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Three Card Monty Economics

Graph Courtesy of Stephen Wellman's Blog Article

I saw a headline earlier today that stated Treasury Secretary Geithner announced the US was tap dancing up against the national debt ceiling at $14.3 trillion.

I had trouble getting my head around how the government would continue to spend more than our hard earned tax dollars without issuing treasury debt, then the UK’s Daily Telegraph reported that the Treasury Secretary had taken the lead of the State of Illinois’ Three Card Monty Economics. I’m not picking on the Treasury Secretary here; the Congress, by not coming to an agreement, kind of forced his hand. But the similarities to this state’s acts frightens me.

Illinois has a history of not funding its pensions when it needs extra cash to spend, and the Treasury Secretary announced today that he is suspending payments into the Civil Service Pension Fund to free up $150 billion of borrowing power.

The Washington Post reports that this will buy the Congress a couple of months extra time to negotiate a solution, but that the government will likely default on its debt on August 2nd if the ceiling isn’t raised.

Income Tax Revenues By Year

If you look at the above graph of Income Tax Revenues by year, you can see the impact of the two recessions and how revenues grow as the recessions end. Deficit spending during a recession is normal policy for a government, and it adds to the national debt. However, when the recession ends, that debt should be paid off – unfortunately, our receipts are always less than our expenses in good times and bad, other than the Clinton/Gingrich budgets of the late 90’s that took advantage of the Peace Dividend from ending the Cold War.

The current selloff in commodities and other contra-dollar investments is only temporary. We have a near-term rally in the dollar but ultimately our government needs a weaker dollar in order to pay back today debt with devalued currency.

Economic policies that mimic the State of Illinois’ slight of hand are a bad sign for the soundness of the dollar. In coming days, I’ll highlight why I think that copper and agricultural commodities will be the leaders to the upside once the current action in the dollar gets back to its foretold trajectory.

This was always one of my college roommate\'s favorite songs – I never understod why