Ron Paul Op-Ed to America On Debt Ceiling Negotiations

Originally on Bloomberg:

Default Now, Or Suffer A More Expensive Crisis Later
Debate over the debt ceiling has reached a fever pitch in recent weeks, with each side trying to outdo the other in a game of political chicken. If you believe some of the things that are being written, the world will come to an end if the U.S. defaults on even the tiniest portion of its debt.
In strict terms, the default being discussed will occur if the U.S. fails to meet its debt obligations, through failure to pay either interest or principal due a bondholder. Proponents of raising the debt ceiling claim that a default on Aug. 2 is unprecedented and will result in calamity (never mind that this is simply an arbitrary date, easily changed, marking a congressional recess). My expectations of such a scenario are more sanguine.
The U.S. government defaulted at least three times on its obligations during the 20th century.
-- In 1934, the government banned ownership of gold and eliminated the right to exchange gold certificates for gold coins. It then immediately revalued gold from $20.67 per troy ounce to $35, thus devaluing the dollar holdings of all Americans by 40 percent.
-- From 1934 to 1968, the federal government continued to issue and redeem silver certificates, notes that circulated as legal tender that could be redeemed for silver coins or silver bars. In 1968, Congress unilaterally reneged on this obligation, too.
-- From 1934 to 1971, foreign governments were permitted by the U.S. government to exchange their dollars for gold through the gold window. In 1971, President Richard Nixon severed this final link between the dollar and gold by closing the gold window, thus in effect defaulting once again on a debt obligation of the U.S. government.

Unlimited Spending
No longer constrained by any sort of commodity backing, the federal government was now free to engage in almost unlimited fiscal profligacy, the only check on its spending being the market’s appetite for Treasury debt. Despite the defaults in 1934, 1968 and 1971, world markets have been only too willing to purchase Treasury debt and thereby fund the government’s deficit spending. If these major defaults didn’t result in decreased investor appetite for U.S. obligations, I see no reason why defaulting on a small amount of debt this August would cause any major changes.
The national debt now stands at just over $14 trillion, while net total liabilities are estimated at over $200 trillion. The government is insolvent, as there is no way that this massive sum of liabilities can ever be paid off. Successive Congresses and administrations have shown absolutely no restraint when it comes to the budget process, and the idea that either of the two parties is serious about getting our fiscal house in order is laughable.

Boom and Bust
The Austrian School's theory of the business cycle describes how loose central bank monetary policy causes booms and busts: It drives down interest rates below the market rate, lowering the cost of borrowing; encourages malinvestment; and causes economic miscalculation as resources are diverted from the highest value use as reflected in true consumer preferences. Loose monetary policy caused the dot-com bubble and the housing bubble, and now is causing the government debt bubble.
For far too long, the Federal Reserve’s monetary policy and quantitative easing have kept interest rates artificially low, enabling the government to drastically increase its spending by funding its profligacy through new debt whose service costs were lower than they otherwise would have been.
Neither Republicans nor Democrats sought to end this gravy train, with one party prioritizing war spending and the other prioritizing welfare spending, and with both supporting both types of spending. But now, with the end of the second round of quantitative easing, the federal funds rate at the zero bound, and the debt limit maxed out, Congress finds itself in a real quandary.

Hard Decisions
It isn’t too late to return to fiscal sanity. We could start by canceling out the debt held by the Federal Reserve, which would clear $1.6 trillion under the debt ceiling. Or we could cut trillions of dollars in spending by bringing our troops home from overseas, making gradual reforms to Social Security and Medicare, and bringing the federal government back within the limits envisioned by the Constitution. Yet no one is willing to step up to the plate and make the hard decisions that are necessary. Everyone wants to kick the can down the road and believe that deficit spending can continue unabated.
Unless major changes are made today, the U.S. will default on its debt sooner or later, and it is certainly preferable that it be sooner rather than later.
If the government defaults on its debt now, the consequences undoubtedly will be painful in the short term. The loss of its AAA rating will raise the cost of issuing new debt, but this is not altogether a bad thing. Higher borrowing costs will ensure that the government cannot continue the same old spending policies. Budgets will have to be brought into balance (as the cost of servicing debt will be so expensive as to preclude future debt financing of government operations), so hopefully, in the long term, the government will return to sound financial footing.

Raising the Ceiling
The alternative to defaulting now is to keep increasing the debt ceiling, keep spending like a drunken sailor, and hope that the default comes after we die. A future default won’t take the form of a missed payment, but rather will come through hyperinflation. The already incestuous relationship between the Federal Reserve and the Treasury will grow even closer as the Fed begins to purchase debt directly from the Treasury and monetizes debt on a scale that makes QE2 look like a drop in the bucket. Imagine the societal breakdown of Weimar Germany, but in a country five times as large. That is what we face if we do not come to terms with our debt problem immediately.

Default will be painful, but it is all but inevitable for a country as heavily indebted as the U.S. Just as pumping money into the system to combat a recession only ensures an unsustainable economic boom and a future recession worse than the first, so too does continuously raising the debt ceiling only forestall the day of reckoning and ensure that, when it comes, it will be cataclysmic.
We have a choice: default now and take our medicine, or put it off as long as possible, when the effects will be much worse.

Theme song for the rest of my life

DEBT CEILINGS - PAY NO ATTENTION TO THE ECONOMIC MAN BEHIND THE CURTAIN

Think about it:

The ratings agencies complacent to this ungodly system state that we will have to downgrade the debt rating of the United States, if we do not increase the debt ceiling. That this will result in higher borrowing costs due to increase in interest rates is true enough..

But wait a minute!! Is not raising the debt ceiling going to do the same exact thing? Of course it is!!! Pick your poison: Increase in borrowing costs via higher interest rates -OR- Increase borrowing costs via higher nominal debt amount. Wow, what a choice!

I wonder if one should go to their loan provider and say "Gimme a higher credit line, or else Ill have the ratings agencies downgrade you! Not that it would help my situation any, but hey, at least I can spend like a drunken sailor another day and make you even more filthy rich, big banker!"

Not to be outdone is Obama himself, who says Social Security payments could be suspended if a deal is not reached August 2nd..

Whoa wait a minute here!!! Are we not supposed to have a lock box to pay recipients with?! Oh yeah, that's right, Bill Clinton and the congress already SPENT that money, and then claimed that we had a budget surplus in the 1990's!! Now they are going to threaten and hold hostage senior citizens via their SSI checks they depend on, all out of a liability that is UNFUNDED to begin with!! Where is the SS tax coming out of my paycheck going anyway?!

In other words "More debt. Or else we are going to push granny and pop-pop off the cliff!"

Then they claim "We need to pay the bills!" Wow spending money before we even have it in our hands via borrowing it. What sense does that make?!

Want proof that perpetual debt is the goal of the international bankers and the Federal Reserve? Look no further than the debt ceiling debate!

Wow, what a world. What a bunch of tyrants we are ruled by.


"Im looking for work." "Pfft.Work in this economy? I'm waiting for the government to bail me out." -Conversation between the player's character and a non-player character, Star Wars Galaxies EMU

DOWN MARKET PROFIT pt 1 - SHORT SALE INTRODUCTION - Dont lose your shorts (yuk yuk yuk hehe!) when the market goes down, profit instead!

I think the end of the previous writing entry has steered me into my next entry which will lead into some shorting basics and options introduction.

The key to a great fortune does lie at the simple fact that the market and all its goods and services go up and down in price. Some can have success using the price arbitrage between buyers and sellers, others can precognize price action and try to stay ahead of it. One of the most overlooked yet powerful tools one can use that exists can be used when the price of an asset goes down in dollar terms. “Huh? You can make money when the price goes down?!” is not an uncommon response when I tell people this!

Two ways you can make money on the downside are a SHORT SALE and a PUT OPTION.

The SHORT SALE is a pretty easy concept once you get the hang of it. Say you have a technology company whose trading symbol is XYZ and it is trading at around $10 a share. You think it had topped out and going to decline in price. You can go to your broker and say I want to short XYZ. If your broker has or can find shares available to buy, you can borrow the shares from your broker and sell those shares into the market, that is the short sale. On the balance here we will:

Sell 100 shares at $10 per share into the market, so we would receive $1000 for selling those shares into the market. Now we have $1000 we will hold on to.

XYZ falls 25% and is now at $7.50 per share. You could buy back 100 shares for $750 and thus pocket $250, but you think it will fall a bit more..

XYZ falls then to around $5 a share, a big 50% loss, which will be your 50% gain!

Now you decide well I will buy 100 shares back at $5 a share which is $500, so out of that $1000 we are holding, we bought those 100 shares for $500, and still have $500. We will pay back the broker the 100 shares, and pocket the $500!

Well what if I cannot borrow the shares or money for whatever reason? That is a good question, and is where the other tool makes a good fit. We are going into options for this one, so I will have to explain them so we can understand our other path clearly. Thus this will be the subject of the next post!

Good Music :)