Tuesday, December 14, 2010

Get accustomed to the new normal

The Federal Reserve has again confirmed its intention buy nearly a trillion dollars in privately held US Treasury bonds. The stated intent is to drive down interest rates but exactly the opposite has happened with bond rates hitting a seven month high. This includes 10 year notes and it’s this interest rate that is used as the basis for home mortgage rates so they are shooting up again.

There is a huge budget problem if bond rates were to continue to rise as a large portion of the 14 trillion the government owes is in short term bonds that need to be constantly recycled. The Treasury must also sell more trillions to finance the Republican plan of spend and not tax fiscal policy. If bond rates were to spike to the high teens as they did in the 1980s, the amount paid in interest alone would break the Federal budget.

Even with much of the debt sold in the last couple of years paying very little interest and at times bonds sold at a negative rate (the Treasury actually made money),  the annual outlay for interest has still has been over 200 billion. At the historical normal interest of 5% interest rate for bonds the outlay should be running close to 700 billion right now. Triple or quadruple that and you can see where we would be.

The question is what would happen first, would annual interest outlays pass the trillion dollar mark, equal to the Pentagon budget (including hidden items) or would it become impossible to sell bonds and the US begin have its checks bounce. Obama seems to be leaning toward the Republican answer for this eventuality, not taxing the people who have been looting the Treasury over the past thirty years or rebuilding our economy but the adoption of  bone crushing austerity.

The tea baggers that demanded that Obama keep his hands off their Medicare will see it evaporate faster than Constitutional rights in a Bush torture camp. Obama could short circuit all of this with bold decisive leadership, that seems increasingly unlikely (try not to laugh to keep from crying). The rich can ride the economy down for years if not decades to a final state of corporate feudalism.

We appear to be entering a new, albeit weak economic bubble but it’s not likely to last into 2012. None of the fundamental problems with the economy are being addressed. The biggest problem (after a lack of tariffs) is of course the low tax rates for the rich and the insanely low capital gains tax. With a 15% tax on dividends the rich have no interest in “creating” jobs as they would if they paid a 70% tax penalty for drawing money from their businesses.

Reaganomics made the destruction of America the most profitable business you can engage in. With dwindling hard assets to sell to China and the refusal of most foreign investors to buy anymore securitized debt the only thing left is to rob the middle class of its remaining wealth.

There isn’t much middle class wealth left to steal however with 93% of wealth already in the hands of the top 20%. So the only thing left is to stop importing consumer goods or in other words austerity. This involves driving down wages and government spending that benefits the bottom 80%. If common people can only afford food and housing with no luxuries like heat you can bring in enough Yuan from strip mining the nation’s resources to take care of the rich in a style they are accustomed to. The rest of us will need to get accustomed to a life of uncertainty where offending your corporate masters or just bad luck is a literal death sentence.  www.prairie2.com