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Larry Cyna
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Mr. Cyna is an accomplished investor in the Canadian public markets for over 20 years, and has managed significant portfolios. He is a financing specialist for private and public companies, and has expertise in real estate and debt obligations. He has assisted private companies accessing the... More
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  • Milton Friedman Video From 1977 – Part II – How To Cause Another Great Depression 0 comments
    Sep 23, 2012 8:38 PM

    How Politicians Can Cause Another Great Depression
    Our last blog referred to Milton Friedman's caution about what caused the 1933 World Wide depression, and compared it to the debate being carried on now. This is a continuation of those comments.

    In his classic video from 1977, Milton Friedman delivers a 52-minute lecture at Utah State University on "Myths That Conceal Reality" including the Great Depression Myth.

    He contends that The Great Depression was fully the fault of the Federal Reserve by a failure of Monetary policy In the years 1929 through 1932, the Federal Reserve reduced the money supply by 1/3, and the number of banks in the US decreased by 1/3. Milton claims that if the Federal Reserve had not done this, the downturn would have been a normal downturn that would have been over in a year or two, instead of the Great Depression that devastated so much of the world.

    A look at the Current US Government Deficit
    In the current fiscal year, the federal government is recording a deficit of about $1.13 trillion, down from $1.30 trillion in FY11 and $1.29 trillion in FY10. Interestingly, these figures are not substantially different from the deficit recorded by Ronald Reagan, although this fact seems to escape most observers.

    This reduction in deficit is a small move in the right direction. As these deficits can't continue indefinitely, the debate should be about how, and how fast, the deficit will be trimmed in the years ahead.

    It is also relevant to examine where these enormous deficits came from, in order to understand whom is at fault and where the blame should lie.

    The Reasons for this Enormous Deficit
    In 2008, the government forecast spending in 2012 that was roughly in line with actually expenditures today, and those forecasts have now proven to be quite accurate. The problem is not in the inaccuracy of spending estimates. The problem lies in the much reduced revenues that the government is collecting since 2008 when the financial meltdown occurred.

    Moreover, due to last year's budget deal, the CBO currently projects that federal spending for the next two years will be lower than was projected in 2008. Put another way, spending by the federal government will actually be less than projected in their long term budget.

    Does this make you wonder why one political party wishes to reduce taxes?

    This is not a commentary on whether spending should be greater or lesser. It's merely pointing out that spending is currently not any higher than one would have anticipated back in 2008. It would be very beneficial if government was able to control spending to match revenues collected, but the world just does not work that way. Once committed, expenditures are very hard to curtail, even if revenues are not matching expectations. Whether it be military budgets, medicare, programs, or whatever, once budgets and commitments are made, they are very hard to break.

    The Problem is Revenue
    Revenue (taxes) collected by the federal government is now more than $1 trillion less than forecasted. The biggest part of this difference is due to the severe recession and gradual economic recovery. Tax revenues sank in the recession. They have improved as the economy has recovered, but the pace has been moderate. Revenues also differ from the 2008 CBO projections due to the 2% payroll tax reduction and the two-year extension of the Bush-era tax cuts.

    The Debate Should be How to Match Expenditures to the Lower Revenues

    An Audit of the Fed - The First Time
    It has been traditional that no-one in government oversees the Federal Reserve. This is to ensure that the Fed is an independent body not subject to the politics of the day, and instead tasked with ensuring the nation's prosperity. After furious debate, this 100 year independence was violated this year, and the books of the Fed were audited.

    September 1, 2012 - Before Its News - Scott - The results of the first audit in the Federal Reserve's nearly 100 year history were posted on Senator Sander's webpage this morning. What was revealed in the audit was startling.

    $16,000,000,000,000 had been given out to US banks and corporations and foreign banks everywhere from France to Scotland, in the period between December 2007 and June 2010. The Federal Reserve had bailed out many of the world's banks, corporations, and governments.

    The Federal Reserve refers to these bailouts as an all-inclusive loan program, but virtually none of the money has been returned and it was loaned out at effectively 0% interest. Why the Federal Reserve had never been public about this or even informed the United States Congress about the $16 trillion dollar bailout is obvious - the American public would have been outraged to find out that the Federal Reserve bailed out foreign banks while Americans were struggling to find jobs.

    Understanding What $16 trillion Means
    To place $16 trillion into perspective, the entire GDP of the United States is "only" $14.12 trillion.

    The entire national debt of the United States government spanning its 200+ year history is "only" $14.5 trillion.

    The budget that is being debated so heavily in Congress and the Senate is "only" $3.5 trillion.

    Take all of the outrage and debate over the $1.1 trillion deficit into consideration, and realize there was no debate about whether $16,000,000,000,000 would be given to failing banks and failing corporations around the world.

    The Tarp Bailout
    In late 2008, the TARP Bailout bill was passed and loans of $800 billion were given to failing banks and companies. The figures don't add up as Goldman Sachs alone received $814 billion. As is turns out, the Federal Reserve donated $2.5 trillion to Citigroup, while Morgan Stanley received $2.04 trillion. The Royal Bank of Scotland and Deutsche Bank, a German bank, split about a trillion and numerous other banks received hefty chunks of the $16 trillion.

    What This All Means
    A lack of regulation and oversight of the Western banks and Trading houses, allowed these so-called conservative institutions to amass debts and losses that dwarf anything imaginable. The extent of their illegal actions, amounted to sums greater than the entire revenue of the United States of America - many times greater.

    To make matters worse, the institution run by these banks - the Federal Reserve - then rescued its owners by spending $16 trillion. Amazing isn't it?

    The Debate Over Less Government Regulation
    A platform of one of the political parties for recovery in the USA is reduced government regulation. Having our financial institutions steal $16 trillion, because of lack of regulation, should point out how ludicrous this argument is.

    The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.

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