The Powers of Nature

We greeted the news Friday night with the lethargic disappointment that comes with a second helping of cheese cake.  We’d longed for a government shutdown…and to see the army of beltway administrators without a purpose in life come Monday.  Instead we got what President Obama called “the biggest annual spending cut in history.”

We’re not sure what he means by “biggest.”  A quick back of the napkin calculation tells us the $38 billion spending cut amounts to about 1 percent of the estimated $3.8 trillion in total 2011 fiscal year spending.  In other words, it’s a sham.

Former U.S. Comptroller General David Walker recently remarked that the House budget debate over such paltry cuts was “like arguing about the bar tab on the Titanic.”  No doubt, the ship of state has struck an iceberg and is rapidly taking on seawater.  In fact, the entire hull should crack and buckle sometime before May 16th.

That’s when, according to Treasury Secretary Timothy Geithner, the federal government runs out of money for good unless the Congressional debt ceiling is raised.  In a January 6, 2011 letter to Congress, Geithner wrote…

Historically Verifiable Policies

“I am writing in response to your request for an estimate by the Treasury Department of when the statutory debt limit will be reached, and for a description of the consequences of default by the United States.

“The Treasury Department now estimates that the debt limit will be reached as early as March 31, 2011, and most likely sometime between that date and May 16, 2011.

“Never in our history has Congress failed to increase the debt limit when necessary.  Failure to raise the limit would precipitate a default by the United States. Default would effectively impose a significant and long-lasting tax on all Americans and all American businesses and could lead to the loss of millions of American jobs.  Even a very short-term or limited default would have catastrophic economic consequences that would last for decades…”

Obviously, the consequences of a U.S. debt default are grim.  But what Geithner will not admit is that the U.S. won’t default in a traditional sense…by not paying the bills.  Nonetheless, by increasing the debt limit the default will still happen.

According to Bill Gross the default will not happen “in conventional ways, but by picking the pocket of savers via a combination of less observable, yet historically verifiable policies – inflation, currency devaluation and low to negative real interest rates.”

The Powers of Nature

Anyone who has bothered to pause and consider the monetary mischief going on knows the historically verifiable policies Gross mentions have been in full bloom like flowers in spring for quite some time.  So it should come as no surprise that lenders are demanding greater compensation from the treasury.

Since March 16th, yields on 10 Year Treasury Notes have increased 11 percent.  Last week oil topped $113 per barrel and gold reached $1,475 per ounce.  Not to mention gas prices… Here in International City we paid $4.10 per gallon for the cheap stuff last week.  What gives?

When Ralph Waldo Emerson said, “Everything in Nature contains all the powers of Nature,” we doubt he was referring to gas prices or the possibility that gas prices could keep going higher.  What he may have meant is that in a natural world things must follow their natural order.  Gas prices must rise until demand is destroyed.

The Fed likes to believe rising gas prices are evidence of an improving economy.  That greater economic activity is driving up gas prices.  Maybe so.  We also suspect geopolitical unrest in the Middle East has something to do with it.  But more accurately rising gas prices are a measurement of the hundreds of billions of dollars of digital monetary credits being created against a more finite supply of resources production.

We hope the Fed can cut a couple percentage points off the unemployment rate soon.  If not, Bernanke’s liquidity trap graphs will tell him to do something really stupid…like QE3.  Then we’ll get to really see the powers of Nature ignite in fury.


MN Gordon
for Economic Prism

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