A Trillion Here, A Trillion There

Will Rogers got rich telling the truth, over and over, in a friendly and amusing way. I have books filled with Rogers’ quips, and I could begin every article with one of them. They still make me laugh, because they are still just as true, seven decades after he wrote them.

A quarter century later, another humorist, who was also a first-rate political scientist, C. Northcote Parkinson, wrote his book, Parkinson’s Law. Chapter 3, "High Finance, or the point of vanishing interest," began with this observation:

[Some thieving Russian has done the unthinkable. He has scanned in the whole magnificent, copyrighted book, which you can download, print out, and read at your leisure for the cost of paper and toner. If you do this, you will never again be mystified by the operation of any bureaucracy.]

People argue in a committee over whether or not to spend an extra $5,000, but they vote to spend a million without much debate. That’s because they understand $5,000. They don’t understand a million.

Earlier this month, the U.S. government's official debt topped $7 trillion for the first time. The last time the official debt rolled over a trillion dollar limit was June 28, 2002. Not so long ago, really. You could say that we’re on a roll.

Thirty years ago, Senator Everett Dirksen uttered his famous words about the U.S. government’s spending: "A billion here, a billion there, and pretty soon you’re talking big money." Well, he should have said it. There is no record that he ever did say it. Too bad. Like Winston Churchill, legend has attributed some choice apocryphal quotations to Dirksen. This is the choicest, of course.

In early 1980, after the Comex changed the rules on buying silver futures, Bunker Hunt was forced to sell his position, losing several billion dollars as a result. The Federal Reserve System intervened and loaned Hunt and his brother a billion dollars, based on their petroleum assets of $9 billion, so that they could settle their short-term debts. Interest costs were $500,000 a day. Bunker Hunt was eventually forced into bankruptcy. Of his assets, he announced: "A billion dollars isn’t what it used to be."

What is a billion? I did some calculations. A billion seconds takes us back 31 years, to 1973: Richard Nixon’s first full year of Watergate revelations. A billion minutes takes us back 1902.5 years: over two decades before the Emperor Hadrian began building the wall across England to keep out the Scots, when the Roman Empire was at its peak of power. ("Peak of power" is defined as "up to, but not including, Scotland.")

A billion dollars of U.S. government spending takes us back a little over 3 hours and 40 minutes.

Maybe the best Web page that describes what a billion dollars represents is the Bill Gates Net Worth Page. If you haven’t visited it, you should. It is updated daily. His net worth is in the range of $32.5 billion.

The page comes at the problem from a number of graphic ways. These are my favorites. If you are worth $80,000, and you spent the following sums, what would it cost Bill Gates to spend the same percentage?

A trillion is 1,000 billions. Take all of the previous examples, and add three zeroes.

We don't understand this. We can pretend that we do, but we don't. The numbers are overwhelming. We can compare trillions with billions, maybe, but we can't compare trillions with that $5,000 deal we've been thinking about.

Compared to the size of the unfunded liability of Social Security and Medicare, $7 trillion doesn’t sound so bad. That’s because the unfunded liabilities of Social Security and Medicare are now in the range of $50 trillion.

Medicare and Social Security are legally off-budget, which means that their massive debts are not counted by the statisticians when they estimate the official debt of the U.S. government. This, despite the fact that all income from the FICA and Medicare taxes – excuse me, "contributions" – that is not paid out to recipients is put into the government’s general fund, counted as income, and immediately spent. The Treasury issues nonmarketable IOU’s to each of the programs’ slush funds – excuse me, "trust funds." In this way, the government converts what would otherwise be a short-term on-budget debt to a long-term off-budget debt. The public doesn’t understand this sleight-of-hand operation, so there is no outcry.

Supply-side economists pooh-pooh the escalating size of both forms of debt, off-budget and on-budget. "Deficits don’t matter" they insist. The phrase, "deficits don’t matter," is to supply-side economists what "we owe it to ourselves" was to Franklin Roosevelt, who signed Social Security into law almost seven decades ago. Both slogans ignore what should be obvious:

There is a basic law of all debt: "There are more debtors who vote than creditors who vote." Any creditor who does not understand this law is going to get a memorable education eventually.

Yes, it’s all comparative. If the Federal Reserve System purchases government debt with newly created money, which is the only way that the FED or any central bank purchases investment assets, the FED can keep the government ahead of its creditors. But the creditors will see the dollar fall in purchasing power. Interest rates will rise, the market value of present debt certificates will fall, and everything will balance – legally speaking. The world’s largest debtor – the U.S. government – will pay its legal obligations on time. It will pay them with depreciating dollars.

Voters, trusting souls that they are, assume that default by the government is politically impossible. They define "default" as "a refusal to pay off loans." This is an incorrect definition. The correct definition is this: "a refusal to pay off loans in money with the higher purchasing power that prevailed when the loans were made." This definition is too complicated for most voters to understand.

I hope you understand it.

"I HAVE NOT YET BEGUN TO CRANK!"

Imagine a counterfeiter. Imagine that he’s a low-tech counterfeiter. He is using a hand-cranked printing press. Compared to the Bank of Japan and the Bank of China, the FED is a one-armed counterfeiter. Alan Greenspan’s motto is, "I have not yet begun to crank."

There are still a few holdouts who predict deflation. There are not many. They have been predicting deflation for two or more decades. They have been wrong for two or more decades.

Let us get our definitions clear. "Deflation" means "a decrease in the money supply." Falling prices are one result of deflation, but they are also the result of increased output of goods and services. The price of computers keeps falling, but this is not the result of deflation. It is the result of Moore’s law: computer chip capacity doubles every 12 months. (It used to be every 18 months.)

In a report called "Sitting on a String," I reported on the anomaly that some monetary indicators started falling in the summer of 2003, despite the fact that the adjusted monetary base, which the FED controls by buying or selling government debt, was stable or increasing slightly.

Since December, the adjusted monetary base has been rising at a 7.5% annual rate. Year-to-year, it’s up 4.9%.

As for money of zero maturity, there has been a slight increase since December.

The same is true of M-2.

Those who predict outright deflation have not dealt with the reality of FED policy over the last two years. The FED has been "accommodative," meaning inflationary, but not above 5%. In the face of the continuing competition from foreign manufacturers, and in the face of a weak job market, the FED’s monetary policies have not pushed up prices too much. But to imagine that the FED is in anything like inflationary mode is simply ridiculous. The FED is not creating monetary reserves any faster than it has over the last two decades.

I have never seen a single essay by any forecaster who predicts deflation – a shrinking of the money supply – that raised the following questions, let alone answered them:

Those who predict deflation go on and on about commercial banks not being willing to lend money that is made available by the FED. This is utter nonsense, unless interest rates go negative. Banks make money by lending. They may lend only to the government, but they do lend. If they lend to the government, the government spends the money. Of that, you may be certain.

The FED spends the money into circulation. This money is deposited by the recipients into their banks. Banks then lend out the money. All available legal monetary reserves are used. If the FED spends money into circulation, recipients will spend it.

The deflationists simply refuse to comment on this obvious fact. Their world is a hypothetical world in which bankers, who make money by lending money, refuse to lend the money deposited by depositors. Bankers lend depositors’ money with even greater predictability than Congressmen spend taxpayers’ money.

Alan Greenspan’s FED has kept a comparatively tight rein on money except in exceptional times: late 1999 and the weeks after 9/11. The increase in the adjusted monetary base and the monetary aggregates has been mild – under 8% in most years, usually under 7%.

You would think from reading the discussions of deflationists that the FED has been creating enormous monetary reserves. You would think that commercial banks had not been lending money. You would be wrong. Banks have not been lending money of late to businesses. This may be a bad sign regarding the confidence of businesses. Or maybe it’s merely the willingness of investors to lend 30-year money at 5%. The corporations don’t want to be saddled with short-term debt.

Why not? Because heads of corporations fear future monetary inflation, which will produce price inflation, which will raise interest rates. They don’t want to have to keep coming back to the banks’ loan windows. They want to lock in today’s low rates. A corporation that borrows mid-term money from a bank is like a home buyer who buys an adjustable rate mortgage. The wise man locks in today’s long-term rate.

Investors have been buying corporate bonds in enormous quantities. They have locked themselves into low rates. They will get killed when rates rise during a time of price inflation. But if rates fall to (say) 1% in a true deflation, the corporate debtors will float new bonds, pay off old bondholders, and call it a good day’s work. Bond investing is asymmetric. The investor gets hurt in both inflationary and deflationary times. They are, in a word, suckers. But sometimes the government makes them suckers by promising price stability when there has to be price instability.

Insurance companies are loaded up with bonds and long-term mortgages. This is why the assets of insurance companies are at risk when central banks inflate. The same is true of mortgage pools such as Fannie Mae and Freddie Mac. A large percentage of the entire capital structure of the United States is based on a sure-lose proposition: the solvency of the U.S. government. To keep it from defaulting, the FED must inflate. But to keep the asset value of the mortgage and bond markets from collapsing, the FED must neither inflate nor deflate. The FED serves the government, not the bond investor. The FED will inflate.

Under normal times, the FED inflates mildly. But with a $50 trillion off-budget liability looming when retired workers go onto Social Security/Medicare, times will not remain normal. Normal times will be budget crisis times.

CONCLUSION

The voters have yawned in the face of a $520 billion annual increase in the U.S. on-budget deficit. The Democrats are campaigning on lost jobs, not the deficit, which they voted for every time they voted to increase spending. All they can say is that Bush’s tax reduction was the cause of the deficit. But the cause is always the same: government spending. The politicians cannot allow a surplus (so called) to accumulate. They use Social Security and Medicare funds to "reduce" the deficit, i.e., create the "surplus." It’s all a sham, and most of them know it. It’s why Congress has their own generous pension system. They know what is going to happen to Social Security.

The bad news is that nobody pays any attention to the bad news. Bush has yet to veto a bill. The spending goes up and up. A trillion here, a trillion there, and pretty soon you’re talking debauched money.

For old-timers who can still recall "Oklahoma," let me remind you of the song, "I’m just a girl who can’t say no. I’m in a terrible fix." Congress doesn’t care enough to say no. The President doesn’t care enough. The voters don’t care enough. So, the majority says yes.

The equity markets, like the bond markets, are now buoyed up by optimistic people who believe, in their heart of hearts, that deficits don’t matter. They will learn how wrong they are when they retire and are helpless.

The modern state is heartless. It also lies. People love convenient lies. Those who believe lies eventually pay a heavy price.

GOLD: A UNIQUE TECHNICAL INDICATOR

I have never been a big fan of technical indicators. But I have just been sent one that impresses me. I had not seen it before. I had not even considered it before.

Like all e-mail users, you have received many versions of the letter from M’Bongo M’Bungo, the former treasurer of Nigeria – or was it Liberia? He sent you and 30 million others a highly confidential letter. It seems he has a pile of money, but he needs your help to get it into a bank outside of Nigeria – or was it Liberia?

Now, however, the offer is different. He doesn’t have a pile of money. He got the pile of money from a pile of gold dust. Let him explain.

Dear Sir

I have a proposal to make, that might be of interest to you. I am in possession of a large sum of money in cash.(US$55.5 million. The money was inherited from my Uncle who was the Chairman of the Sierra Leone Gold Mining Corporation during the Sierra Leonian War when Major Johnny Paul Koromah was the country’s president. The money is of no criminal origin as it was largely realized from black market sale of alluvial gold dust during the war. The money has been lodged at a Security Company in (South Africa) since last year. I now want to move this money abroad and invest it in profitable ventures, as the time is now ripe for such move. WHAT I ASK YOU TO DO:

Firstly to assist me to export this money to any stable country abroad.
To assist me invest the money in profitable ventures in your country or any other suitable country where you have good connections.
To manage the money in a profitable manner preferably a joint venture deal with your company.

The procedure for relocation of the funds to your country is such that you will not run any risk. Basically, we will establish an Investment Account in a local bank in (South Africa) affiliated to the African Development Bank.

We will put the money in the local Account and funnel it through this Account to your over seas account. We will have proper banking trails to show the money as an investment fund. For your assistance you will get 25% (Twent FivePercent) of the total amount and also 25% of net profit from the sale of 125 kilos of gold dust accompanying the money. Upon your request, I will give you further details of the plans and tell you more about my self, but you must treat as highly confidential for my security.

You can contact me through my e-mail above for more details.

Sincere Regards,
Mr williams Umar..

For years, gold got no respect. It is a sign of the changing times when the M’Bongo M’Gumbo letter changes the boodle from dollars to gold dust.

If this offer continues, we will know that the dollar is heading for even more trouble.

February 25, 2004

Gary North is the author of Mises on Money. Visit http://www.freebooks.com. For a free subscription to Gary North's twice-weekly economics newsletter, click here.

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