The Launch of the Titanic

Oh, God, not another "financial" piece... but please, bear with me.

On May 31st, 1911, the Titanic slid down the greased rails at the Harland & Wolff shipyard in Belfast. That day, it was impossible for anyone to envision the fate that awaited it, less than a year later. On November 3rd, 2010, the QE2 slid down the rails of the Federal Reserve, greased by the incompetence of Benjamin Bernake, the fiduciary misconduct of the Obama administration and the criminal complicity of Congress. This time, it's possible -- no, it's unmistakeable -- to see the iceberg "right ahead".

The QE2 in this case is the second round of so-called "Quantitative Easing". What this boils down to is that the Federal Reserve has decided to "print" more money in what they believe is a move that will "promote financial growth". In essence, the Federal Reserve Chairman, Ben Bernake, decided to print up more money on the theory that this will spread more money around and therefore stimulate the economy. Sounds good on the surface, right? "But wait," as they say, "there's more!"

What Bernake and the Fed are trying to do is Keynesian economics. They are trying to spend their way out of debt. This doesn't, as I've explained before, work at all. The idea is completely discredited. It's made even worse because the value of "a dollar" does not have any intrinsic value -- it is not tied to a commodity. Instead, it represents the "good faith" of the United States.

These days, that "good faith" is sorely lacking. The economy of the U.S. is in the dumper and printing more money, as anyone with a fifth grade education (excepting, of course, those who teach at Princeton) can deduce, simply devalues every dollar even further.

There are two major problems, here: illiquidity and insolvency. I don't intend this to be an Econ 101 course (if it were, I'd invite Mr. Bernake) but I'll give a quick explanation for the layman (me!):

• Illiquidity is when you don't have "cash on hand". Think of this as when you own a car (without a loan) or a washer and dryer, but you don't have cash to buy groceries.
• Insolvency is bankruptcy. It's when you owe even on your car and washer/dryer. You don't own anything, anymore. Your debt is greater than your total worth.

Thanks to the policies of the Obama administration and a Congress of accomplices, the United States has a debt that has exploded. The candidates made promises in 2008 to anyone who would listen. They promised "money for nothing". They promised "the government will take care of you." All you had to do was vote for them, then sit back and collect your "Obama Money." Plenty of people, inculcated by over a half-century of burgeoning federal nannyship bought this hook, line and sinker.

While fiscal conservatives warned that there would be a day of reckoning, shouting "ICEBERG! RIGHT AHEAD!", the liberal intelligencia and administration "Goebbels" did their best impression of Captain Smith, increasing speed into the ice field and rearranging the deck chairs. They started handing out money (as my father would say, and keeping in the theme of this piece) like a pack of drunken sailors, increasing the debt from $869 billion in 2007 to $2.2 trillion! Just to put this in perspective, the QE2 ("our" QE2 in this story) is $850 billion.... that's nearly the ENTIRE debt from 2007!

So here's the issue - you can solve illiquidity (at least in the short term) by converting something to cash. The Federal Reserve does this not by pawning real goods, but by printing more money. But this "solution" supposes that you'll have the cash coming in to replace it so you can get your goods out of hock. It flat out does not work if you are insolvent nor does it fix insolvency.

If you don't own anything yourself then you can't hock it; and in the case of the United States, we are insolvent. So printing more money (pawning goods) does nothing! It simply causes us to owe even more and go further into debt.

To put it very simply in our analogy, Bernake is applying full power to the engines with the iceberg looming.

But we do have a chance, yet, to get the ship of state out of harm's way. A new Congress has been elected. It's up to us, the passengers, the voters who put them there, to hold their feet to the fire. It's not good enough to "compromise" -- "we'll just turn the wheel a little and we'll slow down a few knots" -- instead what's needed is full rudder and all astern on the engines. That's what we sent these people to Congress to do and its up to us to make sure they do it.

If we don't, then we may as well start singing "Nearer, My God, to Thee" because there aren't enough lifeboats to go around.

Reminder: If you're getting this via RSS or Email, check the Blog at http://wethepeoplegovern.blogspot.com for embedded links that may be omitted.