RIGHT AT THE CLIFF’S EDGE
As this is being written and published, the current limit on borrowing by the U.S. Federal government is $US 14.3-trillion and the deadline for Congress to raise it, is 2 August 2011 tomorrow. We are now standing right at the edge of a cliff.
The President of the United States cannot go his own way and raise the limit arbitrarily. If he does so, the members of Congress, including those from his own party, are all together legally obligated to impeach him immediately and ask the chief justice to swear in a new presidency. So, when the US government debt reaches the cap set by Congress, the White House has to request that Congress increase the limit. Note that the legal limit has already been breached by some US$ 238-billion. That’s why we have heard such a hot debate over the last few weeks about this global-affecting issue.
Yes, global. If the U.S. Congress does not agree to raise the cap limit tomorrow, borrowed funds will not be available to pay for government bills and the U.S. government would be in default, which would cause a severe rise of interest rates on US Treasury bonds. In turn, the U.S. dollar value would plunge, destabilizing an already fragile U.S. economy and setting the fractured global economy into a tail-spin towards even more disarray and dislocation.
This is the kind of world we all now live in. It is the complete opposite of the OECD’s stated goal, to which the U.S. belongs, which is to build a stronger, cleaner, fairer world to ensure lasting peace and contribute to world security.
THE REAL BENCHMARK
This is the real benchmark we must now use compare it against. That’s why the whole world has been following the debate in Washington largely because the US dollar is the reserve and a major trading and settlements currency of the world. So whatever happens to it affects everybody. Everybody!
America’s currency has been circulating globally for most of the 20th and 21st centuries and the amount of that money (banknotes and coin) in circulation has increased several fold. Now here’s something shocking that you should know about. In Barron’s 21 March 2011 issue, the Federal Reserve of the U.S. finally announced for the first time in history, that the sum total of all US paper dollars and base-metal coins in circulation (CinC) has exceeded US$ 1-trillion dollars. Yes, only a trillion dollars!
Now, compare that with the outstanding gross public debt of the U.S. running at US$ 14.650-trillion and still growing, IOUs all that are printed with ink on the surface of nothing more than security-grade paper?
Yes, ladies and gentlemen. All that glit ters these days is not gold. Fool’s gold perhaps, is more an apt description and with good reason. If this crisis is re solved tomorrow by the U.S. Congress, it will be nothing more than a formality that allows the United States to continue blithely down the road to perdition and with it hoisting and yoking us all to the slavery of paper money inflation for which it is in this age the sole author of.
Today, we see that the world’s central banks are once again beginning to quietly accumulate gold and some other precious metals like platinum as a “monetary reserve”. But, it is also as insurance policy against the small amount of U.S. cur rency notes and coins they carry or the humongous stacks of U.S. Treasury bills, notes and bonds they’ve bought from the U.S. which they now store in their vaults. It’s as if whatever small amount of gold stored in the same vaults can somehow redeem their monetary sins committed with paper, ink and computer hard drives.
The truth is, those sins cannot be erased until the U.S. Federal Reserve and all the major central banks of the world’s’ horde of gold are minted into coins, and allowed to circulate freely as money in the form of gold notes or gold coins that can be exchanged at face value and on demand, which once again would become solid money substitutes, restore value, strengthen confidence and do away with all this insanity going around using contrived worthless substitutes that could one day plunge the world back towards the Medieval Ages.
– End –
Postscript Added as of Tuesday – 02 August 2011 10:30 PM New Zealand Time:
Up to the close of the day’s session, the debate was contentious, with nearly all Republican legislators in joint session of the U.S Congress opposing any increase in taxes and the large majority of Democratic legislators viewing tax increases as necessary along with spending cuts. Supporters of the Tea Party Movement pushed Republicans to reject any agreement that failed to incorporate large and immediate spending cuts or a completed balanced-budget constitutional amend ment.
The immediate crisis ended today when a complex deal imposing limits on both debt and government spending was struck last Sunday, July 31st. After the legislation was passed by both the House and the Senate, President Barack Obama signed the Budget Control Act of 2011 into law on same day as the im posed deadline. On this same day, the debt rose US$ 238-billion, the largest single-day debt increase in the history of the United States, without a corres ponding sale or issuance of Treasury bonds.
In the end, nobody in Congress (or the rest of the world) is happy. What’s happened only is that the U.S. Congress passed a bill to avert the U.S. govern ment from defaulting on its debt and other financial obligations. The newly-increased amount is US$ 2.1-trillion is good until after the 2012 election, and only about $1.5 trillion will be cut from the spending in the coming decade.
Underlying the contentious debate over raising the debt ceiling has been a grow ing anxiety around the world since 2008 about the large United States federal budget deficits and the increasing federal debt. At the end of 2008, that debt equaled 40-percent of the United States’ annual economic output, just a little above the 40-year average of 37-percent. But since then, the figure has shot upward so that by the end of fiscal year 2011, the U.S. Congressional Budget Office (CBO) projects federal debt will reach roughly 70-percent of gross domestic product (GDP) – the highest percentage since after World War II.
Unknown to many, a similar crisis was faced during the Eisenhower Adminis tration in 1953. The debt ceiling was not raised until the Spring of 1954. To accommodate the gap, the Eisenhower administration increased its gold certi ficate deposits at the Federal Reserve, which it could do because the market price of gold at that time had increased.
According to experts today, the Secretary of the U.S. Treasury is still authorized to monetize several thousand tons of gold that it holds. It is valued under an old U.S. law at approximately $42 per ounce, but it enjoys a market value worth over $1,600 per ounce today.
Likewise, U.S. law does not place a limit on the denomination of minted coins, and specifically mentions that the U.S. Mint can create such coins using valuable metal like gold or platinum of arbitrary denomination and value under the discretion of the Secretary of the Treasury. It has even been suggested that a US$ 5-trillion coin issue could be minted and deposited with the Federal Re serve and used to buy back a third of its outstanding debt, thus making funds available and avoiding having to reset the debt cap every so often.
This is what is called seignorage. Instead of issuing gold certificates, a govern ment converts gold (or platinum or both) bullion into currency at the market rate by printing corresponding notes evidencing ownership of those precious metals. A person exchanges one ounce of gold for its value in those notes.
They then keep the notes for one year, and then exchange it all for an amount of gold at the new market value prevailing. They can also trade it beforehand in a secondary market for cash before the agreed upon redemption period date. This second exchange may yield more or less than one ounce of gold if the value of the currency relative to gold has changed during the interim. If the value of the currency relative to gold has decreased, the note holder receives less than one ounce of gold. That’s when seignorage occurs. On the other hand, if the value of the currency relative to gold has increased, the redeemer receives more than one ounce of gold but seignorage does not occur. Seignorage, therefore, is the positive return on issuing notes backed by gold (or platinum) or the “carry” on money in circulation.
And Then Now This on 03 August 2011?