The Weiner Component V.2 #36 – Money & the President: Part 2

Official Portrait of President Ronald Reagan

English: US President Ronald Reagan and Soviet...

English: US President Ronald Reagan and Soviet General Secretary Mikhail Gorbachov at the first Summit in Geneva, Switzerland. Česky: Americký prezident Ronald Reagan a sovětský generální tajemník Michail Gorbačov na prvním summitu v Ženevě. (Photo credit: Wikipedia)

Up until the Reagan Administration the National Debt had been below one trillion dollars.  During Reagan’s time it reached and went beyond the above figure and with succeeding presidents, particularly Republican ones, has gone far beyond that figure.  Today, in late 2017, it exceeds 19 trillion dollars and if the plans of the current President, Donald J. Trump, are carried out it will take a sudden jump of at least 3 additional trillion dollars.

 

The National Debt has been the means by which the amount of currency in circulation has been controlled.  The Federal Reserve uses the Debt to control the amount of cash in circulation.  It continually sells and cashes out long and short term bonds.  By selling less new bonds than it cashes out the FED increases the amount of money in circulation.  By selling more bonds than it cashes out it reduces the amount of money in circulation.  The amount it sells is controlled by the interest it pays on the bonds.

 

The problem, of course in controlling currency in circulation is that there are other necessary expenditures which can throw off the above process.  Today it would seem that the National Debt is completely out of control and currently getting ready to zoom even further in that direction.  Basically what this means is a redistributing of the Gross Domestic Product or National Wealth upward to those who can afford to buy the Government Bonds.  They get additional benefits upon money they invest.  This spending phenomena began on a large scale with Ronald Reagan’s Presidency.

 

Up until this time the Federal Reserve was generally able to control the amount of money in circulation but during the Reagan years the National Debt went to one trillion dollars and then passed beyond that.  The adjustment power did not work with that much debt.  Other presidents, mostly Republican, took the debt far beyond that point so that it is today over 19 trillion dollars and growing.  The current President, if he gets his way with a Republican Congress, could increase it another 3 trillion dollars with his so-called tax reform.

 

Can the country ever get out of this cycle?  That’s an interesting question.  The National Debt consists of two groupings: the public debt and the private debt.  Over the years the Treasury has taken any funds left over by any Department of the Government at the end of the fiscal year and put that money into the General Fund.  They have then credited the particular Department with those excess funds.  Technically each Department still has access to those funds which the Government has spent.  Over the years this has reached a point of at least 50% of the National Debt.  It could even be as high as 70%.  On a quarterly or by-yearly basis the Federal Reserve turns over to the Treasury Department the interest on that part of the National Debt it owes itself.

 

Interestingly Social Security holds the largest amount of the National Debt.  It is well over one trillion dollars and could be well over two trillion dollars.  During the Reagan Administration the Federal Government was facing the possibility of reaching a break-even or worse level with Social Security payouts.  The Reagan People adjusted the amounts collected so that there was a fairly large surplus from that point on.  We are now looking forward to running short of the amount needed in another 20 or 30 years.  In fact, rumor has it that many of the people today paying into Social Security will not have it in existence when they retire.  Is this true?  I doubt it.

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Ronald Reagan was born in 1911.  He became President in 1981, which put him at 70 years of age when this event occurred.  Up to that time he was the oldest man to assume the presidency.

 

Reagan apparently went to college in the late 1920s and early 1930s, the time of the Great Depression.  When he was questioned at the end of his presidency over the illegal Iran-Contra Deal, beyond stating that he had done something illegal, Reagan stated that he had majored in economics in college.  Economics, during this period was still a relatively new science.  Much was not understood.  When a similar condition occurred in 2008 and 2009 the Obama Administration was able to tone down a potentially greater depression than the one in 1929, making it into a recession.

 

President Reagan did not have the sophistication to understand what had happened in 1929.  He believed in simple answers to most problems.  To him economics functioned best under a totally Free Market system.  He did away with the laws that had been passed during the Roosevelt Administration to keep the country from the banking abuse that had brought about the Great Depression.

 

Reagan kept stating that the problem of government was the government, which we had to get out of the way for real economic growth to occur.  He did this while increasing the size of the Federal Government.  It was this action that brought about the Real Estate Bubble in 2008, and caused the government to bail out the banks which had caused the situation, and to pass laws to avoid a greater depression than that of 1929.

 

It is interesting to note that under the Republican President, Donald J. Trump, the country is again hearing the same arguments that brought about the Real Estate Crash of 2008 and the Great Depression of 1929.  It will be fascinating to find out what eventually happens.  Apparently the Republicans have no memory of the past!

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When Ronald Reagan assumed the presidency he firmly believed that the Soviet Union, which he later called the Evil Empire, was far ahead of the United States in military weaponry and men.  His military goal was to catch up and get ahead of them.

 

In point of fact the United States was far ahead militarily of the Soviet Union.  Their keeping up with us would eventually bankrupt them.

 

Reagan had been a movie actor earlier.  He seemed to believe that the weaponry used in science fiction movies could be developed by American scientists as they were needed.  His program, which was named after a Sci-Fi movie was called “Star Wars.”  Trying to do this in real life can be inordinately expensive, even if the chances of success are low to zero.  Luckily none of these hypothetical weapons were required during his presidency.

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During the Reagan years a very small number of economists came out with the theory of supply-side economics.  It began with the concept that Supply determines Demand; that is, if a good or item is manufactured people will want to buy it.  The basic economic theory has been and still is among most economists that Demand determines Supply.  The theory here is that if people want something it will be supplied.  This has been espoused by most economists in the 20th and 21st centuries.

 

The Reagan Administration coming out of the stagflation of the 70s, the combination of unemployment and large increases in the prices of all goods, came out with this theory.  It was called Supply-Side Economics or Reaganomics.  According to this macroeconomic theory economic growth can be most effectively created by lowering taxes and decreasing regulation.  This, in turn, will increase income for the general public and give the wealthy more money to invest in new production.  Everyone would benefit from a greater supply of goods and services that would cost less to produce and, at the same time, increase employment.

 

One of the so-called proofs of this was what happened during the Kennedy Presidency.  In response to a recession income taxes were lowered and people spent more with the government collecting increased taxes.  Unfortunately Reaganomics did not work during Reagan’s eight years as President.  The Nation Debt would rise to over a trillion dollars.

 

This Trickle-down Economics resulted in the wealthy taking their new additional funds and investing them in old productivity like the stock market.

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On August 5, 1981 President Ronald W. Reagan fired all striking air traffic controllers in the United States, 11,345 of them.  In doing this he would undermine the labor movement and help bring about the wage and salary inequities between labor and management.

 

Two days earlier nearly 13,000 airport air controllers walked out after talks collapsed with the Federal Aviation Administration.  7,000 flights were cancelled across the nation.

 

Technically the strike was illegal. But there had been 39 prior illegal work stoppages against the Federal Government from 1962 to 1981.  President Reagan called the strike illegal and threatened to fire any controllers who did not return to work within the next 48 hours.  Federal judges fined the union one million dollars a day.  11,345 controllers stayed out and were fired.

 

Some 3,000 supervisors joined 2,000 controllers who returned to work, with an additional 900 military controllers in manning the airport towers across the nation.

 

Reagan broke the union at considerable risk.  An air disaster might have resulted from the replacing of the striking workers.  It didn’t happen.  It would take several years and a cost of billions of dollars to return the system to a pre-strike level.  More would be spent doing this than the workers had demanded.

 

Presumably Reagan showed how tough he could be to both workers and foreign leaders.  In all probability the Soviet leader, Gorbachev, was impressed by his action or, at least, the recklessness of his action.  At the time I was daily waiting for an air accident to occur.

 

Reagan arranged that none of the striking air controllers ever be rehired.  In 1993 when Bill Clinton became President he countermanded that order.  About 800 of the former air controllers were rehired.  They joined a different union since Reagan had broken their former union.  Also American labor has not done that well since that time.

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Initially Reagan was going to be a one term president but in 1983 he was so popular that the Republican Party decided to have him run for a second term.  President Reagan easily won against the Democratic former Vice President, Walter Mondale.  Mondale received 40.1 percent of the popular vote but, since the electoral vote was on a winner take all basis, practically all of the electoral votes went to Ronald Reagan, 525 out of 538.

 

Ronald Reagan would begin his second term as President at the age of 74.  It came out at that time that occasionally he would fall asleep at times during staff meetings.

 

During this term Reagan concentrated more on foreign relations.  Because he had believed that the Soviet military was better equipped than that of the U.S. he continued to upgrade the American military.  The truth was that the U.S, was far ahead of Russia.  This move forced the Russians to engage in a military buildup, actually an arms race with the U.S.  This started during his first term.  Russia could not afford the race.  In America it would bump the National Debt to over one trillion dollars.  In Russia it bankrupted the U.S.S.R. and caused it to collapse.  It also created a situation where parts of the Soviet Union broke off into separate nations.

 

Reagan saw other nations as good or evil; the Libyan leader, Gaddafi, was the evil leader supporting terrorism.  Using that premise he had the American Air Force bomb the Libyan capital.  There had been earlier incidents between the Libya and the U.S. military but war had not been declared.  The immediate justification for the air raid, on April 14, 1986, was a Berlin terrorist bombing at a nightclub frequented by American military personal.  Reagan in his speech to the American people held Gaddafi personally responsible for the bombing.

 

While Reagan did not approve of the government of Nicaragua he did support the revolutionary Contras against the government.  Congress passed a law barring the use of funds for the purpose of overthrowing the government of Nicaragua.  In January 1984 the CIA mined the harbor in the capital of Nicaragua.  Suggestions from people in the Administration got countries like Saudi Arabia to contribute money to the Contras.  Obliquely, going against the will of the majority of Congress, the Contras or “Freedom Fighters” as President Reagan called them got some funding.

 

Toward the end of his second term in office President Reagan authorized what has historically been called the Iran-Contra Affair.  With the approval of the President arms were illegally sold to Iran and the money obtained bought arms and other military materials illegally for the Contras to use in overthrowing the government of Nicaragua.  While Nicaragua may not have been that friendly to the United States at that time they had a democratically elected government.

 

From what I remember the Contras were terrorists attempting to gain power.  Reagan unsuccessfully attempted to get Congress to appropriate funds for them.  Reagan was sure he was right and the Congress was wrong.  He needed the funds for a group “Freedom Fighters” so they could fight for freedom.  A group of people illegally sold arms to Iran.  The money from that transaction was used to fund the Nicaragua revolution unsuccessfully.  The Reagan people disregarded the arms embargo the U.S. had placed on Iran and used the money gotten illegally.

 

The person handling the operation was an army officer, Colonel Oliver North, whose political leanings were to the far right.  I got the impression that he saw himself in the middle of a James Bond adventure.

 

When the news of this broke, toward the end of the Reagan presidency Reagan gave a speech in which he stated that he couldn’t believe that he had done something illegal.  Reagan has been called the Teflon president, nothing unpleasant stuck to him.  Apparently the American public also couldn’t believe he was capable of doing something illegal.

 

No impeachment charges were brought against him.  After his term as President he was never charged with an illegal act.  This fact also saved most of his staff who had also been involved in the crime.  Colonel North had testified before Congress.  Nothing in his testimony could be used against him.  This made it impossible to develop a case against him.  He ended in talk-radio, ran for the Senate, lost, and returned to talk-radio.

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President Ronald Reagan changed not only the politics of the world by inadvertently ending the Cold War, he also changed the economic functionality of the United States.  The Federal Reserve would lose much of its ability to control the amount of currency in circulation from his presidency on.  Thereafter much of the money added to the National Cash Flow would be done because of the size of the debt.  It would obliquely help bring about conditions that would help the banks bring about the Real Estate Crash of 2008.  Labor and management relations would change to the detriment of labor.  The levels of wealth between the rich and those below them would change, with labor economically crawling upward while the rich became far richer.  America would begin to change with a very gradually decreasing middle class.  The distance of separation between the rich and everyone else would widen.  While Reagan cannot get credit for all of this he is still responsible for the country moving in this direction.

The Weiner Component V.2 #19 – The Trump Budget

Not too long ago President Trump came out with his proposed budget for the year 2018.  It was heavy with a ten percent increase for the military, had draconian cuts for Social Services cutting some programs and illuminating a large number of others.  It also cut out programs for the arts and for scientific research.  It contained what Trump calls Tax Reform.  This is actually a massive cut for the top Two percent of earners and large corporation decreases in taxes.

 

Looking at his Cabinet the indication is that Trump wants a government of the rich, by the rich, and for the rich.  The groups really harmed by his proposal would be the poor who are totally dependent upon the Federal Government for numerous services and the elderly living upon a fixed income like Social Security or a set retirement that decreases year by year as prices slowly rise due to inflation or otherwise.  Their medical insurance would rise significantly but their coverage or protection by the state would decrease significantly.

 

One can suppose a rapid rise in their death rate of the elderly would benefit the government as their producing days are over and they are only consuming.

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In a recent article on the internet a staunch conservative congratulated President Trump for his stance on the budget but then stated that he did not go far enough.  He apparently felt that Trump’s proposed massive cuts to the United States social programs would still be costing too much money.

 

Trump’s Treasury Secretary, Steven T. Mnuchin, was originally a Wall Street financier.  According to his and several other people who are involved in finance and working for Trump have stated and may well believe that following Trump’s budget will raise the Gross Domestic Product (GDP) to 3%.  It was .075 in 2015.

 

These people come from the world of finance.  They are not economists.  To many economists this is wishful thinking nonsense; it’s not about to happen.  In fact with all the Trump cuts, increases in spending, and lowering of taxes for the wealthy the deficit will increase considerably in 2017 and 2018.  Thus significantly upping the National Debt which is currently 19 trillion plus dollars.

 

The National Debt is currently approaching 20 trillion dollars but what it actually is is misunderstood by most people in the country.  Most people consider that this is money owed to countries like China and Japan for the uneven trade that goes on with them.  But this is only partly true.

 

The National Debt consists of two parts: one public and one private.  The public part is the money that the government owns.  It is money that it has lent itself.  The question here is can an entity owe itself money?  In terms of the Federal Government obviously it can.  Several times a year the Federal Reserve transfers billions of dollar in interest to the Treasury.

 

Entities within the government transfer their surplus funds to the general fund.  The government then gives them credit for the transferred funds.  The largest entity to do this is Social Security.  In the 1980s, when Ronald Reagan was President, Social Security was in trouble.  It could conceivably run out of money in the near future.  Congress raised the amounts paid into Social Security by both the individuals and their employers.  And in 1989 Medicare was separated from Social Security.  Additional separate amounts were paid into it by both employers and employees from then on.  Also at this time people who did not pay into Social Security could make payments into Medicare and have it when they retired.

 

From that time on Social Security has had a relatively large surplus.  It is today the largest debt holder of part of the National Debt.  Interestingly Al Gore, when he ran against George W. Bush, has as part of his platform, a lockbox, which would have been banking surplus Social Security funds rather than putting them into the General Fund and spending them.  However with George W. Bush as President the surplus went into the General Fund and was spent.

 

China, Japan and other nations have many individuals and companies within their countries that hold U.S. Government loan papers.  That and loan bonds held by individuals within the United States and other countries would make up the privately held National Debt.

 

The Federal Reserve admits to owning about 50% of the National Debt.  I would estimate it to be more like 60% to 70% of the actual National Debt.

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The FED sells these bonds continually, increasing or decreasing the amount of currency in circulation.  Money is not only cash; it is also credit and debit cards and checks.  The FED regulates the amount of currency in order to control value and limit inflation.  Too much money in circulation decreases the value of the money and too little money being available creates deflation.  The FED has to maintain a balance between the amount of money in circulation and the population of the country.

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In the minds of most people money is an object of value.  It allows people to have what they need and want.  In fact for most of its history money itself was an object of value acceptable all over the world.  Eventually the amount of gold and silver, which was money in the form of coins, was insufficient in terms of all the business that went on in a country.  There wasn’t enough gold and silver available to conduct the necessary business for the country to function properly.  As a result of this the government of each individual nation withdrew the precious metal and began printing its own currency which functioned within its borders..

 

This began at about the first third of the 20th Century and has continued since then.  Money today in the U.S. is a Federal Reserve Note.  It has no real intrinsic value.  It is merely a means of exchange for goods or services.

 

Adam Smith in 1776 published “An Inquiry into the Wealth of Nations.” In this work, which was strongly influenced by French economists called the physiocrats, Smith developed the basis of the modern capitalistic economics.  The true wealth of a nation is what it produces; its goods and services.  These are it Gross Domestic Product.  They are defined as all the goods and services the nation produces in terms of dollars and cents within a given period of time, a fiscal year.

 

This brings us to the basic concept.  What is the actual wealth of a nation?  Today the United States is the wealthiest nation that has ever existed.  Yet according to our current President we cannot afford to take care of our overall population.  I sometimes think that all modern day Republicans would be much happier if they had lived hundreds of years ago when every individual was responsible for himself and for his family and government merely existed to protect him from foreign invasion.  Looking back historically I wonder if such a time ever really existed.

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By following Trump’s budget the government will massively reduce its spending.  The military will have much more to spend.  Trump has indicated that he will massively increase U.S. presence and involvement in the Middle East.  Much of the military funding will be spent overseas and a large percentage of the tax decrease will go to the upper two percent of the population.  They have not noticeably increased their expenditures when their incomes have increased in the past and the probability is that they will not do so in the present.

 

What will happen with his tax cut, if it comes into existence, is that there will be far less money available in the economy for the purchase of goods and services.  The probability is that because of a lack of funds less money will be spent and less goods and services demanded.  The GDP will actually decrease and it could achieve 0 growth or possibly .01% actual growth or even hit a minus figure,

 

There is also the fact that there is a velocity to money spent in the National Cash Flow.  Money when spent is usually spent three to twelve times.  For example a person shops in a supermarket.  He or she spends twenty dollars.  That money may be used to pay the salary of an employee.  The employee spends that money on dinner in a restaurant.  It can again pay an employee’s salary.  The money keeps getting spent until it becomes part of the Natural Cash Flow that can be three to twelve times.  The $20 can generate $60 to $240 worth of increased productivity.  Conversely if the money is not spent that amount of productivity is cut from the GDP.  All of Trump’s cuts will subtract trillions of dollars from the economy.

 

In addition to bringing a tremendous amount of misery Trump could also bring about a tremendous recession of depression.  We are still working our way out of the Great Recession of 2008.  Trump also wants to get rid of the laws that were passed to avoid that situation from ever occurring again.  Concievably the country could be brought back to the point we had reached in 2008 that almost brought the nation to a worse situation than occurred in 1929, with the Great Depression, which was also brought about by a Republican run government,.  This can be done by following what today could be called Trumponomics.

The Weiner Component #147 Part 3 – Money: The FED & the Treasury

English: Chart of M1 money velocity for the Un...

English: Chart of M1 money velocity for the United States. Nominal GDP, and M1 NSA stock data from Federal Reserve. M1 velocity calculated using nominal GDP divided by M1 stock. Data in log transformation. NBER Recessions in gray. Created in Excel. (Photo credit: Wikipedia)

English: A map of the 12 districts of the Unit...

English: A map of the 12 districts of the United States Federal Reserve system. (Photo credit: Wikipedia)

On Wednesday, February 10, 2016, the Chair of the Federal Reserve, Janel Yellen, met with the House Financial Services Committee to give her semiannual report on the state of the nation and answer questions from each of the members.  Again on Thursday, February 11, she met with the Senate Finance Committee to do the same thing.  As she has shown prior she emphasized caution and the need for the FED to carefully monitor the tenuously existing economic conditions in the world.

 

The major problem that exists today is the widening fallout or nervousness from concern over China’s weak currency and economic outlook, which is rattling financial markets around the world.  China’s GDP (Gross National Product) had traditionally been around 8%.  Over the last year or so it dropped considerably while the value of her currency has increased against other national currencies.  A higher Yuan would make China’s goods more expensive overseas.  The Central Government stated that they would lower the value of the Yuan on international markets.

 

This is done, following the Laws of Supply & Demand, by increasing the amount of actual currency available on the international exchanges, supplying more Yuans than are needed.  In this way the Yuan becomes more available than all the other currencies and its value against them drops.

 

This process, in turn, would bring down the cost of Chinese goods in trade with other countries.  Of course, all the non-Chinese markets did not appreciate their currencies increasing in value over that of the China.  This made numerous other countries nervous and some decided to react in a similar fashion.  Consequently a number of governments began attempting to manipulate their currencies.  These actions tended to deregulate international trade.  The United States dollar rose in value against all the other currencies, being considered internationally the most stable.

 

China made two attempts to do this.  Each did lower the value of the Yuan, but in both instances it fell fractionally.  China’s GDP did not rise to its coveted 8%.  Their Central Bank, by attempting to raise the GDP actually, lost control of their economy.  What they had achieved was a currency oscillating in value.  The value of some other currencies have tended to be equally erratic; but the other counties that attempted to manipulate their currency values did not advertise the fact.  Will a new equilibrium be reached in the future?  Probably, at some point.

 

Meanwhile most of the stock markets in these assorted countries went on roller-coaster rides, mainly ending downhill.  Nervous people sold some or all of their stocks; the different stock markets dropped hundreds of points; automatic computer-controlled programs owned by large holders like retirement funds automatically sold; and the drops became even more dramatic.  Exchange rates of the different currencies went on a tetter-totter basis and international stability tethered on a day by day basis

 

Using this information Ms. Yellen and her Board of Directors at the Federal Reserve have to make projections of what the international and national futures will be.  The American Stock Market has lost at least 10%, to date, of its value.  Most stocks are down considerably.  This is also true of most international stocks.

 

The Chinese Government has made two attempts to lower the Yuan.  They lowered it fractionally both times and then lost control of what they were doing.  Everything, inside and outside of China, has been erratic since.  The Central National Banks are now waiting for a sense of equalization to come again.  So far it hasn’t and everyone is still waiting for some return of normality; and this includes Chairwoman Yellen and the Board of Directors of the Federal Reserve.

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In her remarks Yellen said that the Federal Reserve expects to eventually raise its rates slowly; but they are not on any preset course.  She commented that it was possible that the recent economic weakness could prove temporary, and if so it could set the stage for further economic growth and a stronger increase in inflation than the FED is currently forecasting.  If this occurs then the FED would be likely to hike rates more quickly than anticipated.

 

Ms. Yellen said that various economic indicators demonstrate that China, the world’s second largest economy, was undergoing a sharp slowdown.  But recent declines in the value of that country’s currency have intensified concerns about her future economic prospects.

 

This uncertainty led to increased volatility in global financial markets and against the background of monetary weakness abroad, exacerbated concerns about the outlook for global growth, which generally caused the nervous or erratic actions within the various nations.

 

Yellen also stated that the shark decline in U.S. stock prices, rising interest rates for riskier borrowers and further strength in the dollar has translated into financial conditions that are less supportive of growth.

 

“These developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market, although declines in longer term interest rates and oil prices could provide some offset.”

 

She stated that the labor market remains solid, creating 150,000 jobs in January.  That was enough to push the unemployment rate down to 4.9%.  Inflation, however, has continued to fall below the FED’s target of 2% annual price increases.  (At the beginning of February it was .7 of 1 %.)  The shortfall has been steeper recently because of the renewed drop in oil prices and stronger dollar, which holds down U.S. inflation by making foreign goods cheaper for American consumers.

 

But Yellen said the Central Bank continued to believe that the energy declines and dollar strength would fade in coming months.  Inflation would also begin to move closer to 2% as a healthy labor marker pushes up wages.  She also stated that worker pay has started to show its first significant gains since the Great Recession ended 6 ½ years ago.

 

In late 2015 the interest rate the FED charges banks went from 0 to ¼ of 1%.  When the next increase in interest rates will occur is not known.  The FED will examine the indicators again in March.  Many economists believe there will be few if any increases in interest charged by the FED this year.

 

After her report Chairwoman Yellen took questions from each of the members of the Committees, for the House on Wednesday and the Senate on Thursday.

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What Dr. Yellen implied in her statement was that the economies of China, the United States, and many European nations are far healthier than current economic conditions demonstrate.  She indicated that the international economic chaos begun by China will probably soon end in a new financial equilibrium and trade will probably be again balanced between nations.

 

What has caused the stock markets around the world to go through their current gyrations has been nervousness by investors within the individual nations.  It has been fear or an overreaction to the erratic international financing, a sort of terror that the different national economies could follow domestically the international situation.

 

Of course the irony here is that the currency of the United States is considered the safest in the world and the dollar is the most valuable currency available.  Particularly since the U.S. National Debt has supposedly reached about 19 trillion dollars.

 

Dr. Yellen indicated that the FED is doing nothing but wailing for international trade to stabilize again.  At that point the FED will again raise the subprime rate it charges banks another ¼ of 1% bringing it to ½%.  There will probably be very few, in any, raises this year; but it will pick up in the future.  She mentioned that the average depositor is being financially hurt by the low interest rates they’re receiving from their almost required deposits to the banks.

 

While she didn’t state this fact the implication is that countries like Venezuela, that function mainly on one major export like oil, and whose economies have suffered from the drop in oil prices, are now looking for other products or raw materials they can export to raise their economic levels within their borders.  This may take a few years; but that can’t be helped.  The current drop in the price of oil has been matched by the current drops in their standards of living.

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After her remarks Dr. Yellen took questions and comments from all the members of the committee.  Each had a short period to deal with her.  The questions and comments tended to be quite enlightening.  The Democratic Congress people were a bit friendlier in their remarks than the Republicans.

 

One area of interest was that the Federal Reserve has, between 2009 and 2015 transferred over 600 billion dollars to the U.S. Treasury.  This is money that is separate from all the taxes and fines collected.  It was further denoted as no less than 100 billion dollars a year went to the Treasury.

 

The sources of these funds were not mentioned.  Some of these funds are interest on the part of the National Debt which the U.S. Government owns.  The Federal Government admits to owning 40% of its own debt.  That is a conservative estimate.  I would put it up to, at least, 50% or even over 60%.  The Federal Reserve uses parts of the Debt to adjust conditions within the economy at times.  Federal bonds are both short and long term.  Some are always being sold and other expire and are cashed out.  The FED can add money to the economy or National Cash Flow by selling less than it cashes out or the reverse can be done.  If inflation is too low or there is a recession they will sell less than they cash out.  If, on the other hand, inflation is too high then the FED will sell much more than they cash out. Reducing the amount of money available in the economy.  These changes do not necessarily totally solve the economic problem but they were and are a tool that lessens their impact.

 

Forgetting adjusting economic conditions, the rest of the cash transferred to the Treasury was just a simple money transfer.  All of this money was just brought into existence by the FED.  After all they control the printing presses and can issue money within legal limits as they decide it is necessary.  Remember, what stands behind the dollar is the word of the United States Government.  There is nothing else, no entity of value other than the Central Government.  All money today is a token, merely an instrument for exchanging goods and/or services for goods and/or services.

 

There was no mention of the 45 billion dollars a month that was spent for well over two years during this period resolving the housing dilemma created by the banks during the end of 2008 when the Real Estate Market crashed.  The FED bought 45 billion dollars’ worth of fractional mortgage pieces in all 50 states and territories upon which it would never be able to collect its investment.  In essence the FED bought the economy out of the bank caused Housing Bubble.

 

One area of concern that was brought up by several Black members of the Committee was the fact that unemployment is far higher in minority areas of the country, that the general 4.9 percent unemployment was as high as 50% in some of the Black and Hispanic neighborhoods and among young minority members entering the labor market.  Dr. Yellen stated that Monetary Policy was a general force that worked throughout the economy.  It did not differentiate between ethnic or racial groups, that this type of job creation was the province of Congress, using Fiscal Policy to create work projects in area where these people lived.

 

While she didn’t state it this Fiscal Policy was done from 1987 through 1980 during the Administration of President Jimmy Carter.  Assorted Public Projects were built throughout the nation that benefited both communities and created employment in areas that had larger than normal levels of unemployment.

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There is another factor which Dr. Yellen did not mention but that is highly important and that is the velocity of money.  New currency added to the overall economy or National Cash Flow is spent numerous times before it becomes part of the increased amount of money available in an increased National Cash Flow.  It can be spent three to eight times and in some instances as many as twelve times as goods and services are paid for and then reused by the person or institution who receives them.  This is a continuum.

 

If we take five as the average number of times the 800+ billion dollars, the FED added to the economy between 2009 and 2015, as the average velocity in which the money passed through the overall economy the amount of money Dr. Yellen stated was in excess of 4 trillion dollars.  And if we add to that the 45 billion a month that was used to resolve the mortgage crisis for a period of over two years, that makes another 540+ billion dollars, from which the government never collected back a dime.

 

With all this money added to the economy inflation by February of 2016 was 7/10ths of 1%.  The indication is that the total United States economy totally needed these funds, not only to avoid a Major Depression but to just function and grow.  Keep in mind that the overall population of the country is dynamic, constantly growing.

 

If we just consider the taxes paid on this money on a municipality, city, and federal level we are talking about survival for local and state governments.  For example a state like California charges a sales tax of 7½% Imagine how much additional sales tax would be paid by 40 some million people.  States like California and New York have state income taxes which are a small percentage of what the Federal Government collects, but can still be a substantial sum.  Try to visualize the additional amounts collected by these or other states that have their own income taxes.  And, of course, the increased Federal Income taxes on the additional 4.5 billion plus dollars.

 

In all probability the United States recovery from the 2008 Real Estate Crash was brought about by this Creative Monetary Policy brought about by the Federal Reserve with the support of the President.

 

If the Republicans in the House of Representatives were not so Penny wise and dollar stupid as they have been since 2011 when they took control of the House of Representatives they could, as Dr. Yellen suggested in her answers to questions and President Obama earlier proposed, have passed Fiscal Policy laws and the infrastructure of the United States could well be on its way to modernization.  This, in turn, on a more focused basis than just Monetary Policy would have brought unemployment well down from the 4.9% it is now and significantly increased the country’s GDP.  The difference it would have created in the National Debt by the increased government expenditures would have been made up by the increase in taxes on every level of government.  This also could have focused on minority areas which currently have inordinately larger levels of unemployment.

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One of the comments made by a Republican legislator was interesting in demonstrating his ignorance of the basic principles of Macroeconomics.  His comment referred back to the Golden Era of the Federal Reserve when Alan Greenspan was Chairman of the FED and, in the opinion of the legislator, we were living in a Golden Age.  How misinformed or ignorant can anyone be?  There should be an economics literacy test for people running for Congress

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It is because of people like Barack H. Obama, Dr. Ben S. Bernanke, and Dr. Janet L. Yellen that the country is as economically healthy as it is now.  Without them the United States would today be in a dire depression.

The Weiner Component #140C – Congress & the National Debt

National-Debt-GDP

National-Debt-GDP (Photo credit: Wikipedia)

The National or Public Debt is money that the United States has borrowed above what it collects in taxes and which, with taxes, it uses to operate the country.

 

The high current level of the National Debt was brought about by the three last Republican Presidents: Ronald Reagan and the two Bush presidents, father and son.  The majority of the balance came about by policies and wars by these three men.  Prior to Reagan assuming office the National Debt, which had existed since the inception of this nation, was under one trillion dollars.

 

Republican led economizing actions toward the Public or National Debt have been penny wise and dollar stupid; particularly since the Republicans took control of the House of Representatives in 2011.  Since this period their economizing policies have actually exacerbated both the unemployment situation and lowered the overall economic health of the United States, actually keeping the GDP (Gross National Product) considerably lower than it could or should have been.    Their tactics of forcing their agenda through by refusing to enact necessary legislation unless their economizing bills were also passed have cost the government millions, if not billions.  This is particularly true with bills funding the Federal Government or raising the nation’s debt limit that they mostly caused to be as high as it is.  In fact we are just passed a point in time when the government once again needed to have the debt limit raised above the 18.1 trillion limit or cause financial crises by not allowing the Treasury to have enough funds to pay the continuing costs of running the Federal Government.

 

Fortunately this was one of the final acts of the retiring Speaker of the House of Representatives, John Boehner.  He, with the majority leader of the Senate, Mitch McConnell, and with President Obama worked out a compromise bill through a telephone conference.  They raised the National Debt so that it will not have to be adjusted for two years and also funded the military properly for the oncoming year.  This was done in both Houses of Congress with Democratic help.

 

The conservative Congress presumably wants to or was attempting to use this as a bargaining/blackmailing tool to force the President to cut discretionary spending, which already has been and will again be automatically cut by the sequester at the beginning of the New Year.

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The National Debt, all 18.1 trillion of it, consists of two categories, Public and Private Debt.  The Federal Government owns through its assorted agencies probably, at least, 50% of its own debt.  It could be a lot higher than that.

 

Question: Can an entity owe itself money?  Can any individual or entity owe itself money and legally charge itself interest on these funds?  Apparently only the Federal Government can and does do this.

 

But is it real?  Since money has no intrinsic value the Federal Government could print any amount it wishes.  There is absolutely nothing behind the dollar but the word of the National Government.  There are, of course, reasons why it doesn’t but the Federal Reserve can and does occasionally increase the amount of money in circulation in the National Cash Flow.

 

Of course if any agency like Social Security, which has been showing a profit since 1983 when it was last adjusted and is currently owed about three trillion dollars, were to need any of its additional funds or some of the monies owed to it, that would create problems since the monies has been and are continuing to be spent, both the principle and the interest, and Social Security is given book credit for all these amounts.

 

This process is also true for a large number of government funds that run a surplus; the excess money is freely added to the general fund.  The major exception to this practice would be the Federal Reserve which will and has used debt funds to make adjustments in the National Cash Flow, adding money when there is a shortage during periods of deflation or recession and taking funds out of the National Cash Flow during periods of increasing inflation when there is too much money available in the flow.

 

The rest of the Public or National Debt is private, borrowed on a short or long term basis, from individuals, countries, and other entities.  The major foreign holder of American debt is China, (whether its individuals, companies, or the government itself is another question), holding about 3 trillion dollars’ worth of this loan paper.  Japan is next holding a little less.  The third, I believe, is India.  Companies and individuals hold this mortgage paper.  The FED has sales of it going on all the time, selling short to long term bonds.

 

In addition people buy EE bonds as gifts and as a form of savings.  These bonds function over a 5 year period and their cost is less than the face value of the bond which is the value after 5 years.  They make nice gift for youngsters in that they cost less than their face value and if they are held over 5 years pay additional interest.  I bonds tend to cost more and generally pay a higher rate of interest.  Here the interest is added on to the bond.  There are no state or local taxes on these bonds.

 

How real is the Public or National Debt if the Federal Government owns a large percentage of its own debt?  An interesting question and different economists have different conclusions or interpretations of this fact.

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Alan Greenspan, a conservative economist, was appointed Federal Reserve Chairman by President Ronald Reagan in August 1987 and served until January of 2006.  He held that the Free Market was essential in making economic decisions.  Reagan and his advisors followed the same principle.  They deregulated the banking industry and allowed them to move freely forward.

 

Greenspan served for almost 20 years as Chairman, the second longest tenure of any chairman in the FED and was looked upon by many members of Congress almost as a seer who could foretell the economic future.  Unfortunately Greenspan, even with all the information provided by the Federal Reserve’s constant monitoring of the economy missed the major change that occurred during his term as Chairman.  That was the need for rapid monetary expansion by a rapidly growing economy.  Instead of the FED increasing the money supply in a sane fashion it was left to the unregulated banks to expand the amount of currency in circulation.  This was done slowly at first and then gathered speed like a free moving vehicle rushing downhill.  By 2007 the signs of eminent economic collapse were present.  But they were faced with denial by a generation of bankers who had known only rising real estate values.  The Real Estate Crash came in late 2008 when the entire real estate market disintegrated overnight.  So much for economic awareness by the experts!

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First, what is the real National Debt?  Is it just the Private Debt or is it both, the Public and the Private Debt?  The American dollar today is still considered one of the most prized currencies in the world.  The FED has never had any trouble selling its bonds both domestically and to foreign investors.   Most other nations rank their currencies to the value of the dollar.  Some economic theories or beliefs seem to occasionally be in a process of change.  Finally the United States does not seem to be even near the point of going bankrupt.

 

We are moving into economic areas where it would seem new laws of economics seem to be about to be discovered.  Money, in terms of Macroeconomics, is related to the system of taxation but not dependent upon it.  Money, to the state, is a tool utilized to enhance productivity and the levels of national consumption and standards of living for the entire population.

 

The determining factor of how much money should be in circulation is or should be determined by the level of inflation or deflation that exists in the nation.  A high rate of inflation determines that not enough goods and services are being produced. People are bidding up the price of everything.  A rapid drop in prices indicates that too much goods and services are available and there is not enough cash in the general society to purchase them.  One of the main jobs of the Federal Reserve is to maintain a balance between these two forces. For this process the 12 Federal Reserve Banks are supposed to constantly monitor their areas of responsibility.

 

This was not done properly by the FED from the 1970s through 2008 and the Real Estate Collapse was brought about by the deregulated irresponsible banking industry that created excess trillions of dollars that were added to the National Cash Flow.  If the increased cash needed for the economic growth for this period had gradually been added to the national economy by the Federal Reserve there would never have been the 2008 Real Estate Disaster.  The FED, under Alan Greenspan, allowed the Free Market or unregulated Capitalism to bring about economic disaster.

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Many economists believe that as long as the Public Debt does not exceed the Gross National Product (GDP), which is all the goods and services produced in the nation in one fiscal year, the country is safe.  The GDP is estimated to be 17,419 trillion dollars for 2015, the Debt Limit has to be raised beyond 18.1 trillion dollars.  The estimated growth in the GDP between 2014 and 2015 is estimated to be 651 billion dollars.

 

There have been times in the past, usually during major wars or economic emergencies like the Great Depression, when government spending has exceeded the value of the GDP.   These have lasted for short periods of time.  Once it regularly exceeds that level there is, according to some economists, a serious problem.

 

Also as we move toward the middle of the current century the retired population and those needing more continual medical treatment will increase significantly raising the costs of Social Security and Medicare.  Both of these programs will take a larger and larger percentage of discretionary spending continually bringing up the Federal Government’s costs.  Presumably the costs will increase far above the GDP.  At this point, according to some economists, the ever growing National Debt could cause continual economic harm to the country.

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If we accept this premise as accurate there are certain known variables that have not been factored into this premise.  There may also be other unknown variables that could come up.

 

The first major factor to consider is time.  Most of these future projections are based upon the present; that is, given a future of a decade or two or more, if everything remains exactly the same except for what is being discussed, then the projection will happen.  Generally no one can accurately project all the changes that will come about ten or more years from now.  On that basis any prediction is flawed.

 

Think of your own lives.  What was your world like ten or more years ago?  Could you even imagine being where you are now?  Could you imagine the world as it is now?  I recently found myself standing in a supermarket checkout line looking at a display of chocolate bars.  They were on sale, 4 for five dollars.  For no reason I said aloud, “What happened to the 5 cent bars of chocolate?”  The person in front of me, who was being checked out, start to muse aloud about how, as a child, how much candy he could buy then for a quarter.  He was in his mid-fifties.  Values or prices have changed considerably since then.  Money has decreased in value.  That is one variable that no one really projected.

 

Social Security was last fixed or its premiums were raised in 1983 during the presidency of Ronald Reagan.  It has had since then and currently still has a surplus.  Presumably sometime well past the middle of this century it will begin using this surplus and toward the end of this century will have used it out and have to be readjusted, if this is not done earlier.  Medicare was separated from social security in the late 1980s.  From that time on it was funded by an additional payroll tax paid by, like social security, both by employees and employers.  Both or either of these funds can be again increased or fixed.

 

What many economists are projecting into the future is what will happen if the present becomes the future.  Essentially with no other changes in the future except the increase in the elderly population they are predicting what will happen.  They are not taking any other variabilities into consideration.  The probability of the projection coming true as stated is very low, probably well under 25%.

 

In the last few years the amount of money, as a percentage of taxes collected, has been significantly decreasing but so has the cost of running the Federal Government.  We could possibly in Barak Obama’s last year as president actually have a slight surplus decreasing the National or Public Debt.  This did occur during Clinton’s last year as President.

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Will the Federal Government raise the National Debt further toward the end of this century?  We still haven’t defined what is the real National Debt or, for that matter, the reality of the National Debt as a factor in the operation of this nation in terms of Macroeconomics.  We are moving forward in time with assorted future projections by assorted economists, some of these forecasts contradicting other forecasts.

 

Has Congress even begun to study this problem?  Most of what I have heard from Republican Congressmen has been doom and gloom, the country is headed for bankruptcy unless we cut down Federal spending.  Yet the Republican headed Congress can spend well over 4 and 1/2 million dollars holding numerous standing committee hearings trying to tear down or blame Hillary Rodham Clinton for what happened in Benghazi, Libya while Clinton was Secretary of State.  And this same Republican Congress earlier wasted over a billion dollars shutting down the Federal Government by refusing to fund it.  Some of the potential Republican candidates for the 2016 Presidential Elections seem to want to massively expand the war against ISIS.  They seem to have a problem dealing with the real world!

English: The holders of the United States nati...

English: The holders of the United States national debt as of December 2008. (Photo credit: Wikipedia)

The Weiner Component #116 – The U.S. & the Federal Reserve

In 1935, Cret designed the Seal of the Board o...

English: Janet Yellen being sworn in by Fed Ch...

English: Janet Yellen being sworn in by Fed Chair Ben Bernanke (Photo credit: Wikipedia)

By Friday January 9, 1915, the Federal Reserve had turned over $98.7 billion to the Treasury for the year 2014. In 2013 it was $79.6 billion and in 2012 it was $88.4 billion. All of this was the interest on the National Debt bonds, much of which the Federal Reserve had purchased since 2009.

In 2008, the last year of the Bush Administration, the country faced the explosion of the Real Estate Bubble that had been gradually building over the prior thirty years. The big banks had been going crazy with denial in 2007 with their abuses when the oncoming failure became obvious. In essence every dollar in circulation suddenly dropped in value to about a dime. The Obama Administration did two major things in 2009 and 2010. They were able to avoid through rapid action an economic crash potentially larger than the Great Depression of 1929 and they passed Affordable Health Care (Obamacare). In 2010 the country elected a Republican majority in the House of Representatives and thereafter nothing was done by the House to alleviate conditions caused by the Real Estate Bust. In fact Congress passed laws to exacerbate the negative conditions.

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It should be noted that the Federal Government has two major tools to deal with downturns in the economy. One, used by the Federal Reserve, is Monetary Policy and the other, used by Congress and the President, is Fiscal Policy. This is Macroeconomics.

Fiscal Policy has to do with Congress passing bills that add money to the economy. Keep in mind that all currency has nothing behind it other than the word of the National Government. All money is now a means of exchanging something of value for something else of value, goods and services for goods and services.

In 2011 or 2012 President Obama proposed a bill that would create jobs by updating the infrastructure of the United States. The electric grid across the U.S. is well over fifty years old, much of it predating World War II, and parts of it are in constant danger of breaking down. It has not dealt with the changes in demography or increases in population that have occurred over that period. The country has come close to power outages because of cold weather conditions or for other reasons. Many of the bridges throughout the nation are also well over fifty years old. A number have collapsed; many are still waiting to be refurbished.  Also many schools, some of which were built over one hundred years ago, also need refurbishing or replacement throughout the country. Many of the sewers in cities are well over one hundred years old; a few have collapsed in parts.

All of these and many other projects will have to be done at some point in the future. Maintenance is required to keep all aspects of society properly functioning. From 2011 on the House of Representatives with its Republican majority has tended to squeeze the society, downsizing government and adding to unemployment, in fact at one point it closed down the Federal Government by refusing to fund it. The present is an ideal time to do a lot of these fiscal projects as interest rates are at just barely above 0.

Monetary Policy is a tool of the Federal Reserve. It can be used to increase or decrease the amount of money in circulation. Ordinarily the Fed adjusts the money flow in the economy by increasing or decreasing the amount of money it borrows through the sale of bonds. What happens is decided by the rate or non-rate of inflation. The Fed is always cashing out and selling bonds. There are short term, medium term, and long term bonds, lasting from a few months to a number of years. The rate of sale is determined by the level in interest paid on these bonds. The higher the interest the greater the sale and the lower the interest the less the sale. These interest rates are determined by the level of inflation in the country. The higher the inflation the higher the interest. Here money is taken out of the national cash flow so that there is less available to be spent, thus gradually forcing down the rate of inflation. If the opposite is true then the Fed will sell less bonds than it cashes out and continually add currency to the national cash flow.

With no help from Congress during a period of recession or depression the Fed under the chairmanship of Ben Bernanke had to be quite innovative to pull the nation out of the Real Estate Debacle. This was done by the Fed buying $85 billion worth of bonds each month for well over two years: $45 billion in mortgage paper and $40 billion in government bonds. The effect of these two actions was to add well over a trillion dollars to the national cash flow per year; and also to essentially resolve the big banks activity in splitting up individual mortgages into well over one hundred parts. By my estimate it would have taken well over twenty years to straighten out the housing mess if the Fed had left it alone. The Fed did it in a relatively short time by buying most of the pieces. We again have new construction and older houses are being resold.

What is interesting to note here is that 40 billion was utilized on traditional monetary policy while 45 billion dollars was used to purchase mortgage paper from the assorted hedge funds which each owned fractional pieces of mortgages in each of their funds that had been very sloppily catalogued. For the Fed to collect or foreclose on any of these properties it would have to set up a table of all the homes on which it held mortgages within the 50 states and gradually build up its portfolio to the point where it owned over fifty percent of each particular mortgage. The cost of setting up this information bank would have been prohibitive even for the Federal government. The probability is that the Fed did nothing with this paper and a percentage of the population ended up living in their homes for nothing, in essence the government forgave these loans.

Of course the people living in these houses still had to pay property tax. If they did not the municipality would eventually foreclose on the property and sell it for back taxes. These people would suddenly have a lot of disposable income, which many of them spent freely, and they could not claim any home interest payments on their income taxes. This, in turn, added billions of dollars circulating in the National Cash Flow throughout the country.

The practice of adding money to the economy was ended in October of 2014. Janet Yellen, the new Fed chair left the ending of the policy tentative. It could be started up again if the need arose.

Interest rates had also been dropped to a fraction of one percent, practically giving the banks free money from all the savers and checking accounts which they could lend out at a decent rate of interest. Currently the Fed is considering when to raise interest rates. Meanwhile most of the larger banks have announced large profits for 2014.

What is interesting here is that the Federal Reserve used part of the National Debt as a means of positively controlling the amount within and the flow of national currency. They actually increased over time the flow of money by trillions of dollars and, in this way, diminished the effects of the Real Estate Debacle caused recession.

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What Bernanke did was to use part of the National Debt as a means of getting the country out of a serious recession. Since Congress would not act he used the Debt itself as the tool by which a large percentage of recovery was gradually brought about.

The National Debt is divided into two parts: public debt which the government owns and private debt which is held by private countries and by individuals. For example the two largest holders of U.S. debt are China which as of November 2014 held 1.25 trillion and Japan had 1.24 trillion.

All foreign holdings at that time were 6.11 trillion dollars. It should be noted that the National Debt currently is 18 plus trillion dollars. Who owns the balance? Private individuals and companies within the United States and elsewhere would hold at least another trillion dollars. The balance would then be held by the U.S. government and its agencies. For example Social Security has well over 2 1/2 trillion in government debt. All this means that the Federal Government holds well over 50 percent of its own debt and pays the interest on that debt to the U.S. Treasury.

It should be noted that Treasury securities are seen as one of the world’s safest investments. This has been the situation in the world and will, in all probability, remain so.

The 114 Congress, which recently met for the first time and has a Republican majority in both Houses, shows no indication that it is even slightly interested in fiscal policy. While unemployment is down to 5 plus percent for the first time in the nation since the 2008 Debacle it still could be a lot lower with fiscal policy.

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Another factor of importance here is population; it is always gradually increasing. According to the Census Bureau’s Population Clock: there is one birth every 8 seconds, one death every 12 seconds, and one international migration every 33 seconds. The result of all this is a net gain of one person every 16 seconds.

That is an increase in the population of the United States of 3.75 people per minute, 225 per hour, 5,400 persons per day, and 1,965,600 people per year, if we count each month as 30 days and do not allow for each leap year. The current overall number of people in the country is in excess of 350 million people.

Most of these new settlers will reside along either of the coastal areas. In order for standards of living to not decrease with this additional population the GDP (Gross Domestic Product) has to increase one or two points yearly. If it stays at exactly the same point or decreases slightly then the overall standard of living has dropped for the bulk of Americans.

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What will happen with this new Congress should be interesting and economically uninspiring. From now until July 2016 when the Republicans hold their Presidential Convention there will be a lot of jockeying for the lead position in the Republican Party. The major issues like immigration, fiscal policy, job creation, plus whatever else comes up will be largely ignored. They will try forms of blackmail with the President in order to achieve some of their goals. This will be done by attaching riders that he will not approve of to necessary bills. That means that President Obama will probably have to veto the necessary legislation causing all sorts of economic and other problems. The question there is who will take the blame for causing all these disasters?

The Republicans will certainly not be creating any new jobs. Janet Yellen, the current chair of the Federal Reserve may have to restart the program of buying bonds for economic recovery to continue since the Republicans will be doing their dandiest to constrict the economy and inadvertently increase unemployment. What will probably occur between the present and the next presidential election is two years that the future historians will in all likelihood essentially ignore.

Description: Newspaper clipping USA, Woodrow W...

Description: Newspaper clipping USA, Woodrow Wilson signs creation of the Federal Reserve. Source: Date: 24 December 1913 (Photo credit: Wikipedia)