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What's New

2011-10-24 12:05:45

Our borrowed existence – series

Q: What’s new?

A: Like I always say…I’m glad to be asked. For the past six issues, I have presented my case of why the US Dollar (USD) is in more peril than ever in its history of losing its status as the world’s reserve currency, while using research from a wide variety of places, such as Stansberry & Associates, Kiplinger, Weiss Research, the Wall Street Journal, the New York Times, the Congressional Budget Office, the National Inflation Association, the Center on Budget and Policy Priorities, several others…as well as my own analysis...for what it is worth. If you have read these, you know that I believe there are some very serious things that are happening in this country and in the world that are not being talked about by nearly enough people. I would have much preferred people with much more knowledge in these areas than myself to do so, but it wasn’t being done to the extent that it needed to be done. I am not an economist. I am not a politician. I do not have an agenda…other than using this column to inform as many people as I can of the things I see and have researched, in the hope something can be done before it’s too late. Maybe it’s already too late. Last month, we talked about a couple of examples of societies that did not learn from history, that shared many of the same things with us that we find ourselves involved in today. This month, I will provide three solutions that I believe will work to restore the USD as the world’s reserve currency and get our country back to fiscal soundness in the quickest fashion. I will apologize in advance for the length but these three solutions needed to be presented together and they take a quite a bit of space to do so. Next month, I will give you my final solution that I can promise…is guaranteed to work. As I did in the very first article in this series, I told you I am not writing from any standpoint of hate. This problem is much bigger than hate and any political persuasion. I am, as are many of you, fed up with the games of the politicians. We have witnessed and continue to witness the biggest political games that have been played in decades with the deficit, debt and debt ceiling issues. I am convinced, if a pipe sprang a leak there, where most people would set about finding the leak, finding the cause of it, and fixing it…our elected officials, from the President on down would first think, “How can we blame this leak on the other side?” Then they would express why the other side’s way of fixing this leak is playing to the far right or the extreme left, or why it won’t work, without offering a solution that would work. Then they would explain why a commission should be appointed to study whether or not there is actually a leak…and on and on. Meanwhile, the leak is ruining everything and no one is fixing it. When I think of Washington, DC and our elected officials, I often think of Sodom and Gomorrah and Abraham talking to God. “Lord, if I could just find 10 elected officials that wouldn’t play politics with everything from “hairnet to hip boots” and from “soup to nuts,” would you spare our country and the USD’s borrowed existence as the world’s reserve currency?” Here are the top seven factors contributing to the USD losing that status: 1. The price of gold has gone up for 10 years in a row. Name any other market that’s ever risen for 10 consecutive years. There are none. This is a historical anomaly, and it means something has gone badly wrong with the world’s reserve currency. Markets, if left to find their own equilibrium, will naturally fluctuate. Gold isn’t fluctuating. Its steady move up proves something strange is happening to our money. 2. Our government’s deficits are out of control. The government’s annual deficits now routinely surpass $1 Trillion. The first $1 Trillion deficit came in 2008 – and the government explained it away as the consequence of the financial crisis. But we racked up another $1 Trillion deficit in 2009 and yet another 1.3 Trillion in 2010. We’ll have another $1.6 Trillion in 2011 and so on. Our national debt has doubled since 2005. We’ve borrowed more money in the last five years than we had in the entire history of our government until then. This is not sustainable. 3. The government cannot increase tax revenues enough to cover our spending or repay our debts – ever. Our annual deficits have become completely unlinked to taxes. Total federal income taxes and corporate taxes generate $2.1 Trillion a year in revenue, and we still ran a $1.3 Trillion federal deficit last year. So even if we increased tax revenues by more than 60%, we would just break even. I’m sure some of you with a more liberal persuasion just commented, “Oh, so there is a solution where we could get another $1.3 Trillion, huh?” 4. Special-interest groups – particularly government unions – are looting our Treasury. Self-serving special interest groups have completely hijacked government spending. We now spend $200 billion a year on federal pensions. We’re spending another $450 billion on welfare. This spending, combined with our defense spending ($700 billion), exceeds total federal tax revenue and leaves nothing to pay the $220 billion in interest on our debt, nothing to pay for actual government services (like roads, bridges, elected officials’ salaries, benefits, national health care, etc.), and nothing to pay towards the inevitable Social Security/Medicare shortfall. Remember in all of this…most voters do not pay taxes. The majority do not pay taxes. They receive, but they do not pay. Our democratic way is that the majority rules. It is politically impossible to reform this interest-based spending. It will never happen. 5. We’re printing money just like the “Banana Republics” we used to mock. To support the government’s runaway spending, the Federal Reserve is now continuously buying government debt. This process was commonly called “monetizing the debt” or, more simply, “printing money.” The Fed creates new money to buy government bonds. This kind of Ponzi financing destroyed every previous experiment with paper money. If printing money was truly good for an economy, Zimbabwe would be the world’s wealthiest country. Perhaps even more worrisome than the practice itself is the leadership of the Fed, which has alternately defended this practice and then denied using it. If the Fed continues this practice, it will eventually cause a global run on the USD that will destroy the value of our currency overnight. 6. We cannot repay our debts. Total debt outstanding in the U.S. currently exceeds $55 Trillion. That’s $681,165 in debt per U.S. family. There is simply no way to repay (or even maintain) debt of this magnitude using the income of the average American family, which is slightly less than $50,000 per family. Interest alone on these debts (based on a 5% rate) would total $34,000 per family every year. Total debt in the U.S. economy is unsustainable and cannot be financed without printing vast new sums of money, which will set off hyperinflation like we have never seen. 7. Shockingly, new debt issuance in the U.S. is soaring, with the lowest-quality debtors borrowing record amounts. Despite all the evidence that the U.S. economy carries far too much debt, both public and private debt issuance soared to new record levels in 2010. Overall, more than $3 Trillion in new corporate debt was issued last year – the second record year in a row. And junk-bond issuance set a new, vastly higher record. In 2010, 509 speculative-grade corporate borrowers sold $287 billion worth of new debt. That compares to the previous record (2009) of $167 billion. Our economy has become so warped by its debt load it cannot function without ever-larger amounts of debt. Anyone looking at these numbers must realize this is not safe and will not last long. These are the reasons why the USD is in peril of losing its world reserve currency status. If this happens, I and many others believe that everything about our lives will change…from everyday living to retirement. To stop that…we…as a nation…have to put a plan into action that will work, and that is absent of all of the political posturing that normally takes place. Here is what I propose: Solution #1 – Quit listening to anyone who advocates continued spending beyond our budget…regardless of whether the spending is for entitlements such as Social Security, Medicare, Medicaid and unemployment, or discretionary items such as defense, infrastructure, food stamps, Obamacare or whatever. It has to stop now. No one has ever spent their self out of debt…operationally…and into profitability. It cannot be done. God loves everyone, but we can no longer pay attention to anyone who says anything along the lines of, “I want what I’ve been getting whether you have it or not, and I’m not going to take one dime less.” While I happen to be in the age group that is (for now) supposedly not going to be “touched” by Social Security and Medicare changes, our group should lead the way in saying, “If necessary, we will take less too.” If we are serious when we say we don’t want to leave our children and grandchildren with this debt, we have to put our money where our mouth is. This is for all of us…regardless of any type of entitlement payment we are receiving. I believe we all have to “suck it up,” like never before. The most recent debt ceiling debate and subsequent legislation increased the debt ceiling by $2.1 Trillion, while supposedly cutting about the same amount from spending, yet even if this is done, with real cuts to spending, we will increase our debt over the next 10 years by $7 to $9 Trillion. We must have a balanced budget amendment. The time for talking about it is over. In all seriousness…how can anyone vote against it? What possible reasoning is there today for spending more than we take in? It needs to be a real simple…real quick vote. We need two-thirds majority of each house to pass it. It then needs three-fourths of the state legislatures to approve it. We do not have the luxury of the traditional 7 years that Congress set for ratification by the states for the 18th, 20th, 21st and 22nd Amendments. This complete process needs to be accomplished in 90 days. Anyone who doesn’t vote for it is one of those I’ve just described. They should be branded as such and booted out of office as quickly as it can happen. We have already tried to control spending ourselves. We have pledged to our creditors that we will. We have failed time and time again. Now, we must make it a law that any purchase or “investment” that exceeds our income is denied. For now, there can be no more credit. We have blown our creditworthiness. This is the way it is for each of us in our personal lives in our own household budgets. It has to be this way for our government, with no “ifs,” “ands” or “buts.” The biggest reason why the USD is in peril of losing its status as the world’s reserve currency is that government is spending money they don’t have and have no way of getting, other than borrowing it or printing it, both of which devalue the USD and bring on hyper inflation. The “borrowing” days of the future have changed. Now with a lower credit rating from one source, and our lenders holding tons of debt that is now less secure…how much more do you think we can borrow and at what interest rate? What about printing more? That seemingly is the answer the government is going to take as the most recent news from the Fed is that more quantitative easing is back on the table, although they said they would stop at the end of June. No one else in the world can print USDs…but we can…for now. They do have another way of getting revenue…increasing taxes. Let’s explore this. Did you know…even if every American citizen was taxed at 100% of his or her income, it would not be enough to balance the Federal budget for 2011? How sad is this? This may even be sadder…we have now reached the “tipping point” in our society where 56% of all Americans do not pay any Federal Income tax, or they only pay a marginal amount of $500 or less. The vast majority of these people get money back…that they didn’t pay in! This is called a “free ride.” This isn’t “chin boogey.” I’m not making this up. This is the way it is. These are facts. Almost all of these people can vote. Now, can you ever imagine the vast majority of these folks voting for any candidate, for any office, who advocates policies counter to changing their “free ride?” It’s not going to happen. It’s never going to happen unless God wills it. Miracles are easy for God, but they don’t happen that often. But a miracle is what it is going to take because now… it can’t possibly turn the other way. It would be like asking water to flow uphill. It’s a joke to me when I think of the “stink” that was made when the “Bush Tax Cuts” were going to expire at the end of 2010. These tax cuts, when they were implemented, reduced the top personal rate from 39% to 35%. That’s only a 10% reduction (yes…not 4% but 10%). Taking them back up raises an additional $120 Billion per year…enough for less than 30 days of government spending! Yet look at all of the debate and time Washington went through talking about them going back up. We would need 12 times this amount to balance the budget. More about taxation is coming up in Solution #3. Solution #2 – Leakage In the same breath as mandating no spending beyond our income, we have to stop the “leakage” in our system. By “leakage” I mean the fraud, waste and abuse. Heretofore, we’ve been unable to control it. It is rampant. Not only in the lobbyist and “sweetheart” deals that are cut for some, but people who are receiving everything from unemployment compensation, Social Security, Medicare, Medicaid, Food Stamps…and everything else that we are paying for that they should not be receiving. Why are they receiving these? Because we have laws on the books that the Federal, State and Local governments, and our Department of Justice have chosen not to enforce. These laws tell us who gets what and what happens when someone does something out of bounds. Every society must have a set of laws and rules. We have them, but what good are they if they’re not being enforced or enforced selectively? How do you enforce one law and not enforce another? If all else was normal, this one practice alone is enough to bring down our country or any country. Enforce the laws…or change them so they can be enforced. To have a law on the books, that our Justice Department, or Local, State or Federal officials refuse to enforce would make our Founders sick to their stomach and bring about a revolution on its own. We must take this out of those people’s hands who are not enforcing the laws or selectively enforcing the laws. I propose privatizing the oversight of every dollar we spend on the local, state and federal levels, to bonded companies, who have enough assets that losing them or most of them would hurt, and have as their only source of income 15% of the money they are able to save and/or stop from being spent. Think of the jobs this would create…or how many IRS agents and CPAs that might be doing different things than they used to do! We’re talking about huge numbers here. They must be given full access to all information, and the “switch” to be able to turn off the payments. That’s a lot of power, but the penalties they would pay for proven improprieties would be equally as big. Their oversight would be Congress. Any breach of their duty would result in their forfeiting all of the income they have ever received; a civil penalty that would put them out of business; and if the impropriety was criminal…in jail. Presently we have politicians overseeing expenditures of politicians…complete with all of the hidden agendas we’ve outlined in this series. Surely we are all much smarter than to continue to let the “fox guard the hen house?” Solution #3 – Taxation Can we tax our way out of this mess? No, not with our current tax system. The most recent debate over the deficit, debt and debt ceiling could have been spent instead on real tax reform and a change to the tax code. Changing our tax code in the right way, combined with spending cuts and a balanced budget amendment would have stopped the downgrade to our credit rating, the subsequent drop in the stock market, the heightening of the global recession and everything else that is going down. Remember what was stated earlier in this article… “Even if all U.S. citizens were taxed at 100% of their income, it still would not be enough to balance the budget in 2011!” Since this scenario will never happen, what if we substantially increase the tax on all households with an adjusted gross income of $250,000 or more? Let’s say we increase their Federal taxes by 28.5%. This would take the top bracket from 35% to 45%. This of course will never happen either, even though the majority of our society pays no income taxes, and this majority could vote this type of tax increase in through their elected representatives. You see, at some point in the “increasing taxes on the rich” rhetoric that is so prevalent, there will come a time when most people will say, “My sack is full enough, I quit,” or, “I think I will take my marbles and find another game.” But, for the sake of analyzing whether or not this would solve our problem, let’s say this did happen. How much revenue would be raised? Are you ready? As with many things in life, it’s the 80-20 rule. 80% of all the taxes are paid by the top 20% of all income earners. So, if we currently take in $1.5 Trillion in Federal taxes (and we do), 80% of this is $1.2 Trillion. If this goes up by 28.5%, that’s $342 Billion more in the revenue coffers. Now we’ve already identified that this will never happen, without some type of severe repercussions, but let’s say it did. $342 Billion still leaves us more than $1 Trillion short on what our Federal Government is going to spend this fiscal year! Yet there are those whose only solution is to increase taxes on the wealthy. Big government…and all of its spending…are not to be touched. Now do you see how ridiculous this position is? This again is under our current tax structure. It will not work. We have to change it. Is there another solution? Yes. It’s called the FairTax, or perhaps better known as the Federal tax replacement plan. It is NOT the same thing as the Flat Tax, which in my opinion, would return little if ANY increased revenue. The FairTax would take every Federal tax that is paid by individuals and business and replace it by adding 23% tax onto the cost of every new item or service sold in the US for anyone’s consumption, which by definition is the Gross Domestic Product (GDP). It is therefore a consumption tax. If you don’t buy anything…you don’t pay any Federal tax. There is no FairTax assessed on used items, as the FairTax would already have been paid when that item was sold new. The tax is collected at the point of sale. The business who sold the product and/or service keeps ¼ of one percent of it for collecting it, then forwards the balance to the state, which is already set up to do all the things it does to collect, monitor and enforce the state sales tax. The state keeps ¼ of one percent and sends the balance onto the Federal Government. Would you like to see a quick number? If our present GDP is $14.7 Trillion (although the anemic growth we’ve had this year to date projects it to be lower), personal consumption is 81% of the GDP, and the Federal Government realizes 22.88% of this through the FairTax (after the business and state take their ¼ of one percent each for collecting it), that’s $2.72 Trillion in receipts…30% more than what we take in now of $2.1 Trillion! And that’s before we add in the extra revenue received from those in illicit activities who will now pay like everyone else; the increased revenue we will realize by cutting spending and stopping leakage; and how fast business and the economy would grow, creating more jobs, causing more consumer spending, creating even more revenue! There would be no more Federal Income tax…no more Personal Income tax…no more Payroll tax…no more Social Security tax…no more Medicare tax…no more Estate tax…no more Corporate Income tax…no more Capital Gains tax…no more Federal taxes…period. This one tax would replace all of the other Federal taxes. Is it a form of a sales tax? Yes, but unlike state sales tax…the only exceptions are business to business transactions and the cost of tuition for education which is considered an investment. Every man, woman and child that buys anything new in America will pay this tax. Yes, every visitor from every foreign country, every drug dealer, and every person involved in any type of criminal or illicit activity…everyone will pay this tax, but with gross earnings, as there will be no more Federal taxes of any kind withheld from their paycheck. Recently it was reported that eleven corporations that included General Electric, Boeing and Wells Fargo, that together reported $62 Billion in domestic profits in 2010, paid a negative 3.6 percent federal tax rate! This is terrible…and it also serves as great “fodder” for those who spend most of their time on the “raising taxes on the rich” bandwagon, as opposed to solving the problem by cutting spending. But with the FairTax, it wouldn’t matter. No company in America would be collecting Federal taxes on the sale of its goods and services. Think about this for a minute. If there were no Corporate Income taxes, no matching Medicare and Social Security taxes paid by business, and no Capital Gains tax, how fast would this recession turn around? How quickly would the millions that are unemployed and underemployed be put to work? What are the advantages of the FairTax? The following are listed at www.fairtax.org. 1. Eliminates IRS/Government Waste We will never again file a Federal Income tax return, or accompanying tax forms. It has been estimated if all the 2010 tax return pages were placed end to end, they would circle the globe over 28 times or over 700,000 miles. 2. Reveals the Cost of Government with Every Purchase We will pay our taxes when we consume personal items and services. We will no longer have anywhere from 15 to 23 percent of our hard-earned salary withheld for taxes. We will receive our total gross earnings. The amount in Federal taxes that we pay will show up on the sales register receipt. We will experience the true cost of federal programs first hand every time we examine our receipt. 3. All Income/Earnings Untaxed We will receive ALL profits from income-producing investments without taxation. Our taxes will be paid as we spend our earnings on our personal consumption of new products and services. 4. All Poverty Level Spending Untaxed The Family Consumption Allowance (FCA) of the FairTax is sent monthly to the head of household (family/individual) in the amount of the federal taxes equal to poverty-level expenditures to enable the necessities of life (food, medicine, clothing, etc.) from having a tax liability, as the result of the passage of the FairTax. This “prebate” is based on family size only. The monthly “prebate” is in no way based upon income. There is no “means” testing. Every American citizen qualifies regardless of their income. The citizen/family simply must prove that they are indeed a citizen of America. They only need to register once a year to identify the family members living in the same household. No one has to request the “prebate” and you are free from giving the government information about you as a result. The rate of the FairTax “prebate” is computed by comparison to the federal-poverty level and is set by Congress. No one ever reports their income to qualify for the FCAR. Being a legal citizen or legally admitted to our borders is the ONLY requirement. By approaching it in this manner no politician can “play God” and pick “winners and losers” from the tax-code by way of passing tax exemptions. No exemptions means everybody pays and no politician can play “class-warfare” by pitting one class of people free from taxation, against another, that must pay more to make-up the slack. 5. Estimated $300 Billion Black Market Un-Taxed The illegal underground economy (drugs, pornography, illegal aliens, criminals) do not file income tax returns. With the Fair Tax they WILL be paying taxes when they purchase their flashy jewelry, luxury cars, and celebrate their indulgent illegal lifestyle. 6. Additional Tax Sources Tourists visiting the U.S. will pay the FairTax on their purchases. 7. Investment in America Wealthy individuals and profitable corporations will no longer seek offshore banking accounts to hide investments. There would be no need to do so. The $12 to $14 Trillion worth of offshore, hidden assets will return to the U.S. to benefit our own economy and financial infrastructure. 8. More American Jobs Removing compliance/embedded costs by passing the FairTax allows U.S. exports to sell overseas for prices that average 23% lower, while still maintaining similar profit margins. Lower prices increase demand for U.S. exports, thereby increasing the availability of jobs in U.S. manufacturing sectors. At home, foreign imports are subject to the same consistent FairTax rate as domestically produced goods. The FairTax effectively levels the economic playing-field. With China sending barges of slave-made goods to America and collecting a 23% tax on everything they sell in our country, there will be a perfect leveling of the trading deficit that everything imported from China adds to our GDP. Will the FairTax bring in more revenue than $2.8 Trillion? Yes…it could very well bring in much more. I could go into a whole lot of mathematics dealing with the two curves the government uses to project its income (those being the Laffer Curve and the Woodhill Curve), but suffice it to say…if we had a sustained growth spurt of 5% increase in GDP, it could be as much as $4.5 Trillion per year…and even more! And guess what…this kind of revenue would be more than enough to provide real help to those who need it, as well as infrastructure spending, defense, entitlements, interest, debt service and all we have in our budget…if we had a budget…which we have not had for the past 850 days. Is a 5% increase in GDP possible? We’ve done it before. You tell me. If we eliminate Corporate Income Tax, Capital Gains Tax, matching Federal taxes for Social Security and Medicare by business, and the Estate Taxes, do you think the 28 million unemployed and underemployed workers could find a job because business is kicking into high gear? A 5% increase in GDP, with a 5% or lower unemployment and underemployment rate, accompanied by the FairTax, with no exemptions to anyone, a stop in runaway government spending with a balanced budget amendment, and stopping the leakage, could turn around our economy, restore our country’s fiscal soundness, and shore up the USD from losing its borrowed existence as the world’s reserve currency. I know it seems hard to believe with all you have heard, read and seen in the past several months, but in less than 15 years we could erase our $14.5 Trillion worth of debt and begin working on the nearly $50 Trillion worth of unfunded liabilities/promises that have been made with Social Security and Medicare. This isn’t a pipe dream. This can happen. Anyone who has run a profitable business, regardless of its size, could make this happen. Why? Because in the real world (not the one of Washington, DC)…operations rule. There is no room for politics. If the past few weeks had been spent on passing the FairTax instead of the bickering and political posturing that occurred…it…along with the oversight solution…could be in effect right now. The balanced budget amendment could have already been passed and on its way to the states for ratification. I don’t know about you but I am as sick of the Tea Party and the conservatives as I am with the other persuasions who espouse general ideas with no solutions. All I hear from the advocate groups on the “right” is that they stand for smaller government, controlled spending, less taxes, etc…but they seldom have a real plan. Speaker Boehner recently said he got 98% of what he wanted in the most recent debt ceiling debate. Really? The plan that was passed was far short of what was needed. He was told in advance what was needed. The passed plan resulted in a drop of our credit rating anyway. The credit rating companies said we needed $4 to 4 ½ Trillion in spending cuts. We got $2.1 Trillion. You do the math. When does 50% equal 98%? The left advocate groups want to help the middle class and those less fortunate with policies that redistribute the wealth…but they and the President didn’t offer any plan. What’s more, they blamed the drop in the credit rating on the Tea Party. The Tea Party is an advocate group for crying out loud! How in the world can an advocate group that stands for exactly what the ratings companies want us to do, be blamed for a downgrade in our credit rating by these rating companies? To me it is akin to a bystander witnessing a robbery beginning to go down and calling the police. The police show up. As the robber flees he shoots at the police. The police shout, “Halt.” The robber keeps shooting and keeps running. The police fire back and wound the robber. Then the father of the robber holds a press conference to blame what happened on the bystander? This kind of rhetoric is sickening to me and I would have to think just as sickening to anyone that has “both oars in the water.” In addition to the words they use, is the continual “feeding” the American public of information that anyone with a “pint of common sense in their bucket” knows makes no sense. The titles of “Distinguished Senator,” “Honorable Congressman,” and “Mr. President” are given them because of the positions they hold, that we respect, in the greatest country on this planet. None of them are given one of these titles because of their knowledge of business, economics and/or fiscal prudence. I have yet to see more than a handful of people in all of Congress, the President and his staff exhibit such skills…yet these are who we have in charge of fixing the problem. What you have just read is my plan. I figured I had to tell you that it was a plan as you might not recognize what one was any longer. For more than the past 50 years it really didn’t make that much difference who was in power. If the Democrats controlled all or most of Congress and/or the Presidency, things leaned a little to the left. If the Republicans controlled all or most of Congress and/or the Presidency things leaned a little to the right. If these three solutions were in effect…it again would not make that much difference who was in power. Wouldn’t that be refreshing? It can be that way again. But it will take everyone “hollering” into the same megaphone. Whether you’re on the right, left or in the middle…if what I have presented makes sense…holler until you’re hoarse…BALANCED BUDGET AMENDMENT…PRIVATE OVERSIGHT…AND FAIRTAX. We could have these implemented in less than 90 days…irrespective to all of the nonsense we have been getting from those we have elected to represent us! Next month…my last article in this series…I will give you my final solution…the one I guarantee will work.