Friday, April 06, 2012

THE JUGGLING ACT

"Pay no attention to that man behind the curtain"
-Oz

When the government prints trillions of dollars it does not have and throws it into the market you'd expect there to be massive inflation. That hasn't happened, and one major reason is that the federal reserve has been buying up debt, 61% of it. By doing this, it makes the debt have less impact in the short run, but this has long term consequences, as Julie Crawshaw and Forrest Jones explain at the Wall Street Journal:
Goodman also warns that U.S. economy and markets are “at risk for a sharp correction” if conditions aren’t “normalized.”

"This not only creates the false appearance of limitless demand for U.S. debt but also blunts any sense of urgency to reduce supersized budget deficits."
Previously, other countries bought US debt, but they're very hesitant to until Washington starts some fiscal responsibility and gets back a AAA rating. This situation is sweet for big investment groups like Goldman Sachs and Citi by keeping interest rates low which they can easily take advantage of, but its very bad for everyone else. According to economists, the dollar's steady decline could become a sudden collapse because people will just stop trusting the US Dollar's value in a big way and a rush could start. We're facing effectively 10% inflation now (if you include food and gas in the mix, which the Consumer Price Index does not), but just wait to see what happens if the dollar halves in value or lower.

The Obama administration has been successful at keeping this all up in the air for now through various finance tricks and shell games but eventually, as Greece found out, it all comes crashing down in the end. And when that happens, President Obama won't be in office any longer; it will very likely be a Republican, who can then be blamed for it all. The Obama team is banking on being out of the job when their policies cause everything to go horribly wrong (like what happened with the Community Reinvestment Act), sort of like a CEO getting rich off a company he destroys, leaving with a big retirement just before it all falls apart based on his policies.

The problem is the US Government has been doing this for years under a whole string of presidents. Its just gotten significantly, enormously worse and on a much bigger scale under President Obama, and with a deficit load of 13% of the GDP, the stakes are much higher. Ron Paul is a bit of a crank on some issues, but he's pretty right when he warns about the federal reserve.

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