Update On The Economy

(Warning, this post might make you sad and this article contains what might be considered hyperbole.) QE 3 is looking more like a possibility. (Remember that QE stands for quantitative easing and is basically the creation of new money and pumping it into the economy in hopes of giving it a boost or to keep it going.)This means that the government will continue to just print, or digitize money. This will lead to further inflationary pressures down the road. As you may know food, energy, and commodity prices are up in part due to QE 2. Food and commodities are traded in U.S. dollars and when the value of the dollar is reduced because of the creation of more dollars this tends to drive up those prices. Food prices are up in part because of bad weather that has impacted crop yields and because the developing economies of the world are getting wealthier and are demanding more meat products. Energy prices are up due to the unrest in the Middle East, which was caused in part by higher food prices which was due in part because of QE 2. So you can't blame the current spike in inflation solely on the Federal Reserve actions. Back to what QE 3 will mean, the continuation of printing money by our government is starting to look similar to the path of trying to inflate its way out of debt and economic malaise that the Wiemar Republic took, but America is different and is able to avoid basic laws of economics unlike past civilizations or nations that have been unable to do so. This is not a big deal and while it might be easy to make a comparison between Wiemar and America there are differences that make a simple analogy between the two not completely accurate. The Mises Institute does an opinion piece on the possibility of QE 3:

Austrian School economists have often explained the business cycle using the metaphor of liquor or drugs. The expansion of paper money and credit gives a sense of exuberance, an economic high that leads to excessive risk taking and balloons of production. But it can't be sustained. There is a morning after.[...]

Then there is the problem of price increases more generally. The producer price index for February has generated terrifying results, though you probably haven't heard about them. Predictions were for a 0.6 percent increase but the reality was 1.6 percent, which points to double digits on an annualized basis.

And that just the beginning. Food prices rose the most since November 1974. Prices of raw materials rose by 3.4 percent in February from the previous month. Intermediate prices climbed 2.0 percent, with diesel fuel up a monthly 12.6 percent in February[...]

History is littered with monetary mangers who believed they were in total control — until the disaster hit. It is hubris of the first order to believe oneself master of the universe — but hubris is endemic in Washington.

QE3 is playing with fire. Or with a third dose of meth. Or another bottle of Jack. Choose your metaphor. It is a bad and deeply dangerous policy, all built on the insane view that if you stimulate a zombie enough with fiat money, it will start to live and breath on its own.

Reducing this even more, consider this: If you drink enough, does your body start to generate its own liquor?

The Fed and the government have hooked the American economy on a wicked drug. Our job is to drive the dealers from their seats of power.

If the Federal Reserve is not able to detect the exact moment to pull the liquidity back in, inflation and possibly hyperinflation will be the outcome. This has not been done successfully by any central bank that has embarked on the path of inflating its way out of debt, I can't back that up any fact as I just heard that from my opinionated economics teacher who said inflation is coming so this fact should be taken lightly.

Some real spending cuts are actually being enacted by Congress, about six billion. That is a lot of money that will make a big impact on the debt,

The national debt jumped by $72 billion on Tuesday even as the Republican-led U.S. House of Representatives passed a continuing resolution to fund the government for just three weeks that will cut $6 billion from government spending.

If Congress were to cut $6 billion every three weeks for the next 36 weeks, it would manage to save between now and late November as much money as the Treasury added to the nation’s net debt during just the business hours of Tuesday, March 15.

At the close of business on Monday, according to the Treasury Department’s Bureau of the Public Debt, the total national debt stood at $14.166 trillion ($14,166,030,787,779.80). At the close of business Tuesday, the debt stood at $14.237 trillion ($14,237,952,276,898.69), an increase of $71.9 billion ($71,921,489,118.89).

Since the beginning of fiscal year 2011--which began on Oct. 1, 2010--the national debt has climbed from $13.5616 trillion ($13,561,623,030,891.79) to $14.2379 trillion ($14,237,952,276,898.69) an increase of $676.3 billion ($676,329,246,006.90).

Congress would need to cut spending by $6 billion every three weeks for approximately the next six and a half years (338 weeks) just to equal the $676.3 billion the debt has increased thus far this fiscal year.

At least some progress is being made. We just have to give the Republicans more time and a chance to make some real cuts, like reforming entitlement programs, that I am positive they will make. It now looks like Obama's proposed budget will actually add 9.5 trillion to the deficit instead of 7.2 trillion, just off by two trillion. This means that real cuts need to be made and not some phony, weak six billion.

Government money or welfare make up about a third of U.S. wages,

Government payouts—including Social Security, Medicare and unemployment insurance—make up more than a third of total wages and salaries of the U.S. population, a record figure that will only increase if action isn’t taken before the majority of Baby Boomers enter retirement. Even as the economy has recovered, social welfare benefits make up 35 percent of wages and salaries this year, up from 21 percent in 2000 and 10 percent in 1960, according to TrimTabs Investment Research using Bureau of Economic Analysis data.

'The U.S. economy has become alarmingly dependent on government stimulus,' said Madeline Schnapp, director of Macroeconomic Research at TrimTabs, in a note to clients. 'Consumption supported by wages and salaries is a much stronger foundation for economic growth than consumption based on social welfare benefits.'

The economist gives the country two stark choices. In order to get welfare back to its pre-recession ratio of 26 percent of pay, 'either wages and salaries would have to increase $2.3 trillion, or 35 percent, to $8.8 trillion, or social welfare benefits would have to decline $500 billion, or 23 percent, to $1.7 trillion,' she said.

According to this guy, America's economy has reached an important milestone.

We are borrowing more than $5 billion per day. That’s $35 billion per week to run our government, totaling more than $1.5 trillion in borrowed money just to run it this year.

Harvard’s great economic historian, Niall Ferguson, noted that the decline of a country can be marked when it pays its moneylenders more than its army. His classic case comes from the French monarchy of the 1780s that failed to make interest payments on their debt, causing the financial collapse that triggered the revolution. Recently, Carmen Reinhard and Kenneth Rogoff wrote a brilliant book titled 'This Time is Different, Eight Centuries of Financial Folly.' Their vast study revealed that most government officials always believe they are unique and different, causing them to make the same mistakes that crippled past nations and empires.

Admiral Mike Mullen did state that America's debt is the biggest threat to its national security so maybe Ferguson is on to something. I think America can pull through and overcome this financial crisis, even if it doesn't look like it at the moment. We are different from other nations of the past and have overcome similar level of debt after WW II, although under different conditions.

And a nice opinion piece that is full of emotive language and hyperbole,

A devastating debt crisis is coming; simple mathematics predict it. It is no longer a matter of if, but when. The time for hysterics, hyperbole, and finger-pointing is over. The time for political games, grand-standing, and partisan shenanigans is long past. This is no longer about Democrat, Republican, liberal, conservative, or progressive issues. This affects all of us. The looming danger crosses all party and ideological lines and jeopardizes all Americans, present and future generations. We're staring down a massive debt tsunami that threatens the US with a fiscal Armageddon the likes of which we've never seen.

I am sure that I am just looking at the sensational news that is hyping the economic situation up. There are several investors that have an optimistic outlook on the economy and the stock market has done very well the past two years even if it is a bubble, about to burst, that is being inflated by the actions of the Fed. I think the Rubicon is just in front of the world's economy and it is about to cross the Rubicon with a new economic system being on the other side. That sounds crazy so it must be inaccurate. Maybe the Republicans are just getting a slow start and they will make something happen in the next few years.