?
The definition of inflation is simply the government blowing more currency into the currency balloon—called the “money supply”—thereby making the balloon inflate. The more dollars there are in existence, the less valuable each dollar is. If the economy has grown by ten percentage points, then the money supply can be increased by ten percent. The problem is that America has a stagnant economy at present, although the US government continues to print money. More dollars in a stagnant economy means prices go up, causing your savings to be worth less and less over time, as the government theft continues.
The US government has changed the way inflation is calculated, so that it comes out, on average, about eight percentage points lower than it would have, according to 1980 methodology. (To view statistics calculated the old way, go here and page down: http://www.shadowstats.com/alternate_data/inflation-charts.)
The “Rule of 72”
There is a rule for calculating the future value of money, based on average inflation over time. It is called the “Rule of 72.” The way it works is that you divide the rate of inflation into 72, in order to discover how many years it will take for today’s fiat currency to lose half its value. So, if the inflation rate is ten percent—rather than the two percent the Obama Administration claims—that is a real cause for alarm. It means that, in 7.2 years, you will need twice as much money to buy a quart of milk. And, if this high inflation were to continue for another 7.2 years, the price would double yet again (meaning that, 14.4 years from now, you would need four times the number of today’s dollars to buy that same quart of milk).
The Backdoor Tax Increase
Another horrible outcome of all this government-sponsored inflation is this: your taxes get raised—and with no need for an act of Congress or a presidential signature on a tax bill! The way this happens is that your employer eventually raises your pay, in response to the inflation. However, this also means that you end up finding yourself in a higher tax bracket where you must pay a higher percentage of your income in taxes. You are receiving the same value in terms of salary as before, but you are receiving less take-home pay as a practical matter. Sometimes, a small pay raise can hurt more than help, if it barely bumps you over the line into a higher tax bracket, because a higher tax rate might mean that you lose more money at the higher rate than you gained from the pay increase.
Taxation without Representation Is Unconstitutional
Inflating the dollar in this way should be illegal. “Taxation without representation is tyranny,” so taxes should only be increased by a vote of Congress, with the agreement of the American people. So, a backdoor tax increase that goes around the Congress, as currency inflation does, is unconstitutional.
The Employment Situation
The artificially low interest rates the Fed is creating are working temporarily to keep the economy from collapse, but for how long? The truth is that the labor participation rate, according the Bureau of Labor Statistics, is now down around 62%, making the simple, unadulterated rate of unemployment actually around 38%. But, of course, government stops counting people as unemployed once they stop receiving unemployment insurance.
Jim Clifton, Gallup CEO, wrote a blistering commentary exposing the government’s statistical lying. He revealed that Uncle Sam defines a job as one hour of work a week for at least $20; that “unemployed” fails to include people who want a job but have given up seeking employment; and that full-time jobs in America are now just 44 percent of jobs. This means 30 million Americans are out of work or “severely underemployed.”
This lowering of the labor participation rate means that businesses have been shedding workers more than they have been adding them. The increase in the value of the stock market has been a result of inflationary policies that have allowed the banks to more easily come by cash for investment. Once this inflationary stimulus stops, banks will sell off holdings to improve their balance sheets enough to pay for the higher interest the Fed is likely to demand. Companies will lose value and, as a result of this loss of investment capital, shed still more jobs.
The Gross Domestic Product numbers from government, which imply 3% economic growth, are only valid if you allow the government to count items not historically counted—items that no other country counts. These include such things as the costs of books, magazines, and iTunes downloads of songs and movies, as well as the royalties derived from those costs. Take all those things out again, and it turns out that we are in sad shape. In fact, without the jobs Texas has added to the US economy since Obama took office, US job growth is in negative territory.
In the real world—versus the fairytale world of the Obama Administration—the US government is broke. If the annual Obama budget deficit of over a trillion dollars on average were taken into account, along with our debt to GDP ratio and all unfunded liabilities, the US could not qualify for membership in the Eurozone. Our balance sheet, if we could know the true damage, would probably look worse than that of Greece by a significant percentage.
When the Bubble Bursts
When the Obama bubble pops, the risks are as follows: 1) a collapse of the US dollar as dollars are taken out our stock market, sold off, and reinvested elsewhere; 2) a huge spike in interest rates, as banks begin to protect their own money supplies by limiting lending through price increases on loans; 3) an immense economic contraction, as people’s wealth begins to disappear with the devaluation of US currency, and their buying power diminishes; 4) the drying up of credit, as borrowing rates increase and credit card accounts start getting canceled; 5) through-the-roof inflation, as the dollars sold off by foreign investors come flooding back into the US, increasing the domestic money supply by leaps and bounds.
We must recall that the New York Stock Exchange was experiencing record-level highs, almost daily, back in August of 2006. A little over a year later, the financial meltdown that became the Great Recession began. Only real estate, precious metals, and a few other income streams that can maintain value in an inflationary environment will be safe.
But Can the Crisis Be Avoided?
The only hope of avoiding the looming catastrophe would entail 1) sharp, immediate cuts to spending in social programs and other non-productive government spending; 2) a phasing-in of a retroactive tax-cut stimulus in order to spur immediate economic growth; 3) a steady reduction of monetary inflation, coupled with an eventual backing of the dollar by reintroduction of a gold or silver standard; 4) a commitment to future balanced budgets, after an initial slow-down period in government overspending; 5) and an agreement between the government and lenders that would entail the banks’ holding off on calling loans and many other negative consequences, in exchange for a commitment on the part of Uncle Sam to pay down the debt and restore value to the dollar through measured and responsible actions. After all, markets are, in the end, psychologically-driven; and the government must make responsible moves not only to bring our government back in line with reality, but to assuage psychological fears as well.
Common Sense Political Will
Without common-sense leadership to enact responsible spending reductions soon, we risk an unfortunate series of economic bombs going off. Milton Friedman was once asked if he might boil down the laws of economics to one pithy statement. Here is what he said: “There is no free lunch.” No truer words were ever uttered.
The views expressed in this opinion article are solely those of their author and are not necessarily either shared or endorsed by EagleRising.com