Inflation vs. Taxation: Name Your Poison 14 comments
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Last night I wrote a longish post and the system ate it. Probably I had not established a firm connection with the server, and when I hit the publish button, it disappeared. My main point was to ask where the limits were for all of the borrowing and spending going on from the Treasury, and all of the lending going on with the Fed.
I have talked about this before. Both China and OPEC have their political reasons for lending to the U.S., and those keep the dollar afloat for now.
I began last night’s doomed post by declaring to readers that they were part owners in the largest hedge fund (or CDO) in the world — the U.S. Government. Very distant from the founders’ designs, the government lends to private enterprises in a big way, clipping a spread, while still being exposed to default.
The U.S. government has absorbed many private debts into its own debt in exchange for many private debt and equity claims. Given that the government is clipping a spread, and borrowers are obtaining better terms than the market could give, could there be any problem?
Yes, there are several problems:
- The federal credit is not infinite — dare we risk the survival of our government to rescue special interests?
- The ability of the Fed to stretch the currency is not infinite — price inflation has not come yet, but when it does come, it will likely accelerate from all of the promises made.
- There is some degree of favoritism in who gets funds. The larger banking firms have been bailed out at their holding companies, which is a travesty, because only regulated subsidiaries are to be protected, not the interests of holding company stock and bondholders. Small banks have been left to fail.
- Private lenders who would lend at higher rates are getting cheated by the government, which has no business being a lender. (Yes, I know, it has been doing it for decades, but that does not make it right.)
- There is little ability for the government to know whether it is offering fair terms or not as far as the taxpayer is concerned. What is the right tradeoff between offering more loans and taxing the populace more?
- The FDIC trades on the creditworthiness of the U.S. They offer guarantees using the Federal credit, rather than surcharge the banks to make up for losses. Letting banks lend to them at Treasury rates is clever to replenish the reserve funds, but what happens when there are more large defaults? The hole will be deeper, and the climb out more challenging.
- So long as the productive capacity of the U.S. is not expanding, arguing about how it is financed is not a fruitful endeavor.
Leaving aside the mutual suicide pact of those that own a disproportionate amount of U.S. Treasuries, the risks that exist stem from an over-indebted economy, and the inability of consumers to resume their role of excess consumption, with accumulation of debt.
Aside from that, should we have a resumption in the decline of housing prices, an acceleration in corporate defaults, or commercial mortgage defaults that affect the big banks, it doesn’t matter that the government is clipping an interest spread, because the losses will be worse.
As a final note, let’s watch the end of the Quantitative Easing from the Fed. Together with the Treasury they already own over 30% of all 30-year GSE-conforming mortgages, if not more. What? Do we want the government to absorb every bad debt? Where is the responsibility to those that contracted the loans, expecting profit or pleasure?
This will not end well. The only question is whether it ends in inflation or greater taxation. Name your poison.
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The tax increases are in train, and on the way. Huge tax increases, the likes of which we have never seen, and gauged to eclipse even the socialist societies of Europe.
But...
They will not avert inflation, which though it will not be so huge as some think, is also coming, and in large amounts.
Sorry, scratch that. Simply not going to happen is it?
Now some of the auto money helped smaller parts companies survive. But large chunks were squandered on filling auto union coffers. The same unions that helped drive two auto companies into the ground.
> While the TARP bailouts of holding companies was bad, nearly all
> of that is coming back with interest, except for (according to TARP
> oversight committee)
It doesn't matter. The extrinsic injury -- i.e. an inefficient firm surviving -- will have been visited on all of us. The TARP banks should have collapsed because they were poorly run. Now, they're here to stay and will -- undoubtedly -- be bailed out again if need be.
we need to deal from where we are. we are in a nice big hole with a lot of quick sand. the government politically wants to start filling it in without stabilizing the subgrade.
we need to install a congress who will block everything, and give us time to repair. a few years will be enough.
it's going to be messy and long term...
the preppies in charge are the dumbest in the last 50 years...
what the f.... did they teach these clowns in Haaarvaaard, Princeton, Yale and Columbia...
Yes, I know inflation IS taxation.
Pressure build up...with massive currency failures globally. Then someone (with a lot of guns) hits a reset button and you start from scratch while heaping all the blame on free markets, capitalism, and liberty.
On Sep 25 01:06 PM tripleblack wrote:
> As for naming the poison, I won't, out of deference to those of sensitive
> nature.
>
> The tax increases are in train, and on the way. Huge tax increases,
> the likes of which we have never seen, and gauged to eclipse even
> the socialist societies of Europe.
>
> But...
>
> They will not avert inflation, which though it will not be so huge
> as some think, is also coming, and in large amounts.
CHINA & OPEC TAKE OUR DOLLARS BECAUSE THEY DON'T HAVE ANOTHER CHOICE THEY'D LIKE BETTER.
WE DON'T HAVE $100 BILLION A YEAR IN GOLD, YEN, AND/OR EUROS TO GIVE CHINA.
THEY CAN:
1. TAKE OUR PAPER
2. IMPORT $100 BILLION MORE OF US GOODS/SERVICES A YEAR
3. CUT EXPORTS TO US BY $100 BILLION A YEAR.
THEY DON'T LIKE OPTIONS 2 & 3, SO THEY STAY WITH #1.
SAME WITH OPEC
I DON'T SEE THEM CHANGING THEIR MINDS ANYTIME SOON.
If we don't get inflation we won. We spent a bunch of money we didn't have, guaranteed a bunch of assets of failing private companies, and there were no bad effects.
David,
Always write your article in Word locally and then paste it when you are ready to publish. Don't type it raw into the Seeking Alpha article box, that's too risky.