Wednesday, December 17, 2008

Ready to pay?

How will cash-strapped local, state and federal governments cope with rapidly expanding deficits? Simple. The Federal government will ignore the problem and continue to kick the can down the road. They will continue to be irresponsible, continue to run up mind boggling deficits, and will set us up for a currency crisis within the next decade. Just when a critical mass number of baby boomers start asking for Medicare and Social Security benefits, the game will be up.

However, on the local and state level, the luxury of ignoring expanding deficits generally does not exist. Some municipalities will declare bankruptcy and clear the slate of many prior obligations. Some will tighten their belts and cut staff, benenfits and programs. Others will raise taxes in a number of ways. Most will have to do more than one of these things.

New York has already proposed raising multiple taxes. From this article, I quote:

The new charges include an 18 percent sales tax on soda and other sugary drinks, called an "obesity tax," an elimination of a sales-tax exemption on clothing and footwear under $110 and a sales tax on cable and satellite radio.

... also pitched a "digital property taxation," which would impose sales taxes, typically 8 percent, on downloaded songs to an iPod.

In the end, debts must be paid. The federal government would like to inflate away the value of the U.S. dollar so that the debts can be repaid with paper dollars of lesser value, pretending that this will not cause an unreasonable burden on its citizens. Or, more properly, that citizens won't be smart enough to put two and two together and blame the politicans for destroying the currency. Of course, politicians who don't promise bread and circuses can't get elected, so there is plenty of blame to go around.

The creditors (i.e. those owed money) would prefer the currency stays strong so they are paid what they are owed, though smart creditors plan for a degree of inflation in a paper money/fiat system. Until sanity returns, creditors will not be engaging in lending more money to "unworthy" borrowers with insufficient assets. In other words, those who most need to borrow money will be unable to do so.

The bottom line is that the bailouts and Federal Reserve response affect all of us negatively. Every time Washington or a local government gives something away, it must take something from its citizens in return to pay for these gifts. There is no free lunch and our society as a whole is about to learn this in a very real way. Rather than let the correct people fail and get hung out to dry financially, our political machine has decided to hand money to the "chosen ones," ensuring our economy takes longer to recover and that it will be led by the bloated and weak, rather than the lean and strong, when the delayed recovery finally occurs.

Great Depression II has started and cannot be stopped by the bankers and politicans who helped create this mess. When governments need money, they always know where to look. Get your finances in line, pay down debt, keep enough physical cash on hand to meet at least 1-2 months of living expenses, and buy physical gold coins and bars to be kept outside the system away from prying (and needy) bureaucratic eyes.

If you have enough energy and desire to invest, put your money in gold stocks around mid-January to mid-February or so when they are finishing a short-term correction. Avoid general stocks like the plague other than as a short-term bull trade or as a shorting opportunity.

Wikinvest Wire