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Posts Tagged ‘Economy’

Debt Delusion

The recent budget fight is simply a precursor of what must be done.  Both sides are still playing small ball, messing with discretionary spending, when the huge entitlement bomb is going to cause our demise.  While Democratis cry about “cruel” budgets, our debt will go up more this week (about $50B) than the $38B or so that Congress was able to agree to cut.  We’re using bandaids and aspirin when wholesale amputation and emergency surgery is required.  Columnist Robert Samuelson put the matter well in his column today:

We in America have created suicidal government; the threatened federal shutdown and stubborn budget deficits are but symptoms. By suicidal, I mean that government has promised more than it can realistically deliver and, as a result, repeatedly disappoints by providing less than people expect or jeopardizing what they already have. But government can’t easily correct its excesses, because Americans depend on it for so much that any effort to change the status arouses a firestorm of opposition that virtually ensures defeat. Government’s very expansion has brought it into disrepute, paralyzed politics and impeded it from acting in the national interest.

Few Americans realize the extent of their dependency. The Census Bureau reports that in 2009 almost half (46.2 percent) of the 300 million Americans received at least one federal benefit: 46.5 million, Social Security; 42.6 million, Medicare; 42.4 million, Medicaid; 36.1 million, food stamps; 3.2 million, veterans’ benefits; 12.4 million, housing subsidies.

While Paul Krugman cries that Obama is a wimp and Republicans are cruel, it is our continued, insane-level of deficit spending that is cruel.  It has real practical consequences today ($5 gas) and tomorrow (a shrinking, sclerotic, no jobs economy).  There are signs of seriousness and hope among both voters (the Tea Party) and politicians (Paul Ryan, for example),  but one wonders if the stars can align for the kind of serious courage needed to get this sorted out before we have a real Greek-style meltdown.

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Official Corruption

If it isn’t obvious from open borders and lunatic wars in Libya, it should be obvious that our leaders do not work for us but instead work for a vaguely defined transnational ideology insofar as the Federal Reserve apparently loaned billions–and risked the wealth of Americans–in using its “discount window” to lend cash to cash-strapped foreign banks.  Not only this, the Federal Reserve concealed this fact on the theory that to reveal who is using its lifeline might endanger the solvency of its users.  Of course, if a private business concealed its borrowing it would run afoul of securities laws and such would be considered fraud on the market, but banks–and apparently foreign banks too–are a special case, given special treatment reserved only for royalty. Indeed, their special treatment is a betrayal of the transparency and rule of law that were the main strength of the American economy until recent times.

It may be argued that these foreign banks are major creditors of the US entitled to special treatment, but no such revelation is forthcoming in the Bloomberg article with respect to the discount window users.  Indeed, these banks have been given special treatment many times over inasmuch as the Federal Reserve has rescued investors in mortgage-backed-securities at the expense of the American taxpayer and the American currency. We now have $3.50 a gallon gas and a continuing freefall in housing, and all of this stems from the idea that we can have an economy built on subterfuge and accounting gimmicks rather than real wealth creation.

Let’s never forget the Federal Reserve was introduced to avoid the evils of the business cycle.  But as evidenced from the Great Depression forward, its inflationary monetary policies and blatant picking of winners and losers have done more to harm the economy than the old gold standard ever did.  Indeed, the chief value of a gold standard is to decentralize and depoliticize the role of government in monetary policy by creating a neutral, market driven money supply the value of which (i.e., inflation and deflation) rise and fall with the demand for money and the needs of the real economy.   It may mean slower economic growth, but it also means less wealth-destroying inflation and destabilizing bubbles.  Since gold and the dollar were de-linked in the 1970s, gold went from the fixed $35/ounce to about $1,420 today.  This suggests, quite plainly, that inflation is a huge force over time that masks the lack of real wealth creation and the lack of real productivity in the economy.

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The Republicans appear likely to indulge in their worst instincts by agreeing (a) to extend unemployment benefits while (b) signing on to various tax cuts.  While perhaps tax cuts would be valuable, the real driver of our economic troubles is a widespread fiscal disaster among individuals, states and localities, and the federal government.  At all levels there is too much spending, not enough saving, and therefore too much debt.  Tax cuts and spending increases are a formula for more debt, and real debt hawkishness–not the timid embrace of welfare concomitant with tax cuts–is what is called for.  If anything taxes should stay the same while massive spending cuts are enacted in order to go to war with the debt.  If things continue as they are, there will soon be a complete devaluation of our currency, a debt default and/or hyperinflation, and continued stagnation.  Further, these various efforts at stimulating the economy through deficit spending have little to show for them this time around at home, in Japan for the last ten years, or in the US in the 1930s.  Only the private sector can create real wealth, and for it to work, this 1/3-of-the-economy-sucking-government to shrink.

The government needs to get out of the way of the economy.  In the late 70s, the way to do that was through tax cuts, which were exorbitant before Reagan came into power.  But today the way is by its overall mass and impact to shrink:  smaller spending, less generous entitlements, and a serious effort to attack the debt.  If that does not take place, tinkering with this or that program or tax rate will mean little.  Further, the real lesson of the Bush years, one would hope, is that we cannot follow the repeated Republican short-term-thinking which would cut taxes only to maintain generous spending programs.  This only kicks the can down the road.  The spending is the problem:   whether that money comes from borrowing or taxes is somewhat immaterial, either way it is sucked out of the productive economy and will be foisted on taxpayers eventually in some fashion or other.

The worst kind of politics often comes from bipartisanship, where each side gets what it wants, gives up its principles, and the public as a whole suffers due to mutual political expediency by the parties.  Obama must be opposed tooth and nail, along with nearly every component of his agenda.  If taxes slightly rise to deny him a victory on continued deficit spending, so be it.  He must be stopped, rendered impotent, and spending must be cut.

On the merits, unemployment benefits for 99 weeks are ridiculous.  People need to work, lean on family and friends, and nothing makes that happen more surely and quickly than a cut in these benefits.  Yes, there are bona fide hard luck cases, but there also a great many people that will look for and find a job within weeks of benefits running out.  If you subsidize something–in this case unemployment there will be more of it.  A much better program would be one where difficult make work was required to receive benefits, or if the government subsidized home sales and moves to places like North Dakota or Texas where work is plentiful.  More stringent work requirements for unemployment benefits (in the manner of the old “poor house”) would separate those truly unable to find a job from those running out their benefits to the max, while a spouse or parent or significant other’s income allows a middle class living when coupled with the benefits, plus some highly valuable leisure time.

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Whither the Middle Class?

This rather dystopic picture of the future by Douglas Copeland made an interesting point about the reality of widespread, structural unemployment.  (And this is particularly apparent in Florida, which was heavily over-invested in all manner of real estate related gigs, and is now filled with formerly successful real estate agents, mortgage brokers, construction managers, etc.):

Remember travel agents? Remember how they just kind of vanished one day?

That’s where all the other jobs that once made us middle-class are going – to that same, magical, class-killing, job-sucking wormhole into which travel-agency jobs vanished, never to return. However, this won’t stop people from self-identifying as middle-class, and as the years pass we’ll be entering a replay of the antebellum South, when people defined themselves by the social status of their ancestors three generations back. Enjoy the new monoclass!

Of course, there will be no “monoclass.”  There will be a smallish number of super-necessary specialists, not least in the medical field, as well as not-so-necessary and well-connected government people and probably lawyers too.  The rest will be scraping buy.  It will be more like Mexico and the rest of Latin America, and it will be quite unlike the stable, peaceful and prosperous middle class identity and structure of the America of yesteryear.

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When you look at the various policies that have contributed to America’s current crisis, it’s evident that a series of bipartisan, popular-with-elites, and thoroughly short-sighted policies have done much to bring us to where we are.   These policies are largely sacrosanct, particularly among elites, in spite of where we find ourselves as a country.  These include the following:

  • Free trade orthodoxy that eschews any “industrial policy” and has sent a great number of American jobs and much of America’s manufacturing capacity to the Third World, particularly China.
  • A related lack of criticism of our low wage, high consumption economic regime.  Americans’ wages have stagnated and credit–including housing based credit and refinance loans–did much to mask that wealth and wage decline over the last 15 years.
  • Support for multiculturalism, diversity, and mass immigration, which has left America disunited, with a lower wage and lower IQ workforce, and problems of Third World violence and terrorist acts that were formerly unknown to America.
  • A belief that home ownership is something attainable for all and that public policy should support the housing sector with various subsidies for the uncreditworthy.
  • A belief that a college degree is something attainable for all and that it should be subsidized by government grants and loans, which has left many Americans with worthless pseudo-degrees in subjects like “packaging” or “communications” along with mountains of (nondischargable) debt.
  • Indifference to unsustainable government pensions, transfer payments and welfare policies, including Medicare and Social Security, which will be insolvent in short order and will ultimately bankrupt the country.
  • Indifference to high rates of illegitimacy, which is subsidized by various government policies like Section 8 housing vouchers, food stamps, AFDC, and the like.
  • Support for global crusading, interventionism, and other activities that cost a great deal of money, employ our military in thankless and impossible ventures like Iraq and Kosovo, and that create enemies with long memories, while winning us few friends.

The thread that unites these phenomena to me is that they are all mutually enforcing, rooted in cosmopolitanism and sentimentality, and all are far from being solved.  Indeed, some of these problems are being made worse, as in the ram-through of Obamacare.  Elites have offshored jobs and imported cheap labor, which has pushed down wages and reduced productivity-per-worker, as well as the mean IQ, which in turn is masked by easy credit, worthless degrees, welfare policies, deficit spending, and denial regarding America’s various fiscal crises.  The foreign policy problem is mostly sui generis, except insofar as our elites believe so highly in themselves and consider the interests of random Third Worlders equally valuable as those of their countrymen.

In all of these areas, the elites have dissipated the country’s wealth, especially its human capital.  Whether Republican or Democrat, anyone who believes these things does not deserve to govern.

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The economic journalist and consultant behind Shadow Stats has an absolutely off the wall interview in a mainstream business publication that begins reasonably enough, but ends sounding like a cross between Ludwig von Mises and the Road Warrior.

It’s worrisome when guys in pinstripes who went to Ivy League schools begin to make the kooks talking about the Illuminati at gun shows sound like the moderate wing of the movement.  These are very tough times for so many Americans. I hope our country somehow pulls through.  But I fear that it will get much worse before it gets better.  There is so much that is unsustainable right now; it can’t go on like this indefinitely. 

I try to count my many blessings in times like these–a job, a great family, freedom, my education, my faith–but it’s so downright depressing to see so many good, hardworking people caught up in a storm beyond their control, while the worst of the worst, the least productive and most parasitical in DC and Wall Street, are living the high life on a combination of government bailouts and central bank sponsered hustles.

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Spreading the Wealth

Obama may be looking at a big giveaway on the eve of this fall’s elections:  mass reduction of outstanding principal debt on upside down homes. While I am averse by nature to big government interventions, this one has more to recommend than the earlier bank bailouts.  After all, homeowners are probably, on the whole, net taxpayers.  Further, mass indebtedness is encouraging walkaways and bankruptcies among people that would not, outside of this housing bubble, have done so.

But the problem is that this program treats the symptom and creates the roots of new, additional bubbles.  It would force the government to incur additional federal debt to keep Fannie and Freddie on the gravy train.  Like his health plan and his stimulus packages, itt puts off to tomorrow the need for deleveraging, which will take a decade or more.  Finally, with massive unfunded commitments to social security and medicare, this measure would simply accelerate the day of a dollar/federal government default.  This will be the day the music stops.  Even with the ability to turn on the printing press, this kind of moving money in circles and irresponsible borrowing can’t go on forever.

Obama’s cynicism knows no bounds, I must conclude.  This giveaway serves no real social end other than transferring wealth from the public at large to a small number of homeowners (and voters), some irresponsible, others less so.  The inequities would be massive:  those who have struggled heroically to keep up with obligations, those who put more money down and avoided second and third mortgages, less wealthy renters who have watched the bubble come and go, and those whose homes are paid off would all be paying to a class made up of both unlucky and improvident borrowers, some of whom bought homes they could clearly not afford with almost no money down at the height of the bubble.

Of course, it would be hypocritical to embrace the original bank bailout (which I opposed) while being against this.  And as between the two, I’d prefer a bailout that stimulates and assists the average American versus international bankers.  But we can’t be giving away a trillion dollars every other year without going completely broke as a country.  And the worst aspect of all these bailouts is that everyone–including me–is becoming more and more cynical about the old fashioned rules of providence, moderation, and the identity of interests of business and the country at large.  It’s becoming a predatory war of all against all, and the federal government’s largesse is the battlefield.

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