Archive for category National Debt
Are Low Rates Counterproductive?
Posted by Tom in Centrally Managed Economy, Deficit, Fed, Financial Policy, Monetary Policy, National Debt on August 12, 2010
John Michaelson’s WSJ post, “The High Costs of Very Low Interest Rates,” presents the dark side of the Fed’s current policy. In it he makes the following points:
- low rates mean low earnings on savings giving consumers less to spend,
- folks close to retirement need to save more to get expected earnings,
- corporate pension plans need to fund more to make up for low earnings, which reduces money available for investment, and
- banks can borrow at zero and buy US bonds at a risk free return, so they do not lend to businesses for investment and job creation.
What’s sad is that the Fed has not learned from Japan’s lost decade experience. In 1990 following the burst of the credit bubble, Japan dropped it rate to an unprecedented .25% It’s government then borrowed to create massive “stimulus.” This froze out private borrowing, investment and consumption creating the lost decade.
Does any of this sound familiar?
I recommend the full article linked above.
Finally A Stimulus That Has Its Intended Effect
Posted by Tom in Deficit, Democrats, National Debt, Nevada, State Finances, Stimulus/Bailout, Unions on August 11, 2010
What is this latest $26 Billion stimulus, is it number 5 or 6? I’ve lost count. But this one you can bet will work effectively to accomplish its intended purpose…..to buy votes for Comrade Obama and his leftist cronies. It goes directly to the public employee unions, specifically the teachers. That increases union dues which in turn increases political donations. This stimulus rewards spendthrift states–takes from fiscally responsible states like Indiana and gives to bankrupt states like New York and California. Seems we find the most registered Democrats in those fiscally irresponsible states!
Today’s WSJ pens a great editorial on the subject, “Stimulus Pushers.” As the title suggests, Hussein Obama is the dope pusher further addicting these leftists spendthrifts with a high powered dose of bailout. The addicts don’t care about the hidden costs or the consequences; they just want the fix.
A few principled governors like Haley Barbour of Mississippi are pushing back. The federal government is hijacking state budgets. Rick Perry of Texas is in disfavor with the DC crowd so Texas gets penalized in the legislation. What’s astounding in this is the sheer hubris, the sheer abuse of power with the simple justification that the leftists have the power.
Two points are clear: One, this stimulus only postpones the day of reckoning for these bankrupt states. And, two, these parasites if left unchecked will eventually kill the host—the private sector that pays taxes will no longer be able to afford the excessive pay and benefits sucked up by the public sector. Atlas will indeed shrug!
For Nevadans, Reid must go, and the Pelosi’s democratic lackeys must be defeated. By piling up deficits and debt they are stealing from our children and grandchildren, the height of immorality!
The Past, A Prologue
Posted by Tom in Centrally Managed Economy, Deficit, Democrats, National Debt, Statism on August 3, 2010
My friend Ron Tomsic sent this cartoon from the Chicago Tribune, dated April 20th 1934. Note the plan of action in the lower left hand corner.
Those who forget history are doomed to repeat it!
Deflation, A Self Fulfilling Prophesy?
Posted by Tom in Business, Centrally Managed Economy, Deficit, Fed, Financial Policy, Monetary Policy, National Debt, Nationalized Health Care, Taxation on August 3, 2010
When Bill Gross, the bond guru manager of Pimco Total Return Fund, says “it’s happening,” he brings credibility to the deflation first scenario, that is deflation before inflation. According to yesterday’s WSJ article many fund managers are loading up on US Government bonds and hedging stocks. Others expect the Fed to come to the rescue. The Fed has limited options since it has interest rates near zero. According to another WSJ report these options are “unorthodox!” As the Fed mulls these, it may spook investors and highlight the weakness in the economy. So when the Fed is playing offense in trying to reflate the economy, savvy investors might conclude as Gross did that it’s time to play defense. Typically these “unorthodox” measures mean increasing the money supply by buying bank assets good and bad, bonds and mortgage backed securities. Problem is that there are not too many bullets left in the Fed’s arsenal.
To cap matters off, vis a vis the “self fulfilling prophesy,” today’s WSJ leads the front page with “Fed Mulls Symbolic Shift” that is using cash from maturities to buy additional assets instead of letting its portfolio shrink to a stable economy level. The Fed’s $2.3 Trillion portfolio has nearly tripled in size since 2007!
So, what to do? If prices are going to be lower tomorrow, why buy today? And this, ad infinitum! Couple this with Hussein Obama’s proposed tax increases, the pile on of entitlement deficits from Obamacare, and the great uncertainty posed by the regulatory bureaucracy, and you get a bleak picture.
Hope I’m wrong!
July Hayek Dinner: State of the Economy
Posted by Tom in Centrally Managed Economy, Deficit, Economics, Employment, Financial Crisis, Financial Policy, Government Regulation, Individual Freedom, Monetary Policy, National Character, National Debt, Statism, Yucca Mountain on July 21, 2010
Our thanks to Tom Cargill for the excellent presentation last evening and to Jerry O’Driscoll for arranging the meeting in my absence.
Jerry opened with a snapshot on employment trends from selected countries since 2008. The US is at the bottom of the pile and trending down!
Tom picked it up from there with a quick look back on the first decade of this century focusing on four remarkable points: 1. US homeland is vulnerable to attack since 911; the first since the war of 1812. 2. Critics of the market are strong despite the increase in standard of living in the last quarter century. 3. Failures of the welfare state notwithstanding, the US is moving toward socialism. And, 4. the political force toward socialism can be traced to our current great recession.
Technically, the recession is still in full force. The question is what kind of recovery will come, weak flat “U” or “J,” or a double dip. Ten key points are apparent:
- the US has not seen more economic, financial, and political distress since the Great Depression.
- our recession was not caused by market failure but mainly by government failure, both monetary with low rates too long and fiscally with housing policies of Fannie-Freddie.
- yet, the public hypnotized by Obama rhetoric believes market failure was the cause.
- admittedly, the $700 billion financial bailout was necessary to prevent a liquidity crisis.
- but the five “stimulus” packages ignored history and had a negative effect, negative Keynesian multiplier, on the GDP. Wasteful spending directed to leftist programs.
- while we now see some GDP growth, the private sector is not creating jobs and budget pressures will force a decline in public sector employment.
- the private market is not creating jobs due to the great uncertainty of the rules of the game; we are going to state directed allocation of resources not market directed allocation.
- Adam Smith calls man an economic animal, “truck, barter, and exchange” but the uncertainty of the rules creates inefficiencies that lower growth potential.
- the economic game becomes even more uncertain because of the greater role of government; what happens to the chess game if it is announced in the middle of the game that there will be a rule change; Obama is regularly announcing rule changes to come!
- QED, the most likely “recovery” is a flat “J” over the next several years with a chance of a double dip.
Tom now thinks the chance of a double dip is 50/50, an increase from his earlier thinking. Potential economic shocks which will push toward a double dip are: the dramatic increase in taxes next year, and the questionable stability of the European Union. The current divergence in fiscal policy between the overspending US and the rapid austerity in Europe may well be a third negative shock. Tom concluded saying that only a change in the US congress and administration will offer hope of a solid recovery.
We thank Beth Powers and her crew for her comments and patriotic efforts with LibertyInAmerica.org. Please consider a donation to help continue the fine bus treck.
John Dunn provided a positive report on Yucca mountain efforts, see NV4CFE.org.
Finally, our thanks to Mike Herring for treating the group to dinner and drinks, this an an inducement to make contributions to Sharron Angle’s campaign to retire Dirty Harry.
Steve Wynn on the Leftist Democrats Killing the Economy
Posted by Tom in Business, Centrally Managed Economy, Congress, Democrats, Economics, Government Regulation, National Debt, Statism on July 21, 2010
This CNBC interview with Steve Wynn is well worth your time:
Art Laffer’s Lesson in Economics
Posted by Tom in Centrally Managed Economy, Deficit, Economics, Entitlements, National Debt, Stimulus/Bailout on July 8, 2010
Hussein Obama wants to borrow another $50 Billion on the backs of our grandchildren to extend unemployment benefits. Hasn’t worked so far but Obama wants to keep trying! Art Laffer says it reduces incentives to find work.
In a well-reasoned WSJ op ed, Unemployment Benefits Aren’t Stimulus, Laffer shows that welfare makes work less attractive. Historically he charts the unemployment rate against the unemployment benefits:
“While the unemployed may spend more as a result of higher unemployment benefits, those people from whom the resources are taken will spend less. In an economy, the income effects from a transfer payment always sum to zero. Quite simply, there is no stimulus from higher unemployment benefits.
“Given the massive inefficiencies the government creates in securing resources from the private sector, there may also be a large negative income effect over wide ranges of stimulus spending. This is the proverbial “toll for the troll.” These massive inefficiencies could lead to lower output.
“To see these effects clearly, imagine a two person economy in which one of the two people is paid for being unemployed. From whom do you think the unemployment benefits are taken? The other person obviously. While the one person who is unemployed may “buy” more as a result of unemployment benefits, the other person from whom the unemployment sums are taken will “buy” less. There is no stimulus for the economy.”
Art concludes by saying the $3.6 Trillion already spent would have better been used as an 18 month tax holiday! I disagree with this, time limited tax relief begets time distorted economic activity. Permanent entitlement cuts along with permanent tax cuts are what’s needed to restore economic and fiscal sanity.
US Deficit-Debt and the European Debt Quiz
Posted by Tom in Deficit, Economics, Europe, Financial Crisis, Financial Policy, Humor, Monetary Policy, National Debt on May 27, 2010
It’s rare to see a thoughtful economic comment in the liberal NYT, but David Einhorn penned one yesterday with Easy Money, Hard Truths. In it he suggests that our grandchildren will not need to face the day of reckoning caused by our unmanageable deficits and debt simply because we will face it ahead of them. The future, though, is no less grim for them.
“Public sector jobs used to offer greater job security but lower pay. Not anymore. In 2008, according to the Cato Institute, the average federal civilian salary with benefits was $119,982, compared with $59,909 for the average private sector worker; the disparity has grown enormously over the last decade.
“The question we need to ask is this: If we don’t change direction, how long can we travel down this path without having a crisis? The answer lies in two critical issues. First, how long will the capital markets continue to finance government borrowings that may be refinanced but never repaid on reasonable terms? And second, to what extent can obligations that are not financed through traditional fiscal means be satisfied through central bank monetization of debts — that is, by the printing of money?”
A rather humorous take on the question is given by a couple of Aussie satirists, John Clarke and Bryan Dawe, who take on a timely quiz show Q&A on the European debt crisis.
Remember those last words, “laughing as you sink!”
If Greece is Europe’s Achilles Heel…and Europe Falls….
Posted by Tom in Economics, Entitlements, Europe, National Character, National Debt, Nationalized Health Care, Social Security, Welfare on April 28, 2010
I’ve seen items from John Muldin and George Friedman this week analyzing the Greek debt/deficit debacle. Greece is one of the PIIGS of Club Med, the European nations who cannot afford their welfare systems. Greece cannot borrow to fund its largess; its credit rating is junk according to S&P. It is seeking European and IMF bailout aid, the amount of which is dependent on uncovering the accounting tricks it has heretofore used. Normally the IMF would use devaluation as one tool but that is not possible here because of the Euro. Greece will fail.
Sovereign debt problems are forecast for Spain and Portugal also, as they have suffered downgrades. Causes of their problems are similar but the significance is greater as the Spanish economy along with Italy which may follow soon is simply too big for Germany to bail out. Fiscal contagion is a serious problem.
So, let a few PIIGS fail, so what? Problem here is with the European banks. They hold the PIIGS bonds. Without regard to those underwater assets, the European banks were already in trouble since they did not clean up their bad real estate related assets. Think the Japanese banks of the 1990s. Friedman says the even at the peak of the U.S. subprime crisis European banks were in worse shape. How much worse shape now with the PIIGS crisis?
A Euro devaluation? A break-up of the European Union? At least, a significant period of de-stability for a major consumer in the world economy and a significant producer in that economy. Germany will survive in better shape than the rest. The PIIGS are likely to exist outside a re-formed European Union.
Add the fact that the U.S. is not the consumer that it once was. Thankfully, it is de-leveraging more, saving more, and consuming less. It hopes to expand its exports but who will pay the desired price? China? The rest of Asia? Thus the world economy will really be upside-down with a lot of areas trying to be producers but none trying to be consumers!
But the real concern is that the U.S. is a budding Greece bubble waiting to pop. In ten short years 93 cents of every dollar of government revenue will go to pay entitlements and interest on the debt. Obama has put us on the path to become a Europe on steroids just when Europe is exploding! Before Obama took office our entitlements thanks to Roosevelt, Johnson and Bush were on an unsustainable path. Rather than correct this Obama added another major entitlement, Obamacare, which will bankrupt our nation.
Several questions present themselves in this scenario: What of defense? Iran, North Korea, Russia and China are all real and potential problems. We spend so much on butter that we con’t afford guns. What of our assets and businesses? In a declining economy how will be work, live and invest? And, from a personal survival standpoint if the economy declines toward the subsistance level, is it guns and gold to survive? I know my farming skills aren’t all that good!
But there is hope if we recognize that big government must be drastically cut, public employee pensions and compensation reduced to the level of private compensation, entitlements including social security, medicare and medicaid cut in half, and Obamacare repealed and replaced by consumer-based, non-tax advantaged health care. We have a very short window in which to accomplish this dramatic turnaround. Let’s educate the voters and elect people who will get the job done.
Obama Budget Cuts
Posted by Tom in Deficit, Democrats, Financial Policy, National Debt, Obama Budget & State of the Nation on April 23, 2010