Home » Articles » The Difference a Printing Press Makes, Part 2

The Difference a Printing Press Makes, Part 2

by John Rubino on March 11, 2010 · 8 comments

The original, long-since discarded, blueprint for the United States had the central government managing foreign affairs and protecting citizens’ Constitutional rights while the states designed and ran their own economies. The wisdom of this setup wasn’t always clear (segregation for instance) but lately the contrast between states that have to balance their budgets and are therefore forced to innovate and make hard choices, and a central government that can just run a printing press while continuing to expand, is making Jefferson and Madison look very smart.

The federal government, for instance, just passed a $150 billion jobs bill which it will pay for by borrowing and then printing new dollars to buy the resulting debt. No offsetting spending cuts, asset sales, or other adjustments to existing programs:

The Senate Approves $150 Billion Jobs Bill

The U.S. Senate voted on Wednesday to approve a $150 billion bill that will extend some tax credits for businesses and individuals that had lapsed at the end of 2009.

The 62-36 vote will move the legislation to the House where representatives will either have to vote to accept the bill or work with the Senate to come to an agreement on the difference between the two versions of the legislation.

The Senate bill includes $70 billion for emergency benefits programs, including unemployment extensions and would provide $25 billion to state governments to aid tight budgetary conditions.

The move is being billed by Democrats in the Senate as another step in efforts to spur job growth in the recovering U.S. economy, where the unemployment rate rest at an unsettling 9.7 percent during an election year.

A $15 billion bill that was recently passed by the House, which focuses on tax breaks for businesses who hire new employees, will still need to be passed by the Senate before President Barack Obama can give it a final signature.

The bill passed by the Senate on Wednesday will give $25 billion to states to offset the rising costs of Medicaid and would avert a 21 percent increase in the payments made to doctors of Medicare patients.

For the financial sector, the bill would offer a tax break to U.S. banks for overseas income. It also includes incentives for business investment in recovering disaster areas of the U.S., like the Gulf Coast.

For the individual, the bill would offer state sales tax deductions and a reduction in the out-of-pocket expenses for classroom teachers in the U.S. Also included is language focused on helping pension plans that were devastated during the economic collapse and additional aid for the unemployed.

Now consider New York State, which is arguably even more corrupt and badly run than Washington. It would dearly love to keep spending at current levels and just borrow what it needs to keep the political class living in comfort. And it is considering borrowing. But look at what it has to go through to get there:

New York state considers borrowing to bridge deficits

New York state may have to borrow to smooth a path back to financial health over the next few years, its lieutenant governor said yesterday, highlighting the severity of the fiscal trouble facing US states in the wake of the financial crisis and economic recession.

David Paterson, governor, last year tapped Richard Ravitch, whose work with New York city during its financial crisis in the 1970s cemented his credentials as a hard-nosed budget hawk, to draft a turnround plan for the state.

The plan outlined by Mr Ravitch comes amid political uncertainty for Mr Paterson, who recently announced he would not seek another term. However, Mr Ravtich’s reputation ensures that the initiative will be taken seriously by the state legislature, a notoriously fractious body.

Included in the plan are measures that lock the state into paying down a so-called structural deficit in five years, create a five-member oversight board to assess the budget situation quarterly and authorise the governor to make cuts if lawmakers fail to agree on gap-closing measures within a limited time.

Long-term planning would accompany future annual budget talks and the state would have to set aside more rainy day reserves.

“The current economic crisis did not cause New York’s budget troubles,” Mr Ravitch said. “It merely exposed them.”

New York has a chronic mismatch of revenue and spending that it had glossed over with the use of cash accounting, allowing for “one-shot” budget fixes, he said. Accounting practices vary by state.

The budget deficit is projected at more than $9bn (£6bn) for the fiscal year 2011, starting on April 1. But Mr Ravitch estimated the structural deficit was more like $13bn. He predicted that, without reform, the structural imbalance would surge in five years to $60bn, a gap that could only be closed with “horrendous taxes”.

His plan includes a shift to GAAP accounting, the accepted standard for US corporations, as well as a change in the start of the fiscal year to July 1 in line with most states.

The sombre budget news out of New York could be a sign of what is to come nationwide as lawmakers grapple with the latest round of budget deficits.

The ripple effects of the recession have decimated state tax revenues. That has meant several years of budget deficits and painful cuts to staff and services throughout the country. State lawmakers closed a cumulative budget gap of $145.9bn for the fiscal 2010.

As details of Mr Ravitch’s plan have leaked out concern has arisen over the inclusion of deficit borrowing, a practice that has always been controversial but has become a hot issue after Greece’s debt crisis.

Mr Ravitch argued it might be unrealistic to close bulging gaps with spending cuts alone. Under his plan, borrowing would come only with strict limits and controls on spending and revenue balance.

The proposed legislation would authorise up to $2bn annually in short-term borrowing secured by personal income taxes to balance the budget in the first three years of the plan.

A few thoughts:

  • You can look at pretty much any badly-run state (Illinois, Nevada, California; the list is long) and find the same basic process at work: revenues are falling, public sector benefits are soaring, and hard choices are being contemplated. The end result — after many strikes and a few defaults — will be a more rational cost structure and states that can live within their more modest means.
  • The federal government faces virtually no pressure to rein in its obligations. No one besides Ron Paul and Dennis Kucinich are calling for cuts in the world’s largest military empire. And the party in charge is actively increasing government’s role in health care and education, among many other things.
  • The difference is that the Feds can simply print the money they need and the states can’t. Decades of not having to choose between guns and butter, of simply printing whatever was needed to fund whatever was crucial to national survival or moral obligation or electoral success, have produced a system that can’t even contemplate scaling back.
  • The scam is nearing the end of its run. Based on this survey of the brick walls into which the U.S. printing press is about to slam, when it happens it’s likely to be sudden, and — given the cluelessness of the current debate — totally unexpected by the people now in charge. If you think New York’s situation is ugly, just wait.
  • Brad Thrasher

    Will the largely armed and dangerous American People just rollover if we learn there is no gold in Fort Knox?

  • ralph

    Couldn’t agree more. US is doomed. Fake propped up equity and bond markets, artificially depressed gold/silver prices, soaring un-employment, soaring bankruptcies and defaults, non-stop media propoganda making the un-thinkable not so bad, bankrupt states, non-stop QE, endless bailouts, deposit currency hyperinflation, massive deflation (private debt collapse), WAR is PEACE, BLACK is WHITE, BAILOUTS are necessary to save capitalism, LA LA LA LA LA! Its egregious and seems never ending. When will the FRAUD that is the AMERICAN ESTABLISHMENT END???

  • Doug

    I wonder how long the states and PIGS can remain in limbo between default and a bailout. It seems like we will have a daisy chain of bailouts or defaults once the first few countries and states go bust and confidence is lost.

  • Don Eves

    Great essay! Where this train stops is in the bottom of the canyon. People I talk to can feel something is wrong but nearly all have no clue as to actually what is wrong. We have been allowed to live in fairyland for so long society thinks the life it has lived is reality and it should continue. When a society has to have an ever expanding credit base to survive, the doom of that society is certain. Economic laws of nature can only be violated so long. Reality eventually demands a value for value exchange…and value is only determined by the market.

  • Bruce C.

    My father was a stock broker and my godfather’s son was a Wall Street stock analyst, and for as long as I can remember, during every Presidential campaign, they would tell me that the central issue was always how the latest government entitlements that people wanted were to be paid for – by raising taxes or borrowing. I was also told that the pension programs of the large corporations were unsustainable – and I remember that General Motors was cited as a particular example. They didn’t know how such things would play out, and they lamented that economic and political problems seemed to be addressed only when they reached crisis proportions. That was over 40 years ago (they died when I was 11). So, I’ve been prepared or conditioned for the situations described here for a long time. What’s been the most surprising and confounding to me, however, is how long it has gone on for. I remember giving a show-and-tell presentation to my class in 1970, which was called “the trillion dollar year” because the country had finally accumulated that much debt. I thought it was cool that a stack of one trillion dollar bills would be higher than the Empire State Building. That was considered to be a lot of money then, and there was a vague sense of foreboding about it, and yet it also felt like it represented the country’s wealth – that it was somehow a positive thing. I remember palpably feeling the cathartic applause from the audience at a Frank Sinatra concert in 1974 when he alluded to the economic conditions at that time and said “… but we’ll get through it, we’re that strong.” People, in general, who are fortunate enough to do what they love and prosper are naturally optimistic, generous, charitable, and loving. Unfortunately, absent a counterbalancing knowledge of history and a healthy skepticism, those qualities allowed – or tolerated – the welfare state that this country has become.

  • http://blendininn@yahoo.com newfy777


    banks run and owned by we the people
    not private for profit banksters and we the people can keep the money gained from our labor

    “the process of the creation of money is so simple it repels the mind” – John Kenneth Galbraith

    do you believe” we the people” can handle such a “difficult” task as making our own paper money? I believe we can..if we don’t shut down the private,unconstitutional PRIVATE federal reserve corporation,we can kiss the America we once knew goodbye.
    “the private federal reserve is a private institution that is above the law and accountable to no one” – Sir Alan Greenspan on PBS

    “if the American people ever allow private banksters to control and issue their currency, the people and their children will one day wake up homeless on the continent their forefathers conquered” – Thomas Jefferson”….
    the power to issue and control the currency/money, must be given back to the people to which it rightly belongs” – Thomas Jefferson….
    “private central banksters controlling the peoples money are more dangerous to liberty and freedom than standing armies” – Thomas Jefferson….

    its time to END THE FED and big government for good..Ron Paul’s bill HR 1207 to audit the fed,will sadly do nothing,as the federal reserve lawyers will cook the books and make everything look just dandy..an audit of the fed is sadly a waste of time ..the fed must be ABOLISHED..period
    and it can be done w/o nary a bill to get rid of it..
    with a new,honest,debt free,interest free, STATE banking money system, similar to Abe Lincoln’s greenbacks issued in 1862,and JFK’s silver certificates issued in 1963,the fed will die on its own accord..
    STATE run banks ARE the solution..
    a new interest free,debt free paper currency issued in each of the 50 states backed by silver..[the banksters own nearly 96% of the worlds gold that they stole from the U.S. and the rest of the world with money they made from thin air on computers and printing presses.. if we went back to a gold backed currency/money,the banksters would quickly take back control of the money system.IMO.so NO GOLD BACKED MONEY]
    ..we had our money backed by gold in 1929 and the 1930’s..did it stop the great depression? NO! [ although gold would still retain a value 16-20 times greater than silver per the constitution]
    each individual state would make their own $1,$5,$10,$20,$50,and $100 paper notes backed by silver[ex: $20 Texas silver note..under that “payable to the bearer on demand $20 in silver [when presented at any state bank,you would receive either $20 worth of 90% silver coin, 20-.999 silver dollars,4 – 5 oz. .999 silver bars,or 2 -10 oz, .999 silver bars],and all 50 state paper notes would be accepted in every state and abroad..having 50 different notes for the 50 sovereign states would make it extremely difficult for the banksters to take back control of the U.S. money system again.. a dollar would be 31.1 grams of silver[ONE OUNCE] as per the constitution..change for the new paper notes would be pre-1965 90% silver again[only 90% silver with 10% copper is hard enough to take the day to day pounding/ movement/exchanging and hold up],and 100% copper again for pennies..a state run honest money/banking system with interest free loans run by the people.. for the people.. there would be only a small administrative fee/ cost, to borrow money to pay state bank employees and mgrs. etc. EX: you[or a small business starting up lets say ]were to borrow $205,000 for a $200,000 house/loan,you would pay back $205,000[2.5 % charge to borrow money] over the next 5,10,or 15 years[ditto credit cards],instead of the present parasitic fractional reserve “debt money system” where you would buy a $200,000 house[or a $200,000 loan] and because of compounding interest, you would pay the private parasitic fractional reserve banksters nearly $1,000,000 over 30,40 or even 50 years for that original $200,000 loan that was lent money made from thin air..nothing in the first place..they didn’t actually “loan” you a dime..THIS IS ABSOLUTE,UNADULTERATED INSANITY..
    paying the banksters for money made from nothing..it just blows you away when you think about it..its difficult to wrap your mind around
    I still can not get my family to understand that credit card money is “created” when the card is swiped..no money is “lent” to you by a bank or anyone else..
    the money you send in for your credit card payment is pure profit[minus the cost of doing business of course] because no money was ever lent to you.. not a red cent was “loaned” to you
    the private non-federal reserve is simply the greatest scam,fraud, and deception in the history of the world..bar none ..
    and an astounding 60% of Americans are now living paycheck to paycheck and 43% of Americans have less than $10,000 in savings….
    this isn’t living..this is [debt] slavery and many don’t even realize they are lifetime debt slaves of the banksters…state controlled banks with “honest” money, will bring back manufacturing and real,good paying stable jobs…not the cash for clunkers and the proposed cash for caulkers nonsense that the head buffoon is proposing…
    a nation that is prosperous MUST produce goods!
    and products that the world wants and needs!
    3rd world countries are countries that don’t produce goods..
    the U.S.A.. IS in fact by definition a 3rd world country!
    a petition page will soon be up at WEB OF DEBT.COM
    where you can sign it and DEMAND your state
    implement state run banks [unless you live in N.Dakota that already has state banks/banking]
    talk about PROSPARITY RETURNING TO AMERICA..the federal government’s enviromental and other draconian rules and regulations,and letting a private for profit corporation control America’s money supply are strangling small creative business to death[by design]
    imagine paying $500-$1,000 for a new car again..
    of course a new state bank silver dollar will have the purchasing power of a 1913 dollar..but we can start all over again as a nation,
    bring ALL the troops home from abroad ,and have them protect OUR BORDERS!..NOT N. and S. Korea’s!..
    with 50 new sovereign state banks this country can be turned around in days..
    not months or years, but DAYS..

  • cl 17

    its not the end of the world. people without debts will be able to adjust to lower incomes as wage differentials across the globe normalize.

    eventually, people with big debts – who cannot manage the transition – will find tax relief – and probably debt relieve. a government that goes around putting ankle weights on drowning swimmers wont last.

    once asset prices have collapsed, the public sector can re-build and re-engineer the economy around the current financial industry. same with bloated, corrupt, wasteful government. once things get bad enough, a true reform effort can begin. we are not there yet.

    the parasites will be removed. the doomers are wrong. paper assets will probably get wiped out – but real assets, and the notion of private property – will not. there IS a future for the USA.

    look to a resurgent economy based upon technology, engineering, and light manufacturing. look for improvements in agricultural technology and energy production and water purification and recycling. if you can figure out constructive ways to utilize nat gas, you’re in business.

    the big cities on the coasts are probably in serious trouble. detroit is a bad omen. now that the FIRE economy has collapsed along with the ‘legacy industries’ it was supporting, it will be extremely difficult to generate and maintain “service sector” jobs that big urban centers rely upon for tax revenue.

    really, the only people in serious trouble are those who 1) have big debts; 2) live in big cities; 3) live in high tax states unlikely to embrace radical tax and debt relief.

    yes – those people are fukt. but everyone is is going to be okay.

    God bless

  • Brad Thrasher

    Great points cl 17 except for one thing. The civil unrest that results from the collapse will affect us all. Do we have the resources to quell the riots and looting while fighting two wars?

    People won’t be trading guns for butter. They’ll use those guns to take our butter.

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