Tuesday, January 17, 2012

Here's how the US Economy works in 2012

Wall St is back after a 3 day weekend; the filth of the world dressed in expensive attire making deals; making profit based on mirages and insignificance..   market is up today.. yawn..  One of those trading days instantly forgotten by 5min after closing bell rings.

So what to write about? 

We're going to try to address a Very complex topic with as much simplicity as we can convey to educate the reader how truly absurd the economic picture is and how fortunate things have not spun truly out of control as it is.

Now for the purposes of clarity, we're not going to bog the mind with statistics and equations for all that does is stunt even the most advanced intellect from understanding the bigger picture.  For instance, if you are asked to close your eyes and picture a woman between 30 and 50, you can easily and with detail.   Now, try picturing a million women at once with similar detail?  

The mind just doesn't work that way.  Which is a big reason why terms like billions and trillions and zillions have no real meaning beyond the fact we know its a lot. So for this lesson, we're going to use very small and understandable dollar amounts.
OK..  here's how the US Economy works in 2012..

The government has a budget for running expenses- everything from defense to Social Security and many necessary functions in between.   Now for simplicity sake, let's say the total US budget for 2012 based on known expenses is $100 dollars.  I say 'known' because while the government may set aside contingency funds, it can not predict natural disasters, acts of terror, etc.

Now, right now the government takes in less tax revenue than it spends, mainly due to a refusal to tax the super-wealthy and corporations their fair share, so for simplicity, we will say the government collects $95 in taxes.    

It is $5 short.. this is the deficit.

The US has been short for many years and borrowing from China among others- it owes its creditors $115 dollars.   That's the debt.   Now the US brings in $95 in total tax revenue, so even if 100% went to the repayment and severe austerity was enacted- zero to anything else, we still could not pay back our creditors in full in a reasonable period.

So in a very simple world, the US spends more than it takes in.. creditors get owed more and more on the total balance but get nice monthly repayment checks with interest, and the debt continues growing, albeit very slowly. 
Now the government also collects revenue through something called Treasury auctions where it sells bonds to investors at periods of anywhere from 3mths to 30 years based on interest rates offered.  In a perfect world, the US is always able to sell its bonds which gives the necessary and immediate money to continue operating, and over time the investors get repaid on their risk.

OK, now let's make things more realistic--  Since the financial crisis of 2008 began, the US has had to spend A Lot of $ to keep the system from collapsing and economically resetting itself.  So if we use the example of the Govt spending $100 a year in normal operating expense, then the Fed Reserve and Treasury by proportion gave the zombie banks and other Wall St financials $1,000-$2,000.

Now the US govt. really didn't have this money to give.  So, how did it?  Well, it sped up the printing presses, creating lots of lots of money to go to the banks and other entities to keep afloat while the money, while being mere pieces of paper with pictures backed by nothing, also create debt which at a future point must be repaid.

So let's get a little more specific about the banks, Freddie/Fannie Mae and institutions like them.  Why is it when the US govt bails them out, is it not enough?  Well, see the banks and other financials are never honest about how much toxic debt is on their balance sheets.  

So let's say Bank A is holding $100 in debt, it can't ask the Govt for $100. No way the Govt could help, especially if Bank B, C and D also is holding $100 a piece in debt.   So instead each Bank says they only hold $5 in bad debt and if repaid, that solves the problem.  So they get the $5 and a few weeks later magically "discover" another $5 in bad debt and ask for more.  And if not bailed, the system will collapse-  that's the Bank's bargaining chip.
Now the Fed "lends" this money to banks at a very low interest rate .25% or 1/4th of one percent.  But the Fed doesn't want this new money circulated or loaned out to people; so it offers the banks another .25% to hold the money for them.  So basically, the interest paid to hold the money pays the interest to lend, and the banks now have free money to speculate especially in the stock market where the Fed wants it to go, and buying US Treasuries.

Basically, most of the money the government gets each month do not come from true outside investors.  It either comes from the banks, which the Fed gave for free essentially, or the Fed itself directly buys the bonds to spare the government the embarrassment of a lack of buyers.   And how does the Fed pay?  It prints more money.  And what does that do to the National Debt?   Yes, it increases it.

It gets more intricate from here but I want to tie up loose ends.  The US used to be on the Gold Standard until Nixon took the nation off in 1971 due to the expense of funding Vietnam.  Now money is basically pieces of paper, hollow coinage and digital ones and zeros.  

Everything is kept afloat in the US economy for one reason-- confidence.  I give you a piece of paper with Andrew Jackson's picture in it in exchange for something you possess, and you accept because you feel confident that piece of paper will be accepted elsewhere by someone else.   And when you put those pieces of paper in a bank and see your balance digitally blinking, you feel confident you will be able to access those funds at any time.

We're getting close to a point in time where people aren't feeling as confident about being repaid on services rendered or debts held... Nationally.. globally.. and when that happens, all the bad stuff no one wishes to think about, will begin to occur; the things one experienced in the 1930's Depression.
Its all about confidence.. con man.. con game...   


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