Saturday, January 3, 2009
Wanna buy an apple?
To get even more on this, as well as some background - see earlier posts like "Back in the USSA" and others. I am getting worried about the economy. Not for the same reasons as a lot of people, but worried none the less. As stated above, previously I let you know how I feel about these government "bailouts" that keep being thrown around like chicken feed. This is getting ridiculous! We (and yes it is WE!) are giving money to every industry and company that is having trouble. This cannot stand. There are constitutional reasons that should prevent this from happening. Unfortunately, there are not a lot of contitutionalist politicos or even voters around to recognize it or care about it. We won't go there (one of my first posts over a year ago addressed this). I will just keep this to the economic side of the argument. The first rule to remember is - THERE IS NO GOVERNMENT MONEY!! All together now - THERE IS NO GOVERNMENT MONEY. When you hear about a "stimulus" or a "bailout" think about YOU writing a check. There are three ways for the government to have money to throw around, and they all involve US. One, they can print money. If this path is taken, inflation of epic proportions takes hold, and the money is worth nothing at some point. Second, they can take out loans. Loans, you say? Treasury bills and savings bonds are loans. They are saying that if you give the government (buy the paper for) X dollars, at some point in the future you will get back X+Y dollars with Y being interest and your "profit" for loaning the money. If you ever hear a financial reporter talking about the yield on T-notes, this is what they are referring to. The third is a favorite of most "democratic" governments - raise taxes. Let's address these individually - Printing money is not good. You all should have heard stories of money in Nazi Germany or Argentina, or post-war USSR being worth nothing. To have money to get what was needed the government printed bales of money. The problem is, when there are bales of anything around the value drops. If everyone makes $200 an hour, do you really think a McDonald's double cheeseburger would still be a $1? (or now $1.19 at most stores - see your local store for details) This path is not (so far) one that our monetary geniuses have taken. We can all hope they do not get that desperate. Taking out loans, or selling paper; is not a bad way to get money. In fact, it is preferred to the other two, because it places the burden of financing government on those that are willing to do it. Governments offer up $100 worth of notes (T-bills or other instruments of trade) and tell you in a set period of time you will get back $104 (or whatever). You, the investor, decide since the return is "guaranteed" by the government, you will participate. What is wrong with this picture? Well, like any debt, it has to be repaid. The way it is repaid is through one of the three means I listed (if you are brain dead - printing money, loans/government securities, taxes). I have told you why printing money is not an answer. I will no longer have that alternative in the discussion. Just realize if we are down to that one - get an apple stand. That leaves taxes and/or more loans. No problem, just sell another government security. That only works when there are people that want to buy them. Right now the government is benefiting from a rare circumstance where people are so nervous about the future they are willing to buy T-bills for ZERO return. That is right - you buy government bills now and when they mature, you get back your investment. (actually you lose due to inflation and taxes, but hey I am not an economist nor a professor) This will work as long as people are so insecure and afraid of investing that the security of a T-bill is worth the lack of return. With banks failing and the stock market being very volatile, zero return with close to zero chance of loss looks good. If and when the economy starts to recover - ZERO won't look so good. The government then has to raise the return. Who cares, you say? That means the interest rates go up. Who cares, you say? That means credit card rates, car loan rates, mortgage rates, small business loan rates, etc ALL GO UP. And, you ask? This means that just as the economy starts to look better, interest rates (the cost of growth in some respects) goes up. This is the best way to slow an economy, raise the cost of money (interest rates). So, when we get going again, we face the problem of hitting a wall. This is especially true in that the government has recently to "give" the "bailouts" taken on trillions (yes, TRILLIONS with a "T") in debt that will come due in one, three, five, or ten years. Scared yet? So, when you can't sell a T-bill to cover the cost of the old T-bill...... The third and only way left for a government to raise money is here - TAXES. That's right. When all those TRILLIONS of dollars of notes come due from the "bailouts"; if the government cannot sell a note without raising interest rates to a prohibitive level - you and I pay the notes. (the alternative is government default - not a pretty picture) I am talking about taxes to cover the TRILLIONS over and above the TRILLIONS we have been footing anyway! Scared yet? I want to mention another absolute - corporations/business do not pay taxes. All together now - CORPORATIONS/BUSINESS DO NOT PAY TAXES. So, the idiotic notion that we can tax businesses is just that - idiotic! (a quick refresher - business/corporations do not pay taxes because they have no money. They only have the incomes from their customers and the investments of their shareholders. That means any tax goes back into their prices. Who pays the prices - US. There is a previous post on this as well - go study). So, when the notes come due, the interest rates cannot be raised enough to make a T-bill attractive; who pays - WE DO. I am getting burned out now as well. Re-read and do some research - more later.