Wednesday, February 23, 2011

The Federal Reserve Blows Past China in the US Treasury Market

It’s official!  Within the past couple of weeks, news was released that the Federal Reserve has surpassed China as the largest holder of US Treasury bonds, more commonly known as governmental debt. The Federal Reserve now holds around $1.1 trillion in United States debt, while China holds around $891 billion. If you don’t think the Federal Reserve’s recent increase in purchases of government bonds is anything to be worried about, think again.
In early November, 2010, the Federal Reserve announced they would purchase $600 billion in US Treasury bonds over an 8 month span in a program called QE2. Federal Reserve chairman Ben Bernanke stated this program was a necessary form of economic stimulus to help speed up the recovery for the US economy. Although many critics and inflation hawks (such as myself) immediately challenged the proposal of QE2, stating it would spark inflation and prolong the recession, many Keynesians and inflation doves such as Bernanke took action in following through with this plan while ignoring their critic’s concerns.
The purchasing plan for QE2 was for the Federal Reserve to buy US Treasury bonds at a rate of $75 billion per month. Considering this program started in mid-November, the Fed is almost at the halfway point of its $600 billion planned purchase. This means the Fed still plans to purchase $300 billion more in US Treasuries over the next 4 months. Such an action will further strengthen the Federal Reserve’s new standing as the number one holder of US debt.
For those who don’t know, the Federal Reserve is the central bank of the United States. The main duty and obligation of a central bank is to regulate the nation’s currency by increasing or contracting the money supply. In doing this, their main objective is to hold the value of the currency stable and minimize the risk of inflation and deflation. When the Federal Reserve purchases US Treasuries as they are with QE2, they do so by simply printing the money out of thin air and adding it to the United States’ money supply. As the money supply increases at a rapid rate, inflation starts to rise, and the value of the US dollar declines in value against foreign currencies. Both foreign and domestic goods increase in price as inflation starts to rise, and it becomes tougher for the US to pay back its debts to foreign nations. Once this point hits, foreign nations become less likely to lend money to the US government, and the only way the US can continue to borrow is by going to its own central bank and ask them to crank up the printing presses.
The Federal Reserve acting as the top bond holder of US debt is a very bad policy, and it will inevitably slow down the recovery instead of speed up the process. As the federal government continues to spend and foreign nations become less interested in funding such habits, the Federal Reserve will continue to increase its purchases of US debt in an attempt to be seen as an economic stimulator and savior of the US economy. In reality, they will prove themselves to be the exact opposite.  If the Federal Reserve does not immediately slow down their holdings of US debt, it will take a longer time period for the US to pull out of recession.

- Liberty_Mike

Saturday, February 19, 2011

Increasing the Debt Ceiling will Bankrupt the US!

In the upcoming months, the United States Congress will be voting once again to increase the US debt ceiling. Raising the debt ceiling is something Congress has voted in favor of 5 times in the past 3 years. The most recent increase to the debt ceiling occurred on February 12, 2010, where the debt ceiling was increased from $12.394 trillion to $14.294 trillion. The recent proposition by the US federal government to raise the debt ceiling this year proves that Congress would rather continue prolonging our financial problems than actually fix them.
The recently released estimate of BEA economic data for the 4th quarter of 2010 measured the United State’s GDP at $14.660 trillion. With a 2010 GDP measure of $14.660 trillion and an outstanding public debt of $14.13 trillion, the United States has a current debt-to-GDP ratio of 96%. Since the Obama Administration has asked for an increase in the debt ceiling as soon as possible, outstanding public debt levels are expected to increase at least $164 billion in 2011. The current debt ceiling is over 97% of 2010 GDP, so any increase in the debt ceiling in 2011 will bring the US closer to a debt-to-GDP ratio of 100%, or what I like to call bankruptcy. When an individual, business, or nation owes more money than they bring in, they are officially bankrupt and face the severe risk of default.
Right now, the Obama administration, special interests, and mainstream pundits from both parties are making the argument that if Congress fails to raise the debt ceiling in early 2011 the US economy will collapse. They argue that such a collapse will cause a domino effect that will eventually crash the global economy. This scare tactic may work to convince some members of Congress to vote in favor of increasing the debt ceiling, but the reality is that increasing the debt ceiling will cause such problems, not prevent them.
Although raising the debt ceiling will be destructive for the US economy, it is almost certain that Congress will vote in favor of the increase. As the debt ceiling nears 100% of GDP, it is less likely that other nations, mainly China and Japan, will continue to fund the federal government’s shopping spree. This leaves only one option for the United States, which is to monetize the debt by having the Federal Reserve print money to fund government expenditures.  Monetizing the debt is a sign of default, and such an action will inevitably devalue the dollar against other currencies in the global economy.  It is time the US federal government buckles down and stops spending outside of its Constitutional authority. If the debt ceiling is raised in 2011, the infamous quote by Voltaire will become more relevant than ever, “Paper money eventually returns to its intrinsic value: zero”.

- Liberty_Mike

Tuesday, February 15, 2011

Congress Betrays the American People by Voting to Extend the Patriot Act!

The US House passed a bill today, HR 514, to extend 3 provisions of the Patriot Act which were set to expire at the end of the month to now expire on December 8th, 2011. The provisions that the house voted to extend through the end of the year relate to roving wiretaps, individual terrorists as agents of foreign powers, and access to business records. The bill was brought to the House floor to a vote today only needing a simple majority to pass (218 votes), after the bill failed last Tuesday when the house needed a super majortiy (290 votes) to pass the bill, and only recieved 277. The vote count today was 275-144 with 14 Representatives not voting. The yay votes were 210 Republicans and 65 Democrats. They nay votes were 27 Republicans and 117 Democrats.

I find it funny that this bill failed to pass with a super majority on Tuesday (February 8th), and less than a week later it was brought to the floor again for a second vote where it only needed a simple majoirity to pass. It's funny how fast Congress can work to pass a bill when it supports special interests and bureaucracy. Every legislative session we hear of Representatives introducing bills that might actually be beneficial and meaningful to the public, but never make it out of committe. However, whenever bills that violate multiple amendments of the Bill of Rights are introduced, bureaucratic representatives are able to bring them to the floor for a vote with minimal debate and lack of committee hearings. This is just another example of how little members of Congress listen to their constituents concerns, or care about their liberties. Considering the large majority of Republicans voted for the extension of the Patriot Act provisions that violate the 3rd, 4th, 5th and 6th amendments of the Bill of rights, I do not want to hear the Republican party as a whole talk about how they are the "true defenders" of the Constitution when campaigning for re-election in 2012!

Check out the following source to see how your Congress-person voted for the Patriot Act Extension (HR 514).

- Liberty_Mike