Category: Money

“Don’t steal, the government hates competition.” Ron Paul

Social Security beneficiaries received their COLA notice recently, which explained that 2022 benefits will be increased by 5.9% to keep up with the cost-of-living; this was the highest COLA increase since the 2008 Financial Crisis. This may seem like a considerable increase in benefits until you read on and compare to the prior year, current inflation and the historical record of COLA increases and inflation.

Back in 09/19/19 I wrote a post entitled “What is the Worst Ponzi Scheme Ever?”; in it I outlined why Social Security was by far the worst of such schemes, beating all others with a total of $42.1T in unfunded liabilities. According to the Oxford dictionary, “A Ponzi scheme (also a Ponzi game) is a fraudulent investment operation where the operator, an individual or organization, pays returns to its investors from new capital paid to the operators by new investors, rather than from profit earned through legitimate sources.” As the whole purpose of the Social Security Act was to require Americans to invest in the future when they retire, or are otherwise limited or disabled from earning an income, such a scheme qualifies as particularly onerous.

Considering now the current COLA adjustment, we find a further sleight of hand. Inflation as of the notice was running about 6.2% and rising. It is estimated that this will increase to 6.7% by years end. Further consider that the two most affected and essential areas for consumers are food and energy, accounting for 5.3% and 30% respectively for this inflation. Please remember that when you go to the grocer or gas station and experience even higher inflation, understand that these are government figures that are intended to fit a narrative and not reality.

Now it’s not just the .3% shortfall and counting at issue, we need to consider what they did to the Medicare deductions; for 2021 that was $148.50/mo., but for 2022 that will increase to $170.10/mo., i.e. an increase of 14.5%. Please note that this is not IRMMA, just the standard; depending on what your total earnings are you will be assessed additional deductions that will also be at a higher rate than last year, but let’s ignore that for now to keep this simple.

In effect, considering what inflation and increased deductions do to the COLA, but ignoring IRMMA as that will vary, the net effect is an increase in benefits of 3% to 3.2%, or less than half of what you need to keep even. If you are fortunate to make enough income to get you on the IRMMA charts, you will net even less. To add to these concerns, keep in mind that this does not consider what inflation will likely be in 2022, and it’s not what the Fed tells us.  What’s even more an insult on injury is to hear our Chair of the Banking Subcommittee on Economic Policy and the Finance Subcommittee on Fiscal Responsibility and Economic Growth (now that’s a government title for you), Senator Elizabeth Warren, tell us that inflation is simply price gouging by corporate America. Obviously an understanding of basic economics is not what got her the chair on that group.

Inflation’s all-time high was 13.5% back in 1980; the COLA then was 14.3%, and there was no IRMMA or income taxes on benefits. Since 1980, not only have FICA deductions increased and IRMMA added, but 85% of benefits are subject to income tax. Imagine the outrage if a private insurance company operated such a scheme as what our government does; the only difference is Social Security is mandatory.

This morning the financial news talk was centered on the inflation reports, which were at 5.4%, and rising quickly. There was a focus on the looming energy crises around the world, both on extremely high inflated costs, and shortages from all sources, with particular emphasis on natural gas in Europe. Other basic commodities like food, lumber, cooper and other necessities are all experiencing huge surges in prices with corresponding shortages in supply.

The phrase that had many of the interviewers and interviewees stumped was what the Fed and the administration spin the inflation story now as “persistently transitory”; of course such a phrase would confuse anyone paying attention as it is a contradictory construction of opposite meanings. Anything that is persistent is by nature not transitory, and anything transitory is by nature not persistent.

The debates that ensued were predictably about when the Fed will and/or should raise interest rates in order to curb what is obviously apparent as an inflationary trend that is no longer “transitory”. Even so, there were those that still cling to this transitory narrative based on causes that “… are not fundamentally economic in nature.”  Now there’s an oxymoron if there ever was one as how can inflation not be an economic issue? True that the cause may be anything ranging from natural disasters, civil unrest, or distortions caused by policies, but all have economic consequences.

One economist who has consistently shown a clear headed understanding of the issues is Mohamed A. El-Erian, President of the Queens College School of Economics at Cambridge University. He correctly cites various government policies that have contributed to inflation, and cautions against the forever bromide of placing everything on the pandemic, i.e. crises come and go, but it is policies that have a persistent effect. He has been interviewed by various media and has repeatedly warned about the looming threat of inflation, the lack of central bank attention to it, and the concern that inflation will spike so egregiously as to force central banks like the Fed to react with a precipitous rise in rates so as to cause a recession.

Such would be the formula for stagflation, a phenomenon many in the US have not lived through given that more than 50% of the US population was born after 1980.For those who were born after that time, and even for those like me who are Boomers, but may not recall the “Volker Shock”, Paul Volker was the Fed chairman from 1979 to 1987. He was brought in by Jimmy Carter to control the double digit inflation the US was experiencing caused by Nixon ending the US Dollar’s gold standard and issuing wage and price controls, both disastrous policies leading to drastic inflation.  At one point inflation rocketed to more than 11%, causing a loss of confidence in the USD such to the extent that the US was forced to issue UST notes denominated in Swiss Francs. In 1980, Volker raised the Fed rate to 20% which, while eventually but effectively bringing inflation under control through monetary contraction, also resulted in the Recession of 1981.

Thankfully, Regan reappointed Volker and followed his budgetary advice, as did Bush and Clinton subsequently, such to the extent that during Clinton’s administration the US had a balanced budget and a surplus for the first time since 1849. Since 2001 it’s been a tragic history of skyrocketing deficits and debt resulting from bad fiscal and monetary policies; it’s déjà vu Nixon Era.

Now we are faced again with the results of 20 years of fiscal irresponsibility and the monetizing of debt, such to the extent that we face the prospect of either the dollar’s default and demise, or another “Volker Shock”, this one perhaps even more painful. Yet in the face of that we have the Biden administration proposing the most irresponsible spending programs of such magnitude as to be laughable if it weren’t so tragically dumb, a literal case of spending from empty pockets.

Obviously, the US will be forced to yet again raise the debt ceiling in order to pay its current bills, but DC seems to be ignoring the thousand pound gorilla in the room. They need to face the reality that we can’t afford the dollar’s default and demise, and face the reality of depoliticizing the debate, cut spending, allow the Fed to raise rates and prepare for the inevitable Volker Shock II.

Do Americans have the courage of the 1980’s to accept the results of bad policies, and claw our way back at least to some degree of fiscal and monetary sanity? Consider the fact that if the US allowed interest rates to rise to normal market levels, the total of all revenues would not provide the funds to even service our current debt, a debt to GDP ratio that now exceeds 78%, placing the US 8^th in the highest debt of all nations; so what are we waiting for, getting to be first?

Some Fed experts cite the “sluggish” inflation over the last decade, one at a paltry 2% or less, as the basis for judging that this current spike is transitory, as if inflation was a good thing. They need to start understanding that inflation is like that old Lenin saying, “There are decades where nothing happens, and there are weeks where decades happen.”

What is also at stake is losing the reserve currency status of the USD, a metric establishing a currency’s stability, convertibility, credit worthiness, central bank independence and therefore its dependability in world trade transactions. Considering the fact that the US has inflated its currency 26% over the last 1 ½ years, resulting in a serious devaluation, the USD’s stability is an issue. When that happens, currency exchange becomes skewed impacting convertibility. Add to this the fact that UST auctions often result in the Fed having to buy much of the issue, which in turn inflates its own balance sheet, and that all impacts credit worthiness. On top of all this, the politicization of appointing the Fed chairman hardly speaks to an independent central bank. Little wonder that China, the world’s number two economy, and a nation with a debt to GDP ratio better than the US, is looking at a higher reserve status in the near future.

So when we hear such glib but dumb spinning like “persistently transitory”, and when you go to the grocer or the gas pump to see ever rising prices, remember that it’s not monetary and fiscal expansion that causes inflation, it’s that monetary and fiscal expansion is inflation. In the end, Americans need to understand that inflation is a thief and we need to call out our politicians for harboring and abetting the perpetrator.

Manna, depending on one’s beliefs was either a biblical event, or a metaphor about God providing sustenance for the Israelites in their time of need. Today we’ve all heard the term helicopter money, a metaphor about money seemingly dropped from above, falling as if it’s Manna from Heaven.

The reality is a bit more sobering. The most useful tool for the Feds and the UST was actually invented about 570 years ago; it’s called the printing press.  It was not thought of as a magical tool to create money, but one to better disseminate knowledge, which shows you how dishonest governments can be, like drug addicts pretending they don’t have an addiction.

There are many measures and definitions of the “money supply”, and they differ in some respects among economists and from country to country, but we will use the following for simplicity and clarity in what we are measuring and comparing.

MB, the monetary base, is equivalent to the actual sum of currency held by the US Treasury and the Federal Reserve as defined by all banks and other depository institutions in their accounts at the Federal Reserve.

M0 is equivalent to the coins and paper currency held by the public, i.e. outside of the US Treasury, the Federal Reserve banks and the vaults of depository institutions, in circulation plus any deposits which can be converted into cash.

M1 is equivalent to M0 plus checkable or demand and other deposits of the public held at commercial banks, savings and loans associations, savings banks, credit unions and similar items like traveler’s checks.

M2 is equivalent to M1 plus money market funds and deposits, certificates of deposit and other time deposits, but excludes long-term deposits like retirement accounts.

M3 is equivalent to M2 plus long-term deposits like retirement accounts.

As you may imagine, much of this money in the broader supply categories is not actually physical, but virtual as in digital form.  Given that all currencies in the world are now “fiat”, i.e. money by decree, you get one layer of imaginary money on top of another; that’s another topic to be addressed separately. For now let’s just keep it simple and compare the MB and the M1 over the short period of December 2019 to July 2020.

In December 2019, the MB was $3.40T, where as in July 2020 it’s $4.70T, a 38% increase. In December 2019, the M1 was $3.98T, where as in July 2020 it’s $5.33T, a 34% increase. Please note that these amounts are staggeringly higher than just a decade before, so those printing presses were really working hard!

Are we fooled into thinking that the “public” as noted in the M1 definition was suddenly blessed with a magical 34% increase in wealth? Nice try, but we can’t be that dumb….can we?

While manna maybe a literary anachronism, there are people that sincerely believe this bloated monetary policy is something necessary to provide the American people sustenance in a time of need. After all, isn’t that what we hear from our politicians, corporate leaders, financial gurus, so called economic experts and the bobble head media? Yes, for the most part sadly it is, but therein is the problem because while it may be a quick fix for debt addiction, it’s a sure way to impoverish a nation in the long run, only now the long run is getting closer by the millions. As of this month, the debt of the US exceeds its GDP, and will likely grow ever more beyond that; obviously that can’t be sustainable.

Critics have rightfully expressed concern that this policy of monetizing debt is a fool’s game, one that has never worked as empirically evident historically and in current times; it only perpetuates but does not solve the problem anymore than a drug addict ignoring the fact that the end game will be far worse than the pain of kicking the habit.

Don’t expect the critics to have any impression on either major political party; they are both intent on buying votes with more printing press stupidity, intoxicated with the cheap liquor of fake money; apparently the only thing they learn from history is how to avoid learning anything from history.

So then what is the solution? There’s no denying that it would be painful, froth with severe withdrawal symptoms.  Shrinking the money supply will tighten credit, raising interest rates, as it did under Volker a few decades ago.  There will be bankruptcies as the zombie companies and over indebted individuals face insolvency. Governments will need to become fiscally responsible, balancing budgets as their source of funds is reduced to taxation, a politically toxic alternative, not to mention economically counterproductive to recovery.

Which brings us to the ultimate natural control mechanism for preventing the Fed and the UST doing the same thing all over again assuming the above solution is engaged, i.e. a monetary standard, whether gold or some equivalent.  Along with that, we need to shut down the Fed; it has been nothing more than a tool for the cronyism of government and business, particularly Wall Street, creating ever more inequality economically, the enemy of a true free market.

I can hear the snickers of the elitist power brokers in our moribund institutions dismissing such radical ideas as impractical or outdated; what they may or may not realize is that if it doesn’t happen the old fashion way, there is an alternative that will happen anyway as the world has come to accept cryptocurrencies. It’s just a matter of time before this technological revolution of digital gold, which like its physical twin can’t be manipulated, will dump fiat currencies on the trash heap of counterfeit money.

Manna is an illusion, and like all illusions it passes with time.

# LikeMannaFromHeaven