The Writing Is on the Wall: There Will Be Wealth Taxes

We are at a point in U.S. history without precedent. There are levels of government debt typically found at the conclusion of major wars. But rather than containing debt, which has doubled since the onset of the Great Recession, we are at the threshold of serious pressure to finance Boomer entitlements.

For the last five years, the Federal Reserve accommodated a large portion of government financing needs in its effort to reestablish full employment. This has created the false impression that financial markets will absorb whatever debt the government issues.

Though the Fed failed to taper just now, it is on the edge of extracting itself from absorbing the lion’s share of the government’s new debt sale. With reduced central bank absorption of government debt in the offing, the focus shifts back to the ability of the tax base to fund entitlement spending.

For decades, it has been implicitly understood that the Baby Boomer generation would ultimately cause a demographic imbalance of too few workers relative to elder citizens eligible for age-related entitlements. This is generally called the Dependency Ratio, measured here as the ratio of the number of working–age Americans as a percentage of the total population. This is the tax base as measured by the Social Security Administration for the inter-generational transfer from young to old, which will clearly be declining for the next seven decades.

This implies a diminishing base of working-age income earners to support the Boomer generation.

But that’s not all. The Great Recession has further and dramatically eroded the income-earning potential of the young working-age group. The unemployment rate has disproportionately fallen on the young, has eroded their wages and salaries, and, though they are assessed the payroll tax, they pay little income tax in a progressive tax structure. Indeed, the lower half of the income strata funds but 2 percent of income taxes collected by the U.S. government.

The implication is that the contributions by the younger generation to the federal tax base as a source of funding the elderly’s entitlements is a non-starter when the population proportion is diminished along with their economic vitality. So we can forget the presumed great income transfer from the young to the old via taxes and entitlements as the younger generation is struggling to merely support themselves, college degree notwithstanding.

This is the core political-economy issue in all developed countries today, not just the U.S. What is a government to do, irrespective of political philosophy or party when a slowdown in population growth occurs after it has committed itself to age-related entitlements?

If the U.S. is politically unable to diminish its entitlement support, an additional tax base needs to be found, on top of payroll and income taxes.

The obvious candidate to solve the dilemma is a tax on wealth.

Now a wealth tax is a mindboggling proposition for most Americas who believed that the rules of the game are that we work, we pay income taxes when the income is earned, we save, we invest our savings, and we live on the proceeds in older age (in addition to government entitlements we presumably paid for). We already paid tax on income when derived, but a wealth tax implies the government comes back for a second helping again and again every year thereafter.

Given the diehard opposition to any increase in income tax rates, the idea of a fresh new tax would also be expected to create the same legislative stand-off as we are now witnessing over debt ceilings and Obamacare. Furthermore, a wealth tax seems to be a violation of not just the American understanding of the social-economic compact, but many believe naively that the legal/constitutional environment will protect individual wealth — which is suggested in most high school civics classes as something heroic to do with life, liberty and property (with roots in the 14th Amendment and in the Declaration of Independence as originally drafted).

But the financial pressures on today’s government have changed its ethics and standards of behavior — and its interpretation of the economic-social compact — in order to support its previous commitment to politically popular entitlement programs.

While much of this is armchair reasoning, this logic indeed played out.  With stealth legislation passed in 2010, when few were paying much attention, the government broke new ground to expand the tax base and target wealth where it has not been targeted before. Not only was there an increase in the capital gains rate, but a new Medicare surcharge is also being levied on investment income and capital gains to those above a relatively high income level. The tax is effective this year for the first time.  It is not a confiscation of wealth, per se, but of the proceeds of wealth, whether in the form of investment income or capital gains.

This implies that a tax directed at wealth is, de facto, directed at the older generation because it is they who in large part own the lion’s share of the wealth.

To say a wealth tax is a tax on the wealthy elderly squares with the facts. A wealth tax is de facto an age tax: Census data reveals the wealth of those above 65 years of age have 30 times the wealth of those in the 35-to-45 age bracket and six times the wealth of the 45-to-55 age bracket.

To make this new tax more palatable to the demographic being taxed, this wealth tax is styled as a “Medicare surcharge” designed to reduce resistance by the primary payers who are of Medicare or near Medicare-qualified age. As hoped by its creator, it went down as smooth as silk.

Hence what occurred was a new form of income transfer, not from the young to pay the benefits of the elderly but rather a transfer from the relatively wealthy elderly to the less wealthy elderly.

This makes the title of this blog, “There Will be Wealth Taxes”, incorrect in its tense. Wealth taxes have arrived for the purpose of financing entitlements, and one can only presume that it will become more invasive by reducing the minimum income level that triggers this tax.

Despite these government financial pressures to expand the tax base to wealth, many feel in a vague way that the writing is on the wall. Wealth taxes will eventually reach them if not wealth confiscation as has recently occurred in similar financially strapped economies of Europe.

Many are uneasy about the prospects ahead, not just on the tax side but also about how much in the way of real benefits will be available when their time comes. But despite this uneasiness, most Americans hunker down as there is not a similar guiding American experience of an alternative course of action. Most rely on standard domestic investment management to provide for a retirement as the reliance on government programs is now questionable.

But therein lays a problem, because U.S.-based investment management incorporates SEC imposed investment nativity, which assumes the dollar is the safe currency in which to be invested; that inflation will be low; and that the U.S. is the safe harbor and the place where the economy generates yield with little need for the wealth-protection wrappers that are common in other countries faced with these problems.

Furthermore, the common sense notion of diversification — not putting all your eggs in one basket — is thought to be obtained by taking only long positions in the U.S. markets as diversified by sectors across the economy, along with some diversification between debt and equity.

As a result, investment managers are not allowed the flexibility, even if desired or understood, to adequately hedge against the wealth-compromising risk of sovereign default or downgrades, inflation, financial meltdown, sluggish secular economic growth, currency devaluation or wealth taxes.

But it is clear that there needs to be an alternative path to more fully diversify and protect the fruits of one’s labor and place that wealth in an environment that would allow it to grow. Its owners would need to have access to it legally, pay reasonable taxes, and have some measure of protection from confiscation. These forms of wealth include annuities with foreign carriers and Private Placement Life Insurance from a foreign carrier (PPLI) with your funds in custody outside the U.S.

While the U.S. has recently come down hard on foreign bank accounts whose income has not been reported, foreign accounts are available but do require very faithful tax reporting, just as with U.S.-based income sources.

These vehicles have very desirable features which include tax-deferred accumulation; ownership protective wrappers; privacy (inability to determine specific investments); a much larger playing field of available assets, including assets denominated in other currencies; and favorable tax treatment to income streams when one elects to receive them. Other features include the ability to select private mangers that purchase individual claims (rather than expensively charged mutual funds), and delivery of income streams in a choice of currencies and a choice of countries.

It is important to act now while these assets are not entrapped by de facto capital outflow controls that are in the making.

In conclusion, a strong argument can be made for international diversification of wealth into vehicles that for centuries have been devised to provide protection, growth, access and cash flows in appropriate currencies and places.

I will be moderating a panel discussion about how to seek global wealth diversification and protection at an evening get-together at the AT&T Center in Austin, TX, on October 28.

For information about the issues that will be discussed by the panel of legal, financial planning, and investment experts, and to register in order to reserve a seat, click here:


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Is the Printing Press Engaged for the Duration?

spell1A  printing press is a handy thing to have. When a government or central bank can fund itself with money or claims on money, it can buy a lot of things and solve a host of problems, all without the need to tax. I wish I had one.

Developed world governments have lots of problems these days and hence are using the printing press overtime. And with lots of problems comes the thought, at least to an orderly mind, to somehow prioritize the buying. Or, if there is no order, than the disorder of whatever comes next is the order.

This Great Recession experience of the past five years has been an epic chapter of buying in the nearly 100-year history of the Federal Reserve.

In the modern era, economy-wide sustainable growth has been the Fed’s guiding light. It worked quite well for some 50 years to temper the oscillations of the business cycle, both the highs and the lows. And the modern business cycles orthodoxy and Keynesian upbringing is causing the Fed to turn on the printing press to achieve an unemployment rate of 6.5% in this Great Recession, so they claim.

While defining success in terms of unemployment brings clarity as to what Fed policy is about, it opens up monetary policy to an unintended exit if factors other than economic recovery were to reduce unemployment. And financial markets in a bubble state as a result of the Fed’s buying fear that outcome.

As it happens, labor force dropout due to demographics or inadequate skills is occurring. Furthermore, work is being reorganized and parceled out so employees do not exceed 30 hours per week, lest their employers become subject to the Obama Health Care tax. All these factors are bringing down the unemployment rate more quickly than fundamental economic improvement.

Each month, there is a dread fear in financial markets that unemployment will decline sufficiently to cause the Fed to exit QE as they have pledged. Indeed it is the major risk to investors holding positions in an asset bubble market, whether it be in debt, equity, commodities or real estate.

spell2So as we approach the target unemployment rate without much economic recovery, the question is, can and will the target be redefined to be the unspoken necessity of supporting Treasury debt obligations? 

The last time the priority of Fed buying switched from supporting banks and the economy to supporting the government effort to sell Treasury bonds was at the beginning of WWII.

In the three months following Pearl Harbor, given the expectations of the size of wartime debt issuance and with some inflation expectations thrown in, long Treasury yields ratcheted up.

The Fed then approached Treasury (not the other way around) indicating its willingness to enter an agreement to support Treasury bond prices at the March 1942 level for the “duration” of the war.

The Fed did this by buying enough Treasuries along the yield curve to prevent their prices from falling and the market yields from rising — a policy that became known as the Fed’s interest rate peg. It took a tripling of the Fed balance sheet in four years to do the job, which is roughly in the same league as the Fed balance sheet growth since the commencement of the Great Recession.

When the war concluded, federal government deficits turned into surpluses, and there was no longer pressure for the Fed to be the buyer of net new government debt.  And furthermore, there was high inflation. This caused the Fed to claim the “duration” had arrived and that it was time to exit (there’s that word again).  But there was a catch.

To Treasury Secretary John Snyder, exit in the name of economic stabilization was all academic heresy or a potentially expensive distraction from the core responsibility of a government to finance its debt at the most affordable rates. That is, he didn’t care for the idea that Treasury bonds would not be supported ad infinitum at par in the primary and secondary debt markets. Furthermore, he was backed by a gentleman in the White House by the name of President Harry S. Truman. Such is the core concern of a government as to the cost of its interest expense.

The Fed’s post-WWII exit attempt spilled over into widely followed Congressional hearings conducted by Senator Paul Douglas before the Joint Economic Committee. The core question was, did the Fed’s responsibility for full employment and controlling inflation trump the need for propping up the price of Treasuries so interest rates would not rise?

Despite Congressional support for the Fed to exit, it still took years until the Fed became determined to pursue a path independent of Treasury dictates, as inflation soared at the commencement of the Korean War.

While the brouhaha concerning exit continued from 1946 until 1951, an opportunity to back out of the Treasury bond support agreement occurred in 1951 (almost six years after the “duration”). At that time Treasury Secretary John Snyder was incapacitated and in the hospital and his next-in–line at the Treasury, William McChesney Martin, negotiated an exit agreement with the Fed at the White House with the President presiding. The agreement became known as the Accord and was the monumental turning point that allowed Fed independence to foster economic growth without inflation for the next half century.

However, there was a catch. The Accord set the Fed free to pursue economic stabilization so long as there continued to be a strong tilt to Treasury bond support. To accomplish that, Martin suggested, or perhaps insisted (as the folklore goes) that he be installed as Chairman of the Federal Reserve Board of Governors to represent Treasury’s interests in monetary policy — which required a resignation of the existing Fed Chairman. This was all accomplished before Snyder left the hospital. Such is the difficulty of Fed exit when the government’s ability to sell debt and service the interest expense is at stake. (For a revealing account of that history go here.)

What was most interesting about the 1951 exit is that after becoming Fed Chairman, Martin had a Beckett moment, or more like a Beckett career. In his almost 20 years as Fed Chairman he constantly tilted in the direction of containing inflation and would not peg Treasury rates below market even during the Vietnam War, which caused Lyndon Johnson to unsuccessfully seek his resignation.

In the context of today’s financing strains that will grow over the next four decades due to Boomer entitlements, consider the following: The U.S. gross debt-to-income ratio is in excess of 100%, and the CBO projects that ratio to reach 400% in the out years of entitlement growth. Hence, each hundred-basis-point increase in the average interest rate the U. S. pays to service its debt (above the present 2 percent average carrying cost) requires additional taxes to drain another percentage point from the income stream — a drain we can ill afford. You can do the math for the required tax drain when the debt-to-income ratio approaches 200% or 300% and if interest rates were allowed to reflect sovereign or inflation risk.

The CBO has estimated that in the out years of  Boomer entitlements, tax revenues will need to be as much as 25% of annual income as compared to today’s 2% to merely service the projected interest expense on the debt, (even if market yields were to remain at average historical levels).

spell3Today there is a de facto peg already in place. It goes under the title of zero interest rate policy (ZIRP). It is also known as financial repression, which includes ZIRP along with positive inflation causing real yields to go negative all the way out to almost 20 year maturities and has become the explicit policy of the Japan and implicitly of Europe as well.

Given the perspective of the machinations at the end of WWII, is it reasonable to expect that Treasury (and the President and Congress) will allow the Fed to exit its already existing de facto peg? The new “duration” is the length of the entitlements.

Hence, the only likely exit for Fed QEs is an exit from the pretense that QE is an economic stabilization policy that can go away if unemployment hits the Fed’s target. It’s a cover story that is about to be uncovered. Fed buying is the supporting backbone of the Treasury bond market with $500 billion in annual purchases which, in turn, promotes foreign central bank currency wars. With the proceeds, they are investing as much as the Fed is in U. S. Treasuries.

Hence, current Treasury Secretary Jack Lew will have an important say as did John Snyder, in the selection of the next Fed Chairman (if he doesn’t wish to stand in himself). The change of guard will likely occur before the year’s end, when Bernanke returns to Princeton to write his account of the Great Recession.

Hence, what needs to be built is a graceful institutional transition for the Fed to exit stated economic stabilization priorities in favor of Treasury debt priorities without actually exiting its asset purchase program. Otherwise the Fed will morph from one pretense to another as they have done with a loss of their credibility.

So relax, bond market, interest rates will be pegged until inflation is no longer containable at the 2.5% level and that could well not stop them.


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The Now Generation Government Has Failed the Marshmallow Test: Making Sense of the Fiscal Cliff Outcome

Over the past five years, the government has applied the usual demand-side remedies in the epic battle against The Great Recession. The graph shows the time profile of past recessions and recoveries as compared to the Great one that we are still in. Though stimulus fiscalcliff1has been applied in heroic proportions, the employment high ground of five years ago has not been revisited.  This graph clearly reveals this recovery lags all others in the post WWII era in which stimulus spending was considerably lower.

At this moment in history, the realization that continuing to run deficits to win the recessionary battle is compromising the ability to win the war of fiscal sustainability — and without that goes future entitlements, at least in real terms. Thus a trade-off of now vs. the future needed to be confronted.

As former Wells Fargo CEO Richard Kovacevich puts it, at the end of the day, the fiscal cliff deliberations continued to put the stimulus on the overstretched Federal Credit Card.  In his words our federal budget is equivalent to a family earning $22,000 per year, but spending $38,000 per year with an existing credit card debt of $143,000.  The next leg of the saga is to raise the debt ceiling so we can continue to max out a higher credit card limit.

What all this did was to reveal in plain sight that our leaders, who are likely a reflection of our population at large, are members of the Now Generation.

Overcoming our current inability to deal with the bigger problem of fiscal sustainability is key to economic growth as well as maximizing future fiscal proceeds and government benefits. To do so requires an inter-temporal trade-off.

This is a classic test of immediate vs. deferred gratification.

This trade-off was memorably tested in the “Marshmallow Experiment”fiscalcliff2 of children aged  4 to 6 by Stanford psychologist Walter Mischel  who found in a follow-up study that children who were capable of deferring gratification eventually went on to earn higher scores on their SATs and achieved other life accomplishments that require some front-end investment.

Now it is important to note that the Stanford Marshmallow Experiment offered higher returns as compared to present returns. That is, the promise of two marshmallows later vs. one today was made by Professor Mischel, not the U.S. fiscal system.

In our case with projected growing entitlements, we just can’t vote them in and expect them to happen.  We need an environment that would be conducive to fiscal discipline so as not to allow unaffordable debt overhead, lest Reinhart and Rogoff effects of slower growth and government default set in. While this might seem Utopian it has happened, even in the U.S.

The Gramm-Rudman-Hollings Balanced Budget Act nearly 30 years ago addressed the issue of defining a framework to self-control government deficits. Basically, the Act created the requirement that adding a dollar of spending would require identifying a specific spending reduction. This caused each dollar of additional spending to be traded against some existing obligation as a yardstick of value.

Well you can image how popular that was, even then, when leaders could pass the marshmallow test!  Regrettably, the automatic self-constraint mechanism was found to be unconstitutional and was replaced by a succession of legislation that watered down the spending and deficit constraints and brought us to our current state of allowing debt to compromise the economic growth engine along with fiscal sustainability.

In today’s societal trade-off, Congress likely has already put us in an environment in which one marshmallow today will only perhaps generate a fraction of a marshmallow tomorrow. That is, growing marshmallows for the future requires deferred gratification today so that today’s debt is not a deterrent to economic growth and future government revenues and marshmallows.

One factor that reinforces the lack of will to bring about deficit and debt control that could lead to additional future marshmallows is the unwritten American ethic to not willingly fork over to the federal government more than 20 percent of annual GDP in all forms of collected taxes.  If individual income tax rates would generate Treasury Revenue that exceed that proportion of total GDP, deductions and exemptions have been added to the tax code to keep the checks written within society’s actual shadow ceiling.

Even during the height of WWII, with an economic boom and confiscatory individual and corporate income tax rates, the government was only able to raise an income share of 20.9 percent of GDP from all tax sources —  even though the federal spending shares of GDP was 43.6 percent in that wartime period.

Since then, only capital gains of the tech era generated a Treasury revenue share of GDP barely in excess of 20 percent of total income. The state of the economy is the primary determinant of the Treasury taxes paid, so a slow-growth economy spells big trouble for the deficit almost irrespective of tax rates being agonized over in Washington.

The rates that Congress does apply are more for political showmanship and a statement of the collective values, wants and needs of its members rather than a reflection of actual revenues received — though I doubt most of them realize it.

In 2011, the Treasury collected only 15.4 percent of total GDP against spending of 24.1 percent, accumulating debt equal to 8.7 percent of the current GDP pie. This will continue for as long as the eye can see or until the deficit can no longer be financed or pawned off on the central bank.

On top of those implicit American inhibitions, the issue of shared sacrifice in the face of imminent danger is also a passé American ethic, as discussed here by Lacy Hunt.  In 2011, the bottom half of the income spectrum contributed but 2.4 percent of individual income taxes receipts, and the recent taxing the “wealthy” adjustment only reduces that proportion.

We can only guess what tomorrow’s marshmallow allotment will be. But with no deferred gratification constraining debt blow-up, no shared sacrifice, and no willingness to give up more than 20 percent of GDP, future gratification will fall on the back of the central bank until inflation inescapably reduces tomorrow’s marshmallows in real terms.

If there is any rationality to it, what Congress and the President seem to be saying is that they realize there is no Professor Mischel to supply two future marshmallows and that the government’s ability to do so is already lost, except via money illusion of the printing press. So, their logic has become, deferred gratification on our watch is senseless.

Investors thus far have been concerned that would be the unintended consequence, but it now appears to be the unspoken plan.  Investors would be wise to protect themselves.


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Denial, Default or Treasury Currency: the Hobson’s Choice

Spain’s financial vulnerability has been in the spotlight recently. The trickle-down from a single bank’s insolvency gives us a glimpse of how country funding shortfalls are likely to be handled in the coming decades.

The Spanish bank in question, Bankia, was short $23 billion of regulatory capital — small change compared to Spain’s existing debt and additional debt to make good on future baby boomer entitlements over the next four decades.

To plug the hole in Bankia’s capital shortfall, the Spanish government offered a promissory note to Bankia, which to the bank is an asset. To pay for this asset, Bankia offered equity shares of Bankia in favor of the Spanish government. With ownership of the bank shifting to the government, bank “nationalization” was alleged to have occurred.

The financial trickery became more interesting when Bankia attempted to turn the Spanish government IOU into ECB currency by borrowing from the central bank and using the Spanish government note as collateral. Perhaps this plan could have worked with a cooperative ECB, which might have gone along with the scheme, as it is constantly lowering collateral standards in order to spread financial resources over Europe’s government and bank needs.

However, the ECB demurred in outrage with Spain’s scheme to access an ECB currency loan on grounds that the collateral was not suitable. The issue was not so much the collateral but the fact that the transaction would have set a precedent for how the individual governments of the Eurozone could get control of the Euro printing press for their own bailout needs.

It was a nice try, if you ask me, to put Spain in control of Euro monetary policy to fund its own bailouts — a practice called “monetary finance,” which the ECB insists was not part of its obligations to member nations.

But the scheme did indeed recapitalize the bank in question, allowing Spain to honor its financial guarantee to an insolvent bank, though it just couldn’t take it the next step to turn country IOUs into Euro currency.

However, in the U.S., using fiscal schemes to turn country IOUs into currency to pay the government’s bills is a far more straightforward operation with no “independent” central bank to say no.  Indeed, during the Civil War, when the government was faced with wartime expenditures well beyond its limited taxing authority and a limited market for its debt, the National Banking Act of l862 empowered the U.S. Treasury (not a central bank) to issue “money” to pay the government’s bills with payment to the soldiers being the most pressing expense.

Since it was unclear whether the Treasury possessed the Constitutional authority to create money to pay its bills, there was a workaround less complicated than Spain’s attempt to turn country debt into money.

The U.S. Treasury issued zero-coupon, infinite-maturity debt stylized as United States Notes, which are bearer notes denominated in dollars and, most importantly, had the sacred government-bestowed status of “legal tender.” This meant that these paper IOUs satisfied all private and public contracts, thus turning debt into currency.

The designation of legal tender can be seen in the fine print in the below image of a U.S. Note. To verify the point, merely take a look at the Federal Reserve Notes in your wallet and read the identical fine print regarding legal tender status.

The modern version of this U. S. Treasury debt stylized as currency looks familiar. It still exists (and circulates) 150 years later, though most of the Notes are locked up in numismatic collections.  The Treasury currency is similar in appearance to Fed currency designated as Federal Reserve Notes except the Treasury currency is designated as United States Notes across the top of the bill. Both are printed by the Bureau of Engraving and Printing which resides in the Treasury Department.

Now sit back and think of the possibilities presented by the Treasury’s direct money option to pay the government’s bills. This would allow the U.S. to cover the next four decades of baby boomer entitlements (which are well beyond the ability to finance in conventional style) and would also make the existing government debt load significantly more manageable.

It would free the Federal Reserve from the pressure to monetize government debt in round after round of QEs over the next four decades. The Fed could confine itself to matters associated with growth and employment and would be free of the stigma that it created the inflation that would no doubt occur.

In fact, in monetary finance, purchases with Treasury money would be for Medicare, Medicaid or Social Security flowing directly into goods markets rather than financial markets as the Fed conducts its operations. That is, the inflation would be goods inflation, not financial price inflation as we presently have with Fed QEs, which provides little spillover into goods markets.

How difficult would this be to carry out? Well, it would take getting a one-sentence bill through Congress and a Presidential signature to amend the National Banking Act to raise the Civil War maximum issuance of U.S. Notes from $300 million to some number in the trillions. Indeed, it could be treated as correcting a spelling error from millions to trillions, skipping billions altogether. It might even fly under the radar screen and only be a subject of interest to monetary wonks who pay attention to these things (such as the author) and Representative Ron Paul. A final detail that needs to be addressed is moving forward the time limit for new issuance of the currency.

What a game changer that would be, and not just to the prospects of avoiding an actual U.S. debt default down the road — which would happen if the baby boomer bills were to be paid conventionally with interest bearing market debt.  It would also eliminate the entangled political web of attempting to decide which promised (and in some cases paid–for) entitlements to cut and which taxes to increase. It would be more consistent with a growing economy, though the cost would be the damage done by 40 persistent years of inflation. Entitlements would be paid but watered down in real terms without further debate and we could refocus of attention to growth instead of income redistribution.

This is certainly not a first best policy. But it is offered as a forecast of what will be the way out of denial and debt strangulation. It does beat frozen government, an appalling deflationary economic contraction, and an almost certain government default down the road unless the same debt is monetized by a compromised Fed.

The major question would be the inflation rate and the damages and redistributions from it. Certainly it would be beneficial to debtors at the expense of creditors which is consistent with a Fed policy of a positive inflation rate.

From the stroke of the pen signing into law the enabling legislation of raising the authorized issuance, fixed income securities would dive in value, gold would salute and real return instruments would soar. Parenthetically, it would cure the housing price decline and consumer wealth decline almost instantaneously and cause the economy, though inflationary, to function better than it presently does.

While Spain attempted monetary finance this past month, the U.S. could pull it off without a central bank veto. While this would undermine the currency value though not so much in relative terms as most countries will gravitate to the same solution, it is better than destroying all faith in the government and its institutions in these days of government denial and paralysis.

This is a pragmatic look at the detestable Hobson choice facing the electorate and its government. It could be shortly or years down the road. All it would take is a Solomon P. Chase to focus on the art of the possible, perhaps known henceforth as the sesquicentennial solution to deal with the unfunded baby boomer entitlements. It’s a solution that’s been around for a long time and likely to be the only remaining option short of default on the entitlements or default on the debt to fund the entitlements.

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