Again from the NYT — THIS ARTICLE actually takes a look at the real problem with governmental deficits. Deficits, by definition, are expenses greater than receipts. So we have TWO important factors to look at:  expenses and receipts.

Increasing tax revenue addresses receipts. Cutting government services addresses expenses. Closing any deficit means addressing theses items, however, a rift seems to exist in people’s internal bias towards one of these solutions. (more…)

And here’s a look at what the rates on the long bond have done over the last 90 days. I’d guess that the market is seeing the China situation as it is. China will likely no longer import US inflation onto the Chinese people. The Chinese people are frugal with a personal savings rate that dwarfs ours. As such, massive price inflation, particularly on foods will just not be tolerated.

With the RNB floating upward (to reduce the internal inflation in China), the US will no longer be able to cross subsidize our own inflation onto anyone else. This means that 2011 will likely be the year of price inflation for us–the unavoidable consequence of the massive monetary inflation we have already backed into our own monetary cake.

Long Bond Rates

US Monetary Base (MZM from Federal Reserve St. Louis) — rising money supply is the definition of inflation. The MZM supply going from roughly $8.1T to $9.8T in 3 years is about a 21% inflation.

Watch and learn…

This should be required watching. While I don’t agree with many of the solutions proposed, because they ALL imply a more powerful Federal government with much higher taxes.

I think that the filmmakers outline the problem crystal clearly. But, they miss the boat that solutions FROM the Federal government will die in committee. We do not have the discipline to do this. If one thing is clear from our history:  without force, our government cannot and will not change, no matter how good they sound on paper (or film).

The Founders understood this clearly. They constructed our government in such a way that States were intended to cover most social spending and the Federal government a very few other functions (CLICK HERE to read Madison from Federalist 45). The power to print money was put with the Federal government, not the States: so the States cannot chronically spend more than they take in. There is simply no hard stop to prevent the Federal government from eroding the monetary base because the power to spend on everything lies with the power to print money.

This must be separated back to the original Founders intent.

CLICK HERE for an excellent interview on the Charlie Rose show with David Einhorn, a very successful hedge fund manager who made substantial profit by understanding market distortions.

He outlines a point that most people do not understand:  the unseen or unanticipated effects of attempts to regulate the complex markets in the world. His main point is that the market is a rough and tumble place and that laws and regulations provide false “cover.” People are lulled into NOT doing their homework and make mistakes, some of them enormous, based on this moral hazard. (more…)

Read THIS ARTICLE which outlines how the State of Texas is struggling with the concept of Federal coercion. The coercive method used involves the Federal government taking money out of a State via taxation and then sending money back to the State in the form of Federal “grants” but attaching many conditions to it that typically involve other unrelated items that the Feds want done.

This form of coercion was enshrined in law as permissible through the Supreme Court case South Dakota v Dole in 1987. That case arose when the Feds were attempting to get a nationwide drinking age of 21. Several states had drinking ages of 18 and refused to submit to the Feds’ demands. So, the Feds told the States that in order to receive Federal highway funds, then they must submit to Federal demands. This method of Federal coercive power has now spread to many, many other areas with the full blessing of the Courts.

I personally list this Supreme Court case and it’s resultant massive sea-change type of effect on the balance of power between States and the Fed as a pivotal piece in understanding the present nature of the leviathan called our government. And, now the States are facing the repercussions of another critical problem of government:  the Federal deficit.

The Federal government has many, many things it wants to do, but it lacks the funds to deliver them directly. So, it passes a series of legislative demands, funds only a portion of it (because it cannot afford to fund all of it), and then demands that somebody else (the States or the People directly) fund the remainder. Health reform is a classic example of this strategy. The legislation creates a series of Federal mandates, creates direct Federal funding for only part of it. The rest of the funding is demanded from the States, the citizens directly (not through taxation), and from businesses.

Like many States, Texas is struggling to wrap it’s collective head around the impact of Health Reform on it’s own finances. Part of health reform binds the State to certain action through the Medicaid program. The “bait and switch” will serve to decimate the State’s ability to finance the Medicaid program. So, the State of Texas commissioned a study to review it’s options. One option is to refuse Federal funds, which in turn means that it is not bound by Federal demands.

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