Interest Rates, Inflation, and the Coming Poverty

By Mr. Quarter

I have opined previously that, "hard times are coming", and I thought that they were actually already here. My recent reading of the various news sources and analyses suggests that perhaps we really haven't seen the worst of the hard times yet.

First, consider these facts:

1. The Federal Reserve, for the first time in history is monetizing huge amounts of debt. The Fed is purchasing Treasury bonds, and various other assets (some of them in the "toxic"category). This purchase is accomplished by creating money out of thin air via an accounting entry. This is vastly increasing the monetary base - currency in circulation, bank reserves, and vault deposits.
2. The monetary base has increased in the past 8 months by 120 percent.
3. Bank reserves - have increased by over 10 fold in the past 8 months. This is the money that banks have to keep on deposit with the Fed. It is the basis for loans. Right now they are sitting on it and not loaning it out.

These point to a scary near future - way too much money chasing too few products. The result is inevitably inflation, probably on a scale that would make even Jimmy Carter blush. Those of us that have taken it in our collective 401k/IRA shorts due to devaluation of the stocks in our portfolio will now see what is left diminished even further.

Second, national debt is exploding and the Congress and Obama don't seem inclined to even try to rein in the spending. The solution seems to be tax more and often. Tax everything. Tax the health care plan you get from your employer as income. Tax your purchases with a Value Added Tax. Tax the very air that you exhale, or that is exhaled from your tail pipe, water heater, and electric outlet. Tax the emissions from the cow that provides your hamburger, the pig that provides your bacon.

The Obama wisdom seems to be that while collecting those taxes, spend some more and borrow the money to do it! I read recently that by 2019 the share of the national debt for every household is projected to be $155,000 and climbing. To finance the spending in the near term, the federal government will have to sell bonds. But with the debt climbing, bond markets will begin to weigh the risk of repayment. So to attract buyers for these bonds (Can you say China?) the interest rates will have to climb. To unprecedented levels. And the portion of the annual US budget devoted to interest payments increases until there are really only two budget line items: interest payment on the debt, and entitlement payments to the citizenry.

Don't be mislead. This will impact every single American. Rapidly, perhaps exponentially, rising prices for all goods and services with a corresponding erosion of purchasing power. Purchasing power diminished even further by a Value Added Tax on everything except food and clothing (maybe). You won't be able to buy a house or a car without paying at least double digit interest rates, because after all, you will be competing for available credit with the US government. Declining take home pay for poor schmucks that work for a living because of rising payroll taxes to pay for Social Security, Medicare, Nationalized Health Care, and Prescription Drugs. Mandatory increase in retirement age to 70 or 75, with limits based on means testing. Rising income taxes - don't you believe it for a minute that if your income is less than $250,000 you've got nothing to worry about. And don't forget about the future support payments to keep GM, Chrysler, AIG, CitiBank, and Bank America solvent, after all, the government occupy the majority of the seats on their board, and unions will control a large share of the car companies (now that is bound to result in really "good" business decisions).

Obama rocketing this country into ruin with new spending on a scale that is breathtaking, the Congress is doing nothing to reduce spending on any existing program and talking about all the ways they can raise more revenue. Worst of all, the American people are sitting like sheep waiting for the slaughter, doing nothing and letting it happen.