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Weekend Edition

This is what inflation does, plain and simple
Saturday, October 12, 2013

 China is "naturally concerned about the developments in the U.S. fiscal cliff," the Asian country's vice finance minister Zhu Guangyao said in a statement.
 
We just finished week two of the government shutdown. The current gridlock in Washington is congressional Republicans' demands to suspend the implementation of the new "Obamacare" health care regime. In short, neither party is willing to budge on their views regarding Obamacare, so the government shut down.
 
 But China isn't issuing statements about Obamacare... Our Eastern neighbors are more concerned about the next political football... the U.S. debt ceiling. Remember, China is the U.S.' largest creditor with nearly $1.28 trillion in Treasurys. As Zhu wrote, the world's two largest economies are "inseparable."
 
But if the U.S. fails to raise the debt ceiling, the government could run out of cash... Meaning China – and the rest of the world – won't receive its interest payments.
 
 "We've never gotten to the point where the United States government has operated without the ability to borrow. It's very dangerous," U.S. Treasury Secretary Jacob Lew said on CNN. "It's reckless, because the reality is, there are no good choices if we run out of borrowing capacity and we run out of cash. It will mean that the United States, for the first time since 1789, would be not paying its bills, hurting the full faith and credit, because of a political decision."
 
We won't bother pointing out the irony in his statement...
 
According to Secretary Lew, without an agreement, the government will have around $30 billion left to meet its $60 billion-a-day in obligations.
 
 "We hope the United States fully understands the lessons of history," Zhu said, referring to the last government deadlock in 2011, which led, in part, to the U.S. losing its triple-A credit rating.
 
 China isn't the only country pressuring the U.S. to get its act together...
 
Japan, our country's second-largest creditor, is also worried the value of its $1 trillion investment in U.S. Treasurys could plummet if we fail to reach an agreement on the debt ceiling... and subsequently default on our bond payments.
 
"The U.S. must avoid a situation where it cannot pay and its triple-A ranking plunges all of a sudden," Japanese finance minister Taro Aso said at a press conference. "The U.S. must be fully aware that if that happens, the U.S. would fall into fiscal crisis."
 
 We maintain that the political deadlock in Washington is just theater... The U.S. government will raise its debt ceiling, print more money... and continue to punish savers through inflation.
 
Just like the 2011 showdown over raising the federal debt ceiling – the current shutdown is simply about giving self-righteous politicians a forum to grandstand for the public. We don't take this too seriously.
 
In the S&A Digest last week, our colleague Paul Mampilly detailed why this whole thing is just the government trying to manipulate you...
 
The U.S. Treasury issued a six-page report on October 3 to tell you what might happen if the U.S. defaulted on its debt. I'm going to save you a lot of time by telling you what it means.
 
The report starts off with a lie claiming the U.S. Treasury has never defaulted on its debt before. But in 1979, a technical glitch caused the U.S. Treasury to miss payments on $120 million in debt.
 
The report goes on to say that a default would be damaging to business and consumer confidence. But the report doesn't explain that for investors, the threat of a default is pretty much meaningless... even if the debt ceiling is not raised.
 
You see, the U.S. Treasury has numerous options to keep paying the bills. And it knows this.
 
It could operate on a cash-flow basis, meaning it would need to have money in the bank to pay bills as they come due, like paying bills with cash instead of a credit card. The U.S. Treasury always has money coming into its accounts. So it always has some cash it can use to pay interest on bonds. That's especially true right now because the government is partially shut down, and no cash is going out. In fact, the U.S. Treasury should have no trouble making interest payments on the bonds it has issued... According to economist Brian Westbury, the U.S. will take in more than $200 billion in tax receipts and owe just $25 billion in interest payments in October.
 
And nothing restricts the U.S. Treasury from prioritizing interest payments. The obligation to pay interest is set by the 1917 Second Liberty Bond Act and other laws that commanded the Treasury to pay interest on the debt.
 
The only way possible that the U.S. defaults on its debt is if President Obama instructs Treasury Secretary Jack Lew to default on the debt.
 
So if you think the markets are going to crash or soar because of the default, stop worrying. Politicians are trying to make us panic in the hopes that the financial markets will do things to help their negotiating position.
 
There might be some volatility ahead. But this will pass just like the last default in 2011. Don't panic.

 As we pointed out in the September 18 Digest, the wealth disparity in the U.S. is at its greatest level in 100 years...
 
It's a result of inflation. Those with the assets and capital reap the greatest rewards. They have access to credit. And they understand how to buy real estate and great businesses.
 
Meanwhile, folks who depend on a paycheck are destroyed. Their wages fail to keep up with their rising cost of living.
 
A look at the latest Forbes 400 – a list of the wealthiest 400 people in America – suggests the richest Americans have gained most of the wealth generated by the economic recovery since 2008...

In addition, the top 1% collected 19.3% of household income. (That includes wages, pension payments, dividends, and capital gains.) The top 10% earned a record 48.2% of total earnings, according to USA Today, which cites numbers from the University of California, Berkeley and Oxford University.
 
 This is what inflation does, plain and simple. It destroys the wealth of the masses, while greatly enriching a select few.
 
Regards,
 
Sean Goldsmith




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