Washington Chooses Hyperinflation

(August 02, 2011 - by Patrick A. Heller)

This week by President Obama and Congress to “cure” the problem of the federal government borrowing up to the authorized debt ceiling guarantees that the U.S. dollar will deteriorate from hyperinflation.

In theory, it originally looked like the parties were headed toward a compromise that would be a bipartisan agreement to “temporarily” raise the debt limit by $1 trillion, impose virtually no spending cuts and would not increase taxes.

The actual compromise reached was much worse for Americans. The debt ceiling will be raised in steps by $2.1 trillion, which will be enough to get the politicians through the 2012 elections before they have to repeat this spectacle in public. Yet, even this “small” an increase depends on a number of iffy assumptions:

• Gross domestic product will grow by 4.8 percent instead of the most recent quarterly growth of only 1.3 percent or the revised prior quarter growth of only 0.4 percent. Actually the reported GDP growth for the first half of 2011 is likely far too high. If you adjust for the real increase in consumer prices, the 2011 GDP has almost certainly fallen from the same period in 2010.

• The government assumes that interest rates will be unchanged. Who are they trying to kid? As debt levels soar by more than most of the rest of the world combined, creditors are going to insist on a higher interest rate to cover the greater risk of default.

• The so-called “dollar for dollar” spending cuts to offset the rise in the federal debt have not even been considered yet. Most of the proposed initial cuts don’t event start until 2014, well after the time when the entire increase in the debt ceiling will likely have been spent.

• Even worse, the so-called spending cuts will be so minor that federal government expenditures will still rise every year.

In theory, if all the assumptions are accurate, there will be a rise in the federal debt by $7 trillion over the next 10 years, an increase of almost 50 percent from the level that it took 222 years for the government to incur.

The Republicans are celebrating their “victory” in the alleged settlement over the debt limit crisis. The “accomplishment” they are bragging about is the exact opposite of pain actually inflicted on the American people.

You see, all of these assumptions are only considering the federal budget on a cash-flow basis. A more accurate picture would come from analyzing accrual basis financial reports, the accounting standard required for publicly held private companies. On an accrual basis, the supposed long-term savings are almost meaningless.

Back in June, USA Today reported that, on an accrual basis, the federal government’s fiscal 2010 expenditures were at least $7 trillion and that the budget deficit was actually a minimum of $4.5 trillion for just that one year. On an accrual basis, the federal budget deficit for the next 10 years alone would conservatively be at least $50 trillion. The bulk of the new deficit will be caused by pension and welfare payments, the very kinds of expenditures that the politicians have promised won’t be touched (note, however, that Medicare has been virtually destroyed by last year’s health care legislation, for which President Obama is now trying to blame the Republicans).

The federal government does not have a debt crisis. What it really suffers from is a spending crisis. Until spending is permanently cut by at least 65 percent there will be no possibility of fiscal responsibility in Washington. Since pension and welfare payments and liabilities account for at least 75 percent of total federal expenditures, the government will have to cut benefits sharply, either through outright reductions in payments or stealthily by the hyperinflation of the U.S. dollar or a combination of both.

When it becomes obvious that this so-called “fix” didn’t really cure the problem, the politicians will again be forced to resume inflating the money supply (disguised over the past few years by calling it quantitative easing). You can be sure that the politicians will be afraid to reveal the scope of the destruction of the value of the U.S. dollar that will be required to smooth things over until the next election cycle. As a result, look for only part of the next round of inflating the money supply to be acknowledged by the politicians. Whatever the amount of “fiscal stimulus” they admit, look for much occurring out of the limelight.

In this round of political gamesmanship, the American people are the losers. Congress and President Obama have guaranteed premeditated hyperinflation of the U.S. dollar. Put bluntly, the politicians in Washington have chosen to unleash a weapon of mass destruction of the U.S. dollar – with American citizens as the prime victims.

It will take some time before the bulk of the public realizes the extent to which their financial lives have been devastated. In the meantime, it is possible to acquire gold and silver, tangible assets that have never lost their value over thousands of years, at prices that are just a fraction of what I expect they will be within the next year or two. In addition to precious metals, consider acquiring non-perishable food and other goods of enduring value.

Be careful. Remain skeptical of anything said by any of the politicians. There will be a monthly jobs report coming out Friday that will almost certainly overstate the number of people with jobs and understate the number of the unemployed. This will be followed by the monthly report on consumer price increases that will far underreport the actual percentage rise over the past year.

The supposed “good news” of a deal being reached Sunday on raising the federal debt ceiling did not mollify investors. Despite significant efforts by the U.S. government, its trading partners and allies to prop up U.S. stock markets on Monday, the indices fell. The U.S. dollar barely held even, despite huge blatant market interventions to push up the price of the dollar against the Japanese yen. I had anticipated that the prices of gold and silver would fall further than they did upon announcement of a debt ceiling agreement. All of these indicators point to possible soaring precious metals prices in the near future. Those unfortunate enough to still be holding the bulk of their wealth in U.S. dollars and dollar-denominated paper assets have now been warned.