Suggested Answers to First Short Quiz

[johnkarls]

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SHORT QUIZ ANSWERS -- BALANCED BUDGET AMENDMENTS AND REDEEMING NATIONAL DEBT WITH "WALLPAPER" IN BOTH EUROPE AND THE U.S.

Question 1

What is "fiat currency"?

Answer 1

Currency that is not backed by (or exchangeable for) anything at all -- for example, the U.S. dollar which is no longer redeemable in gold (President Nixon took the dollar off the Gold Standard because Fort Knox was almost empty!!!) and the British Pound Sterling which is no longer redeemable for 16 ounces of silver.

Question 2

In addition to not being convertible into anything (for example, the U.S. dollar after President Nixon took it off the Gold Standard and the British Pound Sterling which is no longer convertible into 16 ounces of silver), is "fiat currency" as we have studied in the past, nothing more than a zero-coupon infinite-term debt obligation of the country or countries that issued it?

Answer 2

Yes, fiat currency is nothing more than a zero-interest infinite-term debt obligation.

Question 3

What two super-powers during the last 80 years saw their "fiat currencies" become worthless?

Answer 3

Germany in the 1930's and the Soviet Union in the 1990's.

Question 4

On what currencies did the economies of those two super-powers run after their own currencies became worthless?

Answer 4

The Soviet Union, in effect, ran on the U.S. dollar. Germany, both effectively and officially, ran on the British Pound Sterling.

Question 5

What happened economically to those two countries as they adjusted to running on a foreign currency?

Answer 5

Please see Q&A-6 concerning the virtually-immediate impact of a country's currency becoming worthless.

Internally, an economy whose currency becomes worthless experiences two things = (1) it becomes a barter economy with food emerging as new quasi-currency, and (2) the level of economic activity in terms of exchange is infinitesimal (though the level of economic activity in terms of production may remain quite high if the population is still primarily agrarian).

Externally, an economy whose currency becomes worthless begins to "pull itself up by its boot straps." Businesses that had been exporting will try to keep their work forces on the job with promises of future payment in foreign currencies. If they are successful in keeping their workers on the job (and their workers do not starve to death), they might be able to sell their product for foreign currency -- assuming that the shippers (e.g., railroads to international ports) are still able to keep their workers on the job (including not dying of starvation).

The export industries that are still able to function can use the foreign currency to import food to feed their workers (food grown internally will probably be horded by farmers who are too suspicious of any currency and, for many years, will stick to bartering) and any profits which are represented by foreign currency can be used for expansion or dividends which, over a period of years, will trickle into the general economy.

What remained of the old Soviet Union in the 1990's was able to recover more quickly than Germany in the 1930's because the principal export of the old Soviet Union was oil & gas. It doesn't take much manpower to guard wells and pipelines from freezing human beings and, in the short run during which exploration can be neglected for a few years, all you have to do is get your oil & gas into pipelines leading to an international port or gas pipelines connecting to Western Europe.

Question 6

What happened sociologically to those two countries during the years that were required to adjust to running on a foreign currency?

Answer 6

It doesn't take long to starve!!!

So for anyone who didn't grow/catch/shoot her/his own food, or become a whore for those who did (or became a pimp for such whores), or join a "Russian Mafia" gang that takes whatever it pleases, the probability of starving was overwhelming!!!

Question 7

In addition to everyone starving who couldn't grow/catch/shoot her/his own food or wasn't lucky enough to become a successful whore or pimp, is there a permanent problem associated with a country running on a foreign currency?

Answer 7

Yes. Many economists believe that the best way to combat recessions and/or unemployment is to print money -- which is no longer possible if you don't have your own currency.

[In simple terms, unemployment could be eliminated overnight by putting every unemployed person on the government's payroll and, if you don't raise taxes at the same time which means you will be printing money to hire the unemployed (or borrowing the money if there are any chumps still willing to give you loans), you will have an overnight economic boom as the previously unemployed now begin spending their pay checks. There are at least two tricks involved = (A) judging (or guessing) correctly how much stimulus is needed since, in our simple example, the purchasing power of the newly employed would create inflation and it might have been better for the government to hire only a portion of the unemployed so that the remainder would have been available to the private economy to increase production to meet the new demand, and (B) taking into account whether any actions being taken currently (or whether recent events) have affected the willingness of consumers to spend at their previous levels.]

Question 8

As we have studied in the past, which countries are the "problem children" of the European Union and, for each, how large was the national debt in comparison to Gross Domestic Product (GDP)?

Answer 8

The most current stats per http://www.cia.gov =

Iceland - 126.3% - 2010 & 114.9% - 2009

Ireland -- 94.9% - 2010 & 65.3% - 2009 (Ireland tanking because of the large jump due to the government's ill-advised guarantee of the indebtedness of its banks, rather than the magnitude of the governmental deficits)

Greece - 142.7% - 2010 & 127.5% - 2009

Italy -- 119.1% - 2010 & 115.9% - 2009

Spain - 60.1% - 2010 & 53.3% - 2009 (Spain beginning to tank because of the large jump, more than the magnitude)

Question 9

What is the amount of the U.S. national debt? How does it compare to the U.S. Gross Domestic Product (GDP)?

Answer 9

Per the U.S. Treasury Department, total public debt outstanding on 7/31/2011 was $ 14.34 TRillion (the Treasury Dept's monthly statement for 7/31/2011 is posted on http://www.ReadingLiberally-SaltLake.org).

A few days later, the ballooning public debt exceeded the annual U.S. Gross Domestic Product!!!

Which, of course, means that if the credit markets suddenly view U.S. public debt as "junk bonds" requiring a 20% interest rate to attract sufficient investors, 100% of the federal budget would have to be dedicated to paying interest AND NOTHING WOULD REMAIN TO PAY FOR ANYTHING ELSE.

Question 10

How does President Obama's most-recently-proposed 10-year budget that was defeated 97-0 by the U.S. Senate earlier this year, compare to the 10-year "Base Line" of the Congressional Budget Office (CBO) that the CBO uses for measuring whether a legislative proposal is "revenue neutral" or, in the case of deficit-reduction proposals, for measuring the amount of the reduction?

Answer 10

[Please see Answer 11.]

Question 11

What will be the amount of U.S. national debt at the end of the 10 years according to President Obama's 10-year budget? According to the 10-year "Base Line" used by the CBO?

Answer 11

The CBO's most recent analysis of both the "Base Line" and President Obama's most-recently-proposed budget is posted on http://www.ReadingLiberally-SaltLake.org. Salient points =

The President's most-recently-proposed 10-year budget that was defeated 97-0 by the U.S. Senate earlier this year called for annual deficits ranging from $ 658 Billion to $ 1.8 TRillion.

The 10-year total deficit was $ 9.27 TRillion.

Added to the already existing national debt of $14.34 TRillion, President Obama was proposing a national debt of $23.61 TRillion.

In judging how that level of debt would relate to GDP, assumptions regarding economic growth are necessary. For example --

No growth = $23.6 TRillion debt / $14.4 TRillion GDP = 164%
1%/year compound growth = $23.6 TRillion debt / $15.84 TRillion GDP = 149%
2%/year compound growth = $23.6 TRillion debt / $17.48 TRillion GDP =135%
3%/year compound growth = $23.6 TRillion debt / $19.27 TRillion GDP = 122%


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The CBO's "Base Line" (what happens under existing law including scheduled changes such as the expiration of the "Bush era tax cuts" -- using CBO's economic assumptions) = annual deficits ranging from $ 282 Billion to $ 1.7 TRillion.

The 10-year total deficit was $4.44 TRillion.

Added to already-existing debt, the total in 10 years would be $ 18.78 TRillion.

For growth assumptions between 0% and 3%/year, the debt to GDP ratio =

No growth = $18.8 TRillion debt / $14.4 TRillion GDP = 164%
1%/year compound growth = $18.8 TRillion debt / $15.84 TRillion GDP = 131%
2%/year compound growth = $18.8 TRillion debt / $17.48 TRillion GDP =119%
3%/year compound growth = $18.8 TRillion debt / $19.27 TRillion GDP = 107%


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Several things should be noted =

(1) The CBO's model already makes assumptions regarding growth!!! The ranges for growth shown above show how sensitive the results are to the growth assumptions made!!!

(2) The CBO's "Baseline and Estimate of the President's Budget" (which is posted on http://www.ReadingLiberally-SaltLake.org and on which the foregoing statistics are based), does not readily disclose (if, indeed, it discloses at all) the growth rates it has assumed during each of the 10 years involved.

(3) To the extent the CBO's growth assumptions prove overly optimistic, the results of course would be more dire.

(4) Over the decades, the CBO has been notorious for making "static" rather than "dynamic" forecasts!!! The difference is that "static" forecasting assumes that the policy whose effect is being measured, ITSELF HAS NO EFFECT ON THE ASSUMPTIONS EMBEDDED IN THE MODEL!!! For minor/insignificant policies, this may be valid. But it should be obvious that for major/significant policies, "dynamic" forecasting which includes the impact of the policy being measured on the assumptions embedded in the model, is more appropriate -- for example, the levels of public debt to GDP being discussed would probably produce "junk bond" rates that could easily approach 20% (assuming the U.S. Government could borrow at any rate), which would "bring the house down" = nothing to spend on anything else and an economy that has just experienced "melt down" as it begins to go through the process described in Q&A-5 & Q&A-6.

Question 12

How will the level of U.S. national debt as proposed by President Obama (and the "Base Line" level used by the CBO) compare to GDP?

Answer 12

[Please see Answer 11.]

Question 13

Did the CBO certify President Obama's new health care program as "revenue neutral" because the bill's sponsors claimed (A) they would steal $500 billion from Medicare to help pay for it (even though Medicare itself is going bankrupt), (B) they would dump $500 billion of increased Medicaid costs on the states (even though the states each have one foot in Bankruptcy Court and the other foot on a banana peel), and (C) the new long-term-care governmental-insurance feature which the Obama Administration recently abandoned, would rake in premiums during the 10-year period in return for Tsunami-sized payouts after the 10-year focus of the federal budget (and the cynical sponsors of the legislation knew the U.S. government does not use proper insurance accounting that would require setting aside "unearned premiums and reserves" to cover the Tsunami-sized losses)?

Answer 13

Yes.

Question 14

How will the looming level of U.S. debt over the next 10 years increase if the CBO now recognizes that (A) the $500 billion cannot be stolen from Medicare because it is also going bankrupt, (B) the federal government has to increase state Medicaid support by $500 billion since the states can't afford the increased Medicaid cost that was dumped on them, and (C) the Obama Administration has abandoned the long-term-care premiums over the next 10 years in order to avoid the Tsunami-sized payouts after the end of the federal budget's 10-year focus?

Answer 14

What's another TRillion dollars or two??? [Sarcasm intended!!!]

Incidentally, we have a long-standing Six-Degrees-Of-Separation E-mail campaign recommending the financing of Medicare and Social Security with a European-style motor-fuel tax which will also kill a few other "birds" with the same "stone" = reducing carbon emissions because of greater cost-induced fuel efficiency, reducing our balance-of-payments deficits and reducing the reliance of America and its allies on Middle Eastern countries. [Most European countries have gasoline prices = the equivalent of $15-$20/gallon.]

Question 15

As we have studied in the past, isn't a European Nation's guaranteeing the debt of its banks a fatal mistake?

Answer 15

Or course!!!

That is what Ireland did!!! (Please see Q&A-8.) Which simply meant that the Irish Government joined the Irish banks in the "frying pan"!!!

Question 16

Then why would the European Union in general, and France/Germany in particular, still be judged sane if they either permitted the European Central Bank (ECB) which issues Euros, to guarantee (or purchase) the national bonds issued by Greece, Italy or Spain, or to guarantee the debt of European banks whose holdings of the bonds of those three countries exceed the banks' net worths?

Answer 16

You haven't seen them do it yet, have you!!!

Question 17

What did "QE2" mean from 1969 to 2008?

Answer 17

For several decades after World War II, there were still three luxury liners that made regular trans-Atlantic trips = The France and Cunard's Queen Mary and Queen Elizabeth.

In 1969, the original Queen Elizabeth was replaced by a brand new luxury liner called the Queen Elizabeth II or, more frequently, the QE2.

It was retired in 2008.

Question 18

What has "QE2" meant since 2010?

Answer 18

"Quantitative Easing" means printing money to stimulate the economy.

"QE2" refers to the second round of printing money by Ben Bernanke and his Federal Reserve.

[Bernanke's description/explanation of "QE2" is posted on http://www.ReadingLiberally-SaltLake.org.]

Question 19

Has the U.K. recently engaged in "Quantitative Easing" (i.e., printing money)?

Answer 19

Yes.

Question 20

Has the ECB recently engaged in "Quantitative Easing" (i.e., printing money)? Why not?

Answer 20

No. The ECB is prohibited by treaty from printing money to benefit only one or a few Euro-Zone countries.

Question 21

Has the U.S. Federal Reserve recently engaged in an overt THIRD ROUND of "Quantitative Easing" (i.e., printing money) = "QE3"?

Answer 21

No.

Indeed, in an 8/26/2011 speech at Jackson Hole, Bernanke promised that there would be no "QE3" for the foreseeable future.

Question 22

Has the U.S. Federal Reserve recently engaged in a STEALTH "QE3"?

Answer 22

Yes, two weeks after Bernanke's promise at Jackson Hole, the Fed committed to printing enough dollars for sending to the ECB for the ECB to keep Italy and Spain afloat through the end of 2011. [The NY Times and WSJ articles describing this are posted on http://www.ReadingLiberally-SaltLake.org.]

Question 23

Why did the New York Times and Wall Street Journal (among others) fail to inquire about the particulars of the mid-September STEALTH "QE3" to flood the European Central Bank (ECB) with enough dollars to keep Italy and Spain afloat through the end of the year?

Answer 23

Bernanke and the Federal Reserve refused to even issue a Press Release about their STEALTH "QE3" on the grounds that it merely implemented pre-existing commitments.

The media should at least have asked about the pre-existing commitments.

After all, the NY Times reported that the ECB was supplying US dollars to Italy and Spain again one day before the NY Times reported that the Federal Reserve was the source of those US dollars. The obvious implication is that the "pre-existing commitments" were probably contained in a telephone call THE DAY BEFORE the newly-printed US dollars began flowing.

Question 24

In the wake of the refusal of the Federal Reserve to provide any details about its mid-September STEALTH "QE3" (and the failure of the media to ask for such details), what would likely be the "worst case scenario" for how many additional dollars Fed Chairman Bernanke has committed to print by year end and send to the ECB?

Answer 24

Presumably, Bernanke is printing dollars to loan to the ECB to purchase any Italian or Spanish bonds that will not sell at "reasonable" interest rates.

Presumably, the ECB would not agree to such a thing -- if, for no other reason such as prudence, the ECB (as previously noted) is barred by treaty from taking any action that will benefit only one or a few Euro-Zone countries. Accordingly, the loans by the Federal Reserve to the ECB are almost certainly non-recourse and secured only by the Italian and Spanish bonds.

Without spending an inordinate amount of time trying, probably unsuccessfully, to ascertain how much of the Italian and Spanish bonds need to be re-financed before year end, the "worst case scenario" would be to assume that 100% of the debt needs re-financing.

And in the face of the "stone walling" by Bernancke and The Fed over providing any information, the "worst case scenario" would be to assume that Bernancke signed up each of the other "participating" central banks for a token $1.00 each in order to add their names to the list, leaving U.S. taxpayers "holding the bag" for everything except $4.00 provided by the other 4 central banks.

Per http://www.cia.gov, the most recent estimate of Italian national debt = $2.1 TRillion as of 2010.
Per http://www.cia.gov, the most recent estimate of Spanish national debt = $0.8 TRillion as of 2010.

Sub-Total = $2.9 TRillion.

Plus another TRillion for the deficits of the Italian and Spanish governments that have been (and will have been) incurred from whenever in 2010 that the CIA made its estimates, through 12/31/2011 when Bernanke's commitment ends (if not renewed).

Total = $4 TRillion = the "worst case scenario" for how much U.S. taxpayers will "take on the chin" thanks to Bernanke's STEALTH "QE3"!!!

Question 25

What is Fed Chairman Bernanke's authority for "quantitative easing" in general and the STEALTH "QE3" in particular?

Answer 25

The Central Banks of most countries around the world have only one mission = maintain a stable currency.

The U.S. Federal Reserve Bank (as our Central Bank is called) was given two missions by Congress = (A) maintain a stable currency (i.e., prevent inflation or deflation), and (B) minimize unemployment.

There is no real audit of the Federal Reserve that follows Generally-Accepted Acounting Principles ("GAAP")!!! Nobody knows how much money it has printed to loan to various entities [such as banks during "QE1"] or to purchase various assets such as U.S. governmental bonds.

[Indeed, earlier this year, it was announced that the Fed purchased all of the U.S. government's outstanding "long bonds" (i.e., 30-year bonds) in an attempt to drive down long-term interest rates and force lenders to make 30-year mortgage loans instead (Fannie Mae and Freddie Mac are currently responsible for 90% of new mortgage loans in the U.S., vs. less than 50% until relatively recently) but the public and even Congress can only guess at how much money the Fed has printed and what assets it owns.]

Accordingly, so long as the Fed believes that "a butterfly beating its wings on one side of the earth can create a hurricane on the other side" it has the authority to do anything "under the sun"!!!

And the Fed doesn't even have to state its belief "with a straight face" because nobody knows what it is doing unless the Fed chooses to confess what it is up to!!!

Question 26

If one focuses on the other responsibility of the Federal Reserve (preventing inflation), is it helpful to analogize the U.S. economy to a human corpse which normally contains about 10 pints of blood and then consider the effect on inflation of transfusing into the corpse another 10 pints of blood and calling the transfusions "quantitative easing"? What would be the effect when the corpse finally comes back to life of having all that extra blood?

Answer 26

Yes. Runaway inflation.

Question 27

Who is Jon Corzine? What is currently meant by the phrase "Pulling a Corzine" (vs. what may also soon be meant by the phrase "Pulling a Corzine")?

Answer 27

Jon Corzine took early retirement as CEO of Goldman Sachs and became a U.S. Senator for New Jersey (1/3/2001 > 1/17/2006) and then Governor of New Jersey (1/17/2006 > 1/19/2010).

After being defeated for re-election by Chris Christie, Corzine became CEO of MF Global Investors, a brokerage house, in March 2010.

Corzine "bet the ranch" on deep-discount Greek national debt and the deep-discount national debt of other "problem children" countries of Europe.

Unfortunately for Corzine, his "all in" bet was sinking fast when it was discovered that MF Global Investors had used money belonging to clients in order to maintain its bets on the deep-discount debt of Europe's "problem children" countries.

Currently, "Pulling a Corzine" means only "betting the ranch" on the deep-discount debt of Europe's "problem children" countries.

If it is discovered that the use of client funds was criminal rather than inadvertent, "Pulling a Corzine" will be expanded to include the crime.

Question 28

Has Fed Chairman Bernanke "pulled a Corzine" vis-à-vis the STEALTH "QE3"?

Answer 28

Yes, under the current meaning. But, as explained above, Bernanke could never "pull a Corzine" in the expanded sense of committing a crime because nothing the Fed does can be illegal.

Question 29

Did Fed Chairman Bernanke realize he had "pulled a Corzine" when he dispatched his self-proclaimed "twin," Treasury Secretary Tim Geithner, to an emergency meeting of Euro-Zone Finance Ministers shortly after the announcement of "QE3" in mid-September to lecture them that they will just have to guarantee the debt of their "problem children" countries and guarantee the debt of their banks in order to save Bernanke (and, though presumably not also mentioned, save Corzine)? Did the Euro-Zone Finance Ministers laugh Geithner out of the room?

Answer 29

Yes, he did dispatch Geithner for that reason.

And yes, the Euro-Zone Finance Ministers did laugh Geithner out of the room. Not only because the Euro-Zone Finance Ministers thought it was none of Bernanke's and Geithner's business. But also because the Euro-Zone Finance Ministers felt that Bernanke's STEALTH "QE3" was only aggravating the problem since now Europe's "problem children" countries would be less likely to "mend their ways" after sobering up to the fact that German taxpayers were not going to bail them out, by the unexpected realization that U.S. taxpayers, courtesy of Bernanke, will do so!!!

Question 30

Of what were House Democratic Leader and former Speaker Nancy Pelosi and several of her Congressional colleagues, recently accused?

Answer 30

CBS' "60 Minutes" presented on 11/13/2011 a report by Steve Kroft that members of Congress in general, and Nancy Pelosi while serving as Speaker of the House in particular, had engaged in activity that would have prompted for you or for me or for Martha Stewart an investigation by the Securities and Exchange Commission of "insider trading."

However, Congress traditionally exempts its members from any laws they enact to govern mere citizens.

Accordingly, "insider trading" by Nancy Pelosi or any other member of Congress (including U.S. Senators) is NOT illegal.

[Incidentally, it should be noted that, per "60 Minutes," much if not all of the "insider trading" done in Nancy Pelosi's case was actually done by her husband with "inside information" obtained from Nancy - and that although Yours Truly doesn't have time to "chase that rabbit," it would be surprising if Nancy Pelosi's husband enjoys an exemption from the crime of "insider trading" merely because the "inside information" was obtained from a member of Congress.]

Question 31

Would it also be "insider trading" if it were discovered that Pelosi and the self-proclaimed "twins" (since they claim to work so closely together), Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke, had been making short-term windfalls on going long/short on Euros with advance knowledge of the various policies (such as the STEALTH "QE3") that the "twins" have implemented?

Answer 31

Perhaps someone else has time to "chase this rabbit." There are at least two issues =

(A) Whether the tradition of Congress to exempt its members from any laws it passes extends to the members of the Judiciary and/or the members of the Executive (presumably not); and

(B) Whether "insider trading" relates to trading currencies as well as stocks/bonds (NB: the provisions of the securities laws are usually geared to the definition of "security" which is extremely inclusive almost to the point of including anything that has economic value and can change hands such as, for example, real estate condominiums).