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Monday, February 14, 2011

Defaultlation

"Defaultlation" occurs when governments partially default on their debts via inflation.

Suppose the President went on TV and said "I'm cutting everyone's Social Security check by 10%!" There would be rioting. Via inflation, the net effect is the same.

Social Security payments are adjusted based on the CPI, but the CPI severely understates true inflation. State comedians/economists are not logically consistent. The Social Security income threshold ("wage base") is indexed via average income, and not the CPI. Social Security payouts are indexed based on the CPI, but Social Security taxes collected are indexed based on actual wage inflation.

(The "wage base" is the amount of income subject to Social Security taxes, currently approximately $100k.)

Suppose that you have a government pension worth $100k and a life expectancy of 30 years. With 0% inflation, the present value is $3M. (Government pensions are typically underfunded/unfunded, so I'll ignore the possibility of a couple percent ROI on plan assets. It's a small effect. Besides, most State-licensed investments earn a negative inflation-adjusted return. To keep the calculation simple, I'll ignore the effect of nominal gains or real losses on pension plan assets.)

Suppose that inflation is 10%. Via the "sum of a geometric series" formula, the present value of the pension drops from $3M to $1M, even if the beneficiary lives forever.

With 20% inflation, the present value of the pension is now only $500k. With 25% inflation, the present value is $400k.

Via high inflation, the value of the pension is eroded. State comedians promote the lie "The CPI is an accurate measure of inflation!" The slaves fall for it and don't realize they were conned.

If you look at gold, silver, copper, platinum, palladium, or other commodities, true inflation is 20%-30% per year, or more. There are short-term fluctuations, but it's pretty consistent if you look at a 5+ year time period.

Consider Treasury debt. The interest rate is only a couple percent, while true inflation is 20%-30%+. If you have an unleveraged long Treasury investment, you are getting ripped off by inflation. For example, China's government has an unleveraged long Treasury investment. They are getting robbed by inflation.

Why do the banksters buy Treasury debt? They get to use leverage and cheap Federal Reserve money. The Fed Funds Rate is currently 0%-0.25%, while Treasury Debt yields 0.25%-4%. The banksters borrow at the Fed Funds Rate and buy Treasury debt. With 100x leverage or more, even a small spread of 0.1% or 0.2% leads to profits of 10%-20% or more.

For Social Security, a partial default via inflation is guaranteed. For government pensions, a partial default via inflation is guaranteed. The nominal value of the check keeps coming, so technically it isn't a default. It is a moral default, because the purchasing power is lost via inflation.

For pensions and Social Security, a default via inflation is an easy out. For Medicaid and Medicare, it's harder. Tangible goods and services must be delivered. If rates drop too low, doctors would refuse to participate in Medicaid and Medicare.

Even with the "default via inflation" trick, governments are still very insolvent. They will have to raise the inflation rate to avoid default. If inflation gets too high, then hyperinflation sets in and the State paper money loses all of its value.

The US government is technically bankrupt. However, all US government debts are in US paper dollars. State thugs can keep printing new money to pay off their debt. They're only limited by the possibility of hyperinflation and complete currency collapse.

A technical nominal default on Treasury debt cannot occur. The government can always print more money/bonds to pay off/refinance the debt. Inflation is a moral default, but not a technical default. A default via inflation is guaranteed.

You'll get your Social Security check and pension check. However, the real purchasing power will almost definitely decrease. Inflation also hurts workers, because their pay raises don't keep pace with true inflation.

All debtors benefit from inflation. They can pay off their loans with devalued money. Most insiders are heavy debtors. Banks are heavily leveraged. They don't mark-to-market losses during a recession/depression. They wait for a bailout via inflation.

Most large corporations carry a lot of debt on their books. They receive a State subsidy via inflation and negative real rates. Small business owners have limited access to credit. The taxes they pay subsidize larger corporate competitors.

Insiders benefit a lot from inflation. Via the banksters and the Federal Reserve, they have easy preferential access to credit. This is a huge drain on the productive sector of the economy.

The US government is guaranteed to default. It won't be an outright complete default. It will be a gradual default via inflation. The US government defaults on its debts 2%-3% per month, rather than all at once. I call this "defaultlation".

11 comments:

Scott said...

From today's news: "Cotton prices have jumped to a 150-year-high, rising to $1.90 per pound on Friday, more than double what it was a year ago."

More accurate would be to say "The dollar has fallen 50% relative to cotton."

Gosh, if you bought a warehouse full of raw cotton last year, it would have been a better investment than either gold bars or Apple stocks.

How is 50% increase not hyperinflation?

The best think to do with cash is get rid of it. Before the day is out. Don't park cash for a single day. US dollars are toxic.

MaxShaft said...

In the way it is fair.

Stupid people say we are all one nation! There is an implied contract! We want something for nothing!

Well, it is their pensions and SS payments going to be defaultated on.

Ha-ha-ha... I guess their daddy was right when he told them that being brats that they are, they are going to ruin themselves!

The way I see it, all these socker moms who vote to imprison me in their taxes, property deductions, safety belts, mandatory insurance, gun control, taliban communist presidents without natural citizenship, drug prohibitions and social security, they all deserve it big time.

Screw them, I will enjoy watching their demise.

"Don't spit into a well, you may need to drink from it too" the proverb says. They have been spitting for years. I want to sit back and watch how they going to like the communism they have built.

Scott said...

"all these socker moms who vote to imprison me"

You make a good point there. I can't buy cold medicine anymore when I am sick because it was banned due to meth. So I am miserable and the meth cooks are still out there! When I call the cops to report a cook down the street, not a damn thing is done! But if I buy cold tablets I will be investigated! To hell with this!

FSK said...

Scott:

Why would you call the cops to report a meth lab? Do you work for the State?

Anonymous said...

In the United Kingdom, two people were taking drugs on the upstairs of a double decker bus.

The bus driver drove right up to a police station. The police were told about the drug users in the bus, but they refused to come out and arrest the men. I think all the police were doing paperwork and were not assigned to active duty or something like that.

My family have reported thefts and the police don't investigate and as the result of no investigation get no evidence and then call things off due to no evidence. Nice work if you can get it!

Neighbours have reported ongoing burglaries and the police refuse to come out.

DC said...

@anonymous1
Don't you get it? There is not a free market for police protection. The police make the same amount of money if they investigate a crime or not.
Why should they bother?
If there were free market then your chosen police force would both protect you and catch the thief. If they didn't then they would be out of a job.
-DC
-DC

Scott said...

"Why would you call the cops to report a meth lab?"

Are you serious? These things leave toxic waste all over the neighborhood. I can mind my business if you are doing drugs, growing pot, running a call girl operation, or running your own private mint, but meth labs are not harmless. Are you advocating that meth labs should be left alone, or that I should have just taken down the cook myself and then gone to prison myself?

DC said...

@maxshaft
Theft is in no way fair.
People are forced to pay "social security".
It is not fair of YOU to ridicule a slave for working.
The slaves are forced to pay.
-DC

FSK said...

I didn't realize that meth labs are a pollution risk or explosion risk. If that's true, it is a real crime to operate a meth lab.

MaxShaft said...

...And consequently, it should be a crime for the government to operate a meth lab or anything else that isn't environmentally safe.

But it isn't. Government pollutes and makes nuclear weapons, and even freaking TESTS them, right where we live, on the land it never properly purchased.

Who did ever got to prison for operating Columbia right into the ground, which they claim, and everyone believe was a tragic accident?

How is it that a meth lab can never say that a spill or whatever was a tragic accident?

Meth lab doesn't enslave me to pay for the lab. NASA has millions of slaves.

I am sorry, but the "Meth LAB is criminal because it has some environmental issues" doesn't pass the sniff test.

If you really believe that crap, then be a man of your word and start reporting major offenders, especially those who do it on slave money.

When you are done with the big ones, it would make a sense for you to come after tiny private offender.

MaxShaft said...

to DC:

I ridicule those who vote for taxes, ANY taxes to be applied to me by force, and then lie that we had a contract. I don't mine anyone voting for any tax to be paid by them only.

I did not vote for Obama, yet, he gets to control my life to the point of murdering me if he so desires. What kind of contract is this?

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