A Trillion Here, A Trillion There

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We have
a lot of senators in there that have been elected on nothing
but a slogan. But what have they cost us after they got in?
You take a fellow that has never juggled with real jack [money],
and he doesn’t know the value of it; a billion and a million
sound so much alike that he thinks all the difference is just
in the spelling.

~
Will Rogers

Will Rogers
got rich telling the truth, over and over, in a friendly and amusing
way. I have books filled with Rogers’ quips, and I could begin
every article with one of them. They still make me laugh, because
they are still just as true, seven decades after he wrote them.

A quarter
century later, another humorist, who was also a first-rate political
scientist, C. Northcote Parkinson, wrote his book, Parkinson’s
Law
. Chapter 3, "High Finance, or the point of vanishing
interest," began with this observation:

PEOPLE
WHO understand high finance are of two kinds:

those who
have vast fortunes of their own and those who have nothing at
all. To the actual millionaire a million dollars is something
real and comprehensible. To the applied mathematician and the
lecturer in economics (assuming both to be practically starving)
a million dollars is at least as real as a thousand, they having
never possessed either sum. But the world is full of people
who fall between these two categories, knowing nothing of millions
but well accustomed to think in thousands, and it is of these
that finance committees are mostly comprised. The result is
a phenomenon that has often been observed but never yet investigated.
It might be termed the Law of Triviality. Briefly stated, it
means that the time spent on any item of the agenda will be
in inverse proportion to the sum involved.

People argue
in a committee over whether or not to spend an extra $5,000, but
they vote to spend a million without much debate. That’s because
they understand $5,000. They don’t understand a million.

HOW
MUCH IS $7 TRILLION?

Earlier this
month, the U.S. government’s official debt topped $7 trillion
for the first time. The last time the official debt rolled over
a trillion dollar limit was June 28, 2002. Not so long ago, really.
You could say that we’re on a roll.

Thirty years
ago, Senator Everett Dirksen uttered his famous words about the
U.S. government’s spending: "A billion here, a billion there,
and pretty soon you’re talking big money." Well, he should
have said it. There is no record that he ever did say it. Too
bad. Like Winston Churchill, legend has attributed some choice
apocryphal quotations to Dirksen. This is the choicest, of course.

In early
1980, after the Comex changed the rules on buying silver futures,
Bunker Hunt was forced to sell his position, losing several billion
dollars as a result. The Federal Reserve System intervened and
loaned Hunt and his brother a billion dollars, based on their
petroleum assets of $9 billion, so that they could settle their
short-term debts. Interest costs were $500,000 a day. Bunker Hunt
was eventually forced into bankruptcy. Of his assets, he announced:
"A billion dollars isn’t what it used to be."

What is a
billion? I did some calculations. A billion seconds takes us back
31 years, to 1973: Richard Nixon’s first full year of Watergate
revelations. A billion minutes takes us back 1902.5 years: over
two decades before the Emperor Hadrian began building the wall
across England to keep out the Scots, when the Roman Empire was
at its peak of power. ("Peak of power" is defined as
"up to, but not including, Scotland.")

A billion
dollars of U.S. government spending takes us back a little over
3 hours and 40 minutes.

Maybe the
best Web page that describes what a billion dollars represents
is the Bill Gates Net Worth Page. If you haven’t visited it, you
should. It is updated daily. His net worth is in the range of
$32.5 billion.

The page
comes at the problem from a number of graphic ways. These are
my favorites. If you are worth $80,000, and you spent the following
sums, what would it cost Bill Gates to spend the same percentage?

You lose
a penny. It would cost Bill $4,000.

You and
your wife go to a movie: $16. It would cost Bill $6.51 million.

You go
out for dinner: $40. That would cost Bill $40.6 million.

Other ways
of approaching this.

You take
a Viagra tablet: $10. (Now I know why Pfizer runs that race
car commercial about making the right move. It’s sure right
for Pfizer!) At that price, Bill can stay the course for 8.9
million years.

If his
fortune were in $1 bills, it would stack up 2,200 miles.

It cost
Mike Tyson $3 million (he forfeited 10% of the fight purse)
when he bit off a piece of Evander Holyfield’s ear in a boxing
match. Assuming that this piece of ear weighed about an ounce,
Bill could afford to eat 338 pounds of Evander Holyfield, if
he were so inclined.

For more
examples, click
here
.

A trillion is 1,000 billions. Take all of the previous examples,
and add three zeroes.

A trillion is a million millions.

We don’t understand this. We can pretend that we do, but we don’t.
The numbers are overwhelming. We can compare trillions with billions,
maybe, but we can’t compare trillions with that $5,000 deal we’ve
been thinking about.

IT’S
ALL COMPARATIVE, ISN’T IT?

Compared
to the size of the unfunded liability of Social Security and Medicare,
$7 trillion doesn’t sound so bad. That’s because the unfunded
liabilities of Social Security and Medicare
are now in the range of $50 trillion.

Medicare
and Social Security are legally off-budget, which means that their
massive debts are not counted by the statisticians when they estimate
the official debt of the U.S. government. This, despite the fact
that all income from the FICA and Medicare taxes — excuse
me, "contributions" — that is not paid out to recipients
is put into the government’s general fund, counted as income,
and immediately spent. The Treasury issues nonmarketable IOU’s
to each of the programs’ slush funds — excuse me, "trust
funds." In this way, the government converts what would otherwise
be a short-term on-budget debt to a long-term off-budget debt.
The public doesn’t understand this sleight-of-hand operation,
so there is no outcry.

Supply-side
economists pooh-pooh the escalating size of both forms of debt,
off-budget and on-budget. "Deficits don’t matter" they
insist. The phrase, "deficits don’t matter," is to supply-side
economists what "we owe it to ourselves" was to Franklin
Roosevelt, who signed Social Security into law almost seven decades
ago. Both slogans ignore what should be obvious:

  1. Deficits
    do matter if you’re the creditor, and the debtor stiffs you
    by defaulting.
  2. We
    don’t owe it to ourselves; some voters owe it to the others.

There is
a basic law of all debt: "There are more debtors who vote
than creditors who vote." Any creditor who does not understand
this law is going to get a memorable education eventually.

Yes, it’s
all comparative. If the Federal Reserve System purchases government
debt with newly created money, which is the only way that the
FED or any central bank purchases investment assets, the FED can
keep the government ahead of its creditors. But the creditors
will see the dollar fall in purchasing power. Interest rates will
rise, the market value of present debt certificates will fall,
and everything will balance — legally speaking. The world’s
largest debtor — the U.S. government — will pay its
legal obligations on time. It will pay them with depreciating
dollars.

Voters, trusting
souls that they are, assume that default by the government is
politically impossible. They define "default" as "a
refusal to pay off loans." This is an incorrect definition.
The correct definition is this: "a refusal to pay off loans
in money with the higher purchasing power that prevailed when
the loans were made." This definition is too complicated
for most voters to understand.

I hope you
understand it.

"I
HAVE NOT YET BEGUN TO CRANK!"

Imagine a
counterfeiter. Imagine that he’s a low-tech counterfeiter. He
is using a hand-cranked printing press. Compared to the Bank of
Japan and the Bank of China, the FED is a one-armed counterfeiter.
Alan Greenspan’s motto is, "I have not yet begun to crank."

There are
still a few holdouts who predict deflation. There are not many.
They have been predicting deflation for two or more decades. They
have been wrong for two or more decades.

Let us get
our definitions clear. "Deflation" means "a decrease
in the money supply." Falling prices are one result of deflation,
but they are also the result of increased output of goods and
services. The price of computers keeps falling, but this is not
the result of deflation. It is the result of Moore’s law: computer
chip capacity doubles every 12 months. (It used to be every 18
months.)

In a report
called "Sitting
on a String
," I reported on the anomaly that some monetary
indicators started falling in the summer of 2003, despite the
fact that the adjusted monetary base, which the FED controls by
buying or selling government debt, was stable or increasing slightly.

Since December,
the adjusted
monetary base
has been rising at a 7.5% annual rate. Year-to-year,
it’s up 4.9%.

As for money
of zero maturity
, there has been a slight increase since December.

The same
is true of M-2.

Those who
predict outright deflation have not dealt with the reality of
FED policy over the last two years. The FED has been "accommodative,"
meaning inflationary, but not above 5%. In the face of the continuing
competition from foreign manufacturers, and in the face of a weak
job market, the FED’s monetary policies have not pushed up prices
too much. But to imagine that the FED is in anything like inflationary
mode is simply ridiculous. The FED is not creating monetary reserves
any faster than it has over the last two decades.

I have never
seen a single essay by any forecaster who predicts deflation —
a shrinking of the money supply — that raised the following
questions, let alone answered them:

  1. What
    financial asset can’t the FED legally buy with newly created
    money?
  2. In
    a world of falling prices and bankruptcies, what financial asset
    owner would not accept a check from the FED or one of the FED’s
    licensed fiscal agents?
  3. What
    is to prevent the FED from buying the entire capital base of
    the United States?

Those who
predict deflation go on and on about commercial banks not being
willing to lend money that is made available by the FED. This
is utter nonsense, unless interest rates go negative. Banks make
money by lending. They may lend only to the government, but they
do lend. If they lend to the government, the government spends
the money. Of that, you may be certain.

The FED spends
the money into circulation. This money is deposited by the recipients
into their banks. Banks then lend out the money. All available
legal monetary reserves are used. If the FED spends money into
circulation, recipients will spend it.

The deflationists
simply refuse to comment on this obvious fact. Their world is
a hypothetical world in which bankers, who make money by lending
money, refuse to lend the money deposited by depositors. Bankers
lend depositors’ money with even greater predictability than Congressmen
spend taxpayers’ money.

Alan Greenspan’s
FED has kept a comparatively tight rein on money except in exceptional
times: late 1999 and the weeks after 9/11. The increase in the
adjusted monetary base and the monetary aggregates has been mild
— under 8% in most years, usually under 7%.

You would
think from reading the discussions of deflationists that the FED
has been creating enormous monetary reserves. You would think
that commercial banks had not been lending money. You would be
wrong. Banks have not been lending money of late to businesses.
This may be a bad sign regarding the confidence of businesses.
Or maybe it’s merely the willingness of investors to lend 30-year
money at 5%. The corporations don’t want to be saddled with short-term
debt.

Why not?
Because heads of corporations fear future monetary inflation,
which will produce price inflation, which will raise interest
rates. They don’t want to have to keep coming back to the banks’
loan windows. They want to lock in today’s low rates. A corporation
that borrows mid-term money from a bank is like a home buyer who
buys an adjustable rate mortgage. The wise man locks in today’s
long-term rate.

Investors
have been buying corporate bonds in enormous quantities. They
have locked themselves into low rates. They will get killed when
rates rise during a time of price inflation. But if rates fall
to (say) 1% in a true deflation, the corporate debtors will float
new bonds, pay off old bondholders, and call it a good day’s work.
Bond investing is asymmetric. The investor gets hurt in both inflationary
and deflationary times. They are, in a word, suckers. But sometimes
the government makes them suckers by promising price stability
when there has to be price instability.

Insurance
companies are loaded up with bonds and long-term mortgages. This
is why the assets of insurance companies are at risk when central
banks inflate. The same is true of mortgage pools such as Fannie
Mae and Freddie Mac. A large percentage of the entire capital
structure of the United States is based on a sure-lose proposition:
the solvency of the U.S. government. To keep it from defaulting,
the FED must inflate. But to keep the asset value of the mortgage
and bond markets from collapsing, the FED must neither inflate
nor deflate. The FED serves the government, not the bond investor.
The FED will inflate.

Under normal
times, the FED inflates mildly. But with a $50 trillion off-budget
liability looming when retired workers go onto Social Security/Medicare,
times will not remain normal. Normal times will be budget crisis
times.

CONCLUSION

The voters
have yawned in the face of a $520 billion annual increase in the
U.S. on-budget deficit. The Democrats are campaigning on lost
jobs, not the deficit, which they voted for every time they voted
to increase spending. All they can say is that Bush’s tax reduction
was the cause of the deficit. But the cause is always the same:
government spending. The politicians cannot allow a surplus (so
called) to accumulate. They use Social Security and Medicare funds
to "reduce" the deficit, i.e., create the "surplus."
It’s all a sham, and most of them know it. It’s why Congress has
their own generous pension system. They know what is going to
happen to Social Security.

The bad news
is that nobody pays any attention to the bad news. Bush has yet
to veto a bill. The spending goes up and up. A trillion here,
a trillion there, and pretty soon you’re talking debauched money.

For old-timers
who can still recall "Oklahoma," let me remind you of
the song, "I’m just a girl who can’t say no. I’m in a terrible
fix." Congress doesn’t care enough to say no. The President
doesn’t care enough. The voters don’t care enough. So, the majority
says yes.

The equity
markets, like the bond markets, are now buoyed up by optimistic
people who believe, in their heart of hearts, that deficits don’t
matter. They will learn how wrong they are when they retire and
are helpless.

The modern
state is heartless. It also lies. People love convenient lies.
Those who believe lies eventually pay a heavy price.

GOLD:
A UNIQUE TECHNICAL INDICATOR

I have never
been a big fan of technical indicators. But I have just been sent
one that impresses me. I had not seen it before. I had not even
considered it before.

Like all
e-mail users, you have received many versions of the letter from
M’Bongo M’Bungo, the former treasurer of Nigeria — or was it
Liberia? He sent you and 30 million others a highly confidential
letter. It seems he has a pile of money, but he needs your help
to get it into a bank outside of Nigeria — or was it Liberia?

Now, however,
the offer is different. He doesn’t have a pile of money. He got
the pile of money from a pile of gold dust. Let him explain.

Dear Sir

I have
a proposal to make, that might be of interest to you. I am in
possession of a large sum of money in cash.(US$55.5 million.
The money was inherited from my Uncle who was the Chairman of
the Sierra Leone Gold Mining Corporation during the Sierra Leonian
War when Major Johnny Paul Koromah was the country’s president.
The money is of no criminal origin as it was largely realized
from black market sale of alluvial gold dust during the war.
The money has been lodged at a Security Company in (South Africa)
since last year. I now want to move this money abroad and invest
it in profitable ventures, as the time is now ripe for such
move. WHAT I ASK YOU TO DO:

  1. Firstly
    to assist me to export this money to any stable country
    abroad.

  2. To
    assist me invest the money in profitable ventures in your
    country or any other suitable country where you have good
    connections.

  3. To
    manage the money in a profitable manner preferably a joint
    venture deal with your company.

The procedure
for relocation of the funds to your country is such that you
will not run any risk. Basically, we will establish an Investment
Account in a local bank in (South Africa) affiliated to the
African Development Bank.

We will
put the money in the local Account and funnel it through this
Account to your over seas account. We will have proper banking
trails to show the money as an investment fund. For your assistance
you will get 25% (Twent FivePercent) of the total amount and
also 25% of net profit from the sale of 125 kilos of gold dust
accompanying the money. Upon your request, I will give you further
details of the plans and tell you more about my self, but you
must treat as highly confidential for my security.

You can
contact me through my e-mail above for more
details.

Sincere
Regards,
Mr
williams Umar..

For years,
gold got no respect. It is a sign of the changing times when the
M’Bongo M’Gumbo letter changes the boodle from dollars to gold
dust.

If this offer
continues, we will know that the dollar is heading for even more
trouble.

February
25, 2004

Gary
North [send him mail]
is the author of Mises
on Money
. Visit http://www.freebooks.com.
For a free subscription to Gary North’s newsletter on gold, click
here
.

Gary
North Archives

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