America, did you hear about the recent tax increase?

Posted by Arkady K. On 11/04/2010

Yeah, we just had a tax hike and it was pretty damn big.  You must be confused, what tax hike, nothing happened in Congress.  Well in case the picture does not give it away, this tax increase was not done by Congress, it was done by the Federal Reserve chairman Ben Bernanke.  He announced it yesterday and here is the relevant information:

The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. 
This will be done because our economy is struggling and housing is depressed, a rather bleak economic assessment, but one that is strangely similar to that of 2008.  After all the spending and all the Fed's machinations we are still struggling and still searching for a recovery, yet instead of reversing course and exploring a different strategy our Central Bank prefers to double down on previous failures.

This action is a direct assault on your life, especially those in the lower and middle classes.  If you have savings of any kind, if you barely make ends meet - what was announced today spells disaster for you.  Even if you have not paid any federal taxes last year, got exemptions from the government and are receiving aid - Ben Bernanke just levied a tax you.  A nasty tax.  How nasty?

Take the Bush tax cuts as an example. In the next 10 years, if the Bush tax cuts were kept permanent *just* for those making under $250,000 this would keep 2.2 trillion dollars in the private sector.  So per year, the Bush tax cuts would save the people in the 25% and 28% percentile about 200 billion per year.  These are the cuts that were so hotly debated, Congress could not even reach a conclusion before breaking for campaigning, yup, just 200 billion a year.

Now, what did our central bank do?  Imposed a 600 billion dollar tax increase in less than a year on EVERYONE.  You, me, your family, everyone.  Does not even matter if you work, you just got taxed!

If you are not getting angry by now, then I suck at explaining things.  If you are confused as to how this tax increase will show up, then simply look at this:

A 6 month chart of the US Dollar.  A chart of currency destruction, systematic and purposeful currency demolition.

You see, America imports heavily one of the most core commodities that we rely on daily.  Oil.  Oil is everywhere and the destruction of the dollar will make oil more expensive translating into higher prices at the gas pump, heating your home, deliveries, food, construction and virtually every other basic necessity of life.  Because most other commodities are traded in US Dollars, commodities like grains and building metals like copper have spiked.  Observe the basket of commodities as of today:

This is a yearly chart, painful to look at.

Prices for everything you use on a daily basis will be going up soon.  Take that to the bank.

This is how our central bank which is supported and protected by powerful politicians in Congress and the executive branch via the White House is stealing from you.  Stealing from you in the most egregious and shameful manner possible, using a tactic that most Americans are not aware of during a time when everyone is preoccupied with the elections.  An announcement for this gargantuan purchase being made shortly after a historic GOP wave is no coincidence.

You may be hearing about this in the news under the moniker of QE2 or Quantitative Easing 2, but this is being done for debt monetization purposes only.  Do not let creative marketing ploys fool you. This actually makes Ben Bernanke a felon, for he perjured himself in front of Congress.  When pressed by Congressman Jeb Hensarling, Bernanke promised that he would not monetize the debt.  It should make you very worried that Bernanke is powerful enough to tell Congress one thing then turn around and do the opposite.

Why is this particular action so scary?  Why is this different than QE1?  The major difference is that during QE1 Ben bailed out the banks by buying mortgage paper that nobody else wanted to purchase.  He bought all this paper at unknown prices and saved the banks by providing them a mechanism to stay afloat without addressing the trillions in their bad purchases.   They of course turned around and padded their pockets with it, bought commodities and created asset bubbles in the stock market.  This recovery that the media is swooning over has been at your expense, while the rich got richer.  However QE1 was supposed to be more than just a life line for banks it was supposed to be a catalyst for inflation.  Banks were supposed to generate loans and flood the economy with liquidity.  They did not.  They refused to and rightfully so.  Because this is not 1987, or 1992 or even 2000.  Economic activity is so dead that nobody is interested in lending and thus, Ben failed.  A visual representation of this failure can be seen here:

For better or worse, the lifeblood of America, credit, is nowhere to be seen.  Bernanke's hope that the primary spigot of inflation - the commercial bank - never opened.  Banks sat on your money, invested in their own desires and paid themselves generous bonuses.  As you can see from the chart, this is entirely unprecedented since they started tracking this data!   For those who idolize Reagan, notice that the booming 80s coincide with the first major credit expansion in America.  This is no coincidence, but please see this article for analysis on that subject.

So what now?  Bernanke realizes that our fledgling private sector has been largely replaced with public spending, in fact this has been the case throughout the Bush presidency as the real GDP remained largely flat. With federal spending in mind Bernanke is going to buy US Bonds which places dollars in the US Treasury.  These dollars are then used to pay for medicare, medicaid, construction projects, school subsidies, grants, loans, unemployment benefits, bailouts and every other sector that has a strong Federal presence.   We are paying workers to perform government mandated work through Fed infused dollars.

But there is good news.

The US government spent 3.7 Trillion, but only collected 2.1 Trillion in taxes so far.  A visual representation:

Note:  Pensions spending includes all form of Social Security.  Others include grants, research and farm subsidies.

What do you see here?  I will tell you what I see.  A government neck deep in unconstitutional programs that has exceeded the ability to pay for these programs with the current tax receipts.  Even if we bite the bullet and let all Bush cuts expire, this will bring in 300 billion next year, but even some Democrats have conceded it will cause so much economic damage.

So instead of exposing the hardships to the American people and cutting spending or even raising revenues, our politicians allowed our Central Bank to circumvent the entire system and slap the nastiest tax of all.  A tax that smashes the lower/middle classes and savers.   So what is the good news?

The new GOP Congress must do the following:
- Reduce Defense spending by 75%.  I don''t care what needs to be done, just do it.  Savings 670B.
- Close down the Department of Education and return education to the states.  Savings 157 B.
- Slash and de-fund silly stimulus ideas via infrastructure, cut transportation by 50%.  Savings 53 B. 
- Reduce farm subsidies, grants and research spending (in Others) by half.  Savings 50 B.
- Admit that the Federal government cannot and should not be in the business of health care.  Demonstrate what happens when Medicare/Medicaid spiral out of control.  Introduce rationing and slash Medicare spending by 50%.   Savings of 415 billion.  
- Reduce half of the Federal welfare programs, cut food stamps and shorten unemployment.  Return this work to the States.  States should build lodging and soup kitchens to ensure no citizens suffer.  Savings 225B.

A lot of the work needs to be transferred to the states and this will result in local taxes going up, but Americans must understand the price of the services provided by our government.   There is a cost for our wars, a cost for Medicaid/Medicare, a cost for expensive projects and a cost for bailing out failed corporations. Those that insist on maintaining these programs should have the option of forfeiting more of their paycheck for the common good.

Failure to acts will result in interest spending, standing at 187 B so far this year, to spike upwards and deficits to grow further.   A spike in interest payments will set us on the path of Greece, because our government will be forced to choose - pay out social security or pay interest - wrong choice and there will be civil unrest.  Our Congress has the power to stop this!

In closing, enjoy the following interview with Ron Paul and Andrew Napolitano and what else can be done to further educate and inform Americans of what is happening behind the closed doors of the Federal Reserve.

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"It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.” - M. Rothbard