Monty Pelerin's World

Economics, Finance and Politics Through The Prism of Classical Liberalism

February 2010 - Posts

Tough Guy Bernanke Blows Smoke

Tough Guy Bernanke Blows Smoke

Tough Guy Bernanke Blows Smoke

Fed Chairman Ben Bernanke appeared before Congress this week wearing his “bad guy” face. I did not watch his testimony either day. Apparently, based on news reports and blogs, nothing of significance happened on the second day.

The Washington Times reported on Bernanke’s Wednesday testimony:

With uncharacteristic bluntness, Federal Reserve Chairman Ben S. Bernanke warned Congress on Wednesday that the United States could soon face a debt crisis like the one in Greece, and declared that the central bank will not help legislators by printing money to pay for the ballooning federal debt.

“We’re not going to monetize the debt,” Mr. Bernanke declared flatly …

These statements are unequivocal. It will be interesting to see how Bernanke rationalizes his way out of this testimony. I don’t believe he can stop and pointed the reasons out in an AT post, Obama’s Ides-of-March Moment is Near on 2/24.

My guess is that Bernanke’s wiggle room will turn on something akin to what the definition of “is” is. It is likely to turn on a narrow definition of Quantitative Easing (QE) or “monetizing the debt.” The Fed considers monetizing the debt a direct purchase of newly-issued Treasuries. But QE, as monetizing the debt is known, can be performed indirectly and, I suppose, claimed to be not QE

Here is a simple example illustrating both direct and indirect methods that show their equivalence. First the direct example: Suppose the Treasury was to issue another $50 billion of debt and the Fed bought it directly. That would clearly be considered QE. The nation’s money supply would increase by $50 billion. The Fed’s balance sheet would increase by $50 billion of new Treasuries.

Here is one way that indirect QE occurs and has occurred. A bank has toxic assets of $50 billion that it wants to get rid of. The Fed agrees to buy them at face value so long as the bank to uses the proceeds to buy Treasuries from a primary dealer. The Fed’s balance sheet has increased by $50 billion of toxic assets (presumably worth less) while $50 billion of new money has been created to buy them. The $50 billion goes into new Treasuries, recently bought by the primary dealer.

Economically there is absolutely no difference between the first and second example. They are both QE, regardless of whether the Fed says they are or not. To understand whether QE is taking place, all one has to do is look at the total assets of the Federal Reserve Balance Sheet. If they are increasing, QE is occurring.

You will know when QE stops one other way. Social Security or Medicare payments will stop.

Monty originally posted this on American Thinker.

2010 will be a watershed election

The following appeared on American Thinker today. An expanded article dealing with the same topic will soon be posted at Monty Pelerin’s World.

February 27, 2010

2010 will be a watershed election

Monty Pelerin
Public concern for the sustainability of our fiscal condition and way of life is rife. Yet, the political class is unwilling or unable to respond. Inaction reflects in the public’s rising anger.

As Rasmussen reported:

Voter unhappiness with Congress has reached the highest level ever recorded by Rasmussen Reports as 71% now say the legislature is doing a poor job. … Only 10% of voters say Congress is doing a good or excellent job.

The dissatisfaction is non-partisan. Almost half of Democrats say that Congress is doing a poor job, up 17 points from January!

The purpose of elections is to express displeasure, remedy political malpractice and change policies/politicians. When elections no longer perform this function, they become perfunctory charades. The public has started to believe that elections don’t matter.

The people will change the composition of Congress in the 2010 election. But changing horses is less important than changing direction. What if the new Congress is incapable or unwilling to change direction? Then the 2010 election signals that elections no longer matter. At that point, we recognize that the people no longer control their government.

The tradition and history of this country cannot coexist very long with rule “of the government, by the government and for the government.” The American people are imbued with the spirit of freedom. It is in their genes. As described by Arthur Lee in 1769:

Liberty is the very idol of my soul, the parent of virtue, the nurse of heroes, the dispenser of general happiness….”

The Tea Party movement was an early indicator of an incipient restlessness. Their numbers, while growing, are a small fraction of the angry public. 2010 may be our last, best chance to regain control of the government within the existing system. Will 2010 be the last real election? If so, then what?

Does our citizenry still have the love of freedom that our forefathers did? Are they willing to make the same sacrifices? If there is not a reversal of direction after the next election, the answers to these questions will be learned in the next few years.

Monty Pelerin @ will be posting a longer version of this article on his website in the next day or so.

The Claude Rains Recovery

The Claude Rains Recovery

“No Recovery?” In the best Claude Rains fashion, “I am shocked, shocked!”

There is no economic recovery, and there will be no economic recovery this year and probably not next. Yet the media, mainstream economists and the Administration insist we are in the midst of one. Things are definitely getting better, at least according to them. This concerted propaganda effort is reminiscent of a major Madison Avenue advertising campaign designed to wear down the resistance of the targeted buyer. The campaign is not based in reality. Its success is dependent upon three things: 1) constant repetition; 2) the public’s short memory span; and 3) the public’s economic illiteracy.

As time passes, however, more data appears and contradicts the “advertising” message. Spinning the data becomes harder and harder to do. Daryl Montgomery provides an excellent article detailing the inconsistencies of the data with the claims of a recovery. He states:

A number of economic reports in the last few days indicate that the U.S. economy has not only not failed to recover from the recession, but continues to fall deeper into a hole. Banking, consumer confidence, employment numbers, durable goods and the housing industry – each representing a different aspect of the economy – are all sending out troubling signs. Despite the onslaught of negative data, mainstream economists continue to echo the official U.S. government view that “the recovery is still on track.”

For an old movie buff, each spinning provides a “Rains moment.” No, supporters do not express “shock” when data is outside their desired parameters. Rather they use institutionalized double-speak to provide their cover. Negative results are “unexpected,” “likely to reverse next month,” “due to seasonal adjustments,” “highly unusual,” etc. etc. Whether the reporters and analysts are Rains fans or not, their shtick looks like it originated in the movie Casablanca.

The campaign is failing with the public. The continued repetition of the data is drowning out the “Joe Isuzu” government campaign. To paraphrase that great economist, Marx (Groucho, that is), “what are you going to believe, the data or what I am telling you?”

Montgomery concludes his worthwhile read:

There is little evidence that the U.S. economy has recovered from the recession or is going to recover from the recession anytime soon. The support for the recovery viewpoint comes from government statistics that have been highly manipulated. All governments, of course, want to present a rosy picture of their handling of the economy for political reasons and it is much easier to make the numbers better than it is to actually make the economy better. Eventually the public catches on to this game, however. The recent consumer confidence numbers indicate that the American public is no longer buying the public relations story, but is starting to pay more attention to the realities they have to face on a day to day basis.

The following list of recent economic news was provided by Financial Armageddon on Feb. 25:

“U.S. Jobless Claims Rise Unexpectedly” (Associated Press)

The number of newly laid-off workers filing applications for unemployment benefits in the U.S. unexpectedly surged last week after having fallen sharply in the previous week. The gain dampened hopes about how quickly the labor market may improve this year.

“U.S. Economy: Equipment Demand Slows to Start 2010″ (Bloomberg)

Orders for durable goods excluding transportation unexpectedly fell 0.6 percent, the most since August, while a measure of bookings for business equipment showed its biggest decrease in nine months, the Commerce Department in Washington said.

“New Home Sales Hit Record Low, Prices Tumble” (Reuters)

Sales of new homes unexpectedly fell to a record low in January while demand for loans to buy homes hit a 13-year low last week, fanning fears of renewed weakness in the housing market.

“Consumer Confidence in U.S. Falls More Than Forecast” (Bloomberg)

Confidence among U.S. consumers fell more than anticipated in February to the lowest level since April 2009 as the outlook for jobs diminished, a sign spending may be slow to gain traction as the economy recovers.

“Economic Indicators Rise Less Than Expected, Mixed Open” (Marketplace)

The Conference Board reported that its index of leading economic indicators rose in January, but the gain was smaller than expected.

“Consumer Sentiment Index in U.S. Declined in February” (Bloomberg)

Confidence among U.S. consumers unexpectedly fell in February from a two-year high, signaling Americans may not be convinced the job market is turning around.

The Reuters/University of Michigan preliminary consumer sentiment index dropped to 73.7 from January’s 74.4. The measure averaged 88.9 during the economic expansion that ended in December 2007.

“Businesses Slashed Wholesale Inventories 0.8 Percent in December, Weaker Than Expected Showing” (Associated Press)

Businesses slashed wholesale inventories sharply in December, a much weaker showing than had been expected.

The Commerce Department says that wholesale inventories were reduced 0.8 percent in December. Economists surveyed by Thomson Reuters had expected inventories to rise by 1 percent during the month.

“Instant View: ISM Services Index Below Forecast in January” (Reuters)

The U.S. services sector grew less than expected in January, according to an industry report released on Wednesday.

Monty originally posted a similar article on American Thinker.

FED Bunkum

FED Bunkum

A Wall Street Journal article reported: “The Treasury said it will borrow $200 billion and leave the cash proceeds on deposit with the Federal Reserve, reviving a program that will make it easier for the Fed to raise interest rates when the time comes.” I had to read that sentence several times to try and understand what it said. I still have no idea what it means.

You see, if the Treasury were able to borrow money, we would not have QE (quantitative easing). QE is when the Fed, directly or indirectly purchases Treasury Bonds because others won’t. Furthermore, I cannot see anyway that setting this fund up will “make it easier for the Fed to raise interest rates when the time comes.” What has this fund to do with raising interest rates? Is raising interest rates a difficult thing? Does the Fed need help doing so. Possibly, but only because they are so out of practice. Isn’t raising interest rates so simple a Caveman could do it, without help from the Treasury?

I read through the entire article several times. There is no way to make any sense of this move unless you believe the Fed intends to continue its machinations of adding more questionable assets to its balance sheet. After all, that was what the program was originally intended for. If the Fed is truly done with stimulating, there is no need for this fund.

It is likely this is merely Fed “smoke” or duplicity. I do not believe they can get out of QE until the government gets deficits to a fraction of what they are currently running. Based on 10-yr projections, that isn’t going to happen for more than 10 years.

Of course, the other explanation is just sloppy journalism (which it appears to be anyway).

If anyone can explain this, I would love to hear from you.

Obama’s “Ides-of-March” Moment is Near

Obama’s “Ides-of-March” Moment is Near

In Jimmy Carter’s reign, the Wall Street Journal editorialized about “Ratcheting to Ruin.” The title derived from the fact that each cycle high in unemployment was higher than previous ones, and each cycle high in inflation was also. “Stagflation” was coined to describe what up until then was believed to be impossible in the Keynesian world. This period ushered in a new era in both politics and economics. Carter was replaced by Reagan, and Keynes was replaced by Friedman.

Thirty years later Keynes is back in vogue, Obama has ascended to the White House and times are again reminiscent of the Carter era. The economy is awful. Fear and dissatisfaction prevail. Politicians are held in contempt. There is one major difference – Carter did not face an “ides of March” event.

In Shakespeare’s Julius Caesar, a soothsayer warned Caesar to “beware the Ides of March.” The prescient warning did not help Caesar. As Obama approaches his March moment, no warning can change his fate.

Ben Bernanke promised to end Quantitative Easing (the printing of money to stimulate the economy and fund the deficits) by the end of March. Some believe his commitment was a “campaign promise” to ensure his Senate reconfirmation. Others believe it was a real commitment, necessary to maintain a stable dollar. Shortly, the world will find out.

Mr. Bernanke, quite unintentionally and through no fault of his own, will be Obama’s Brutus, regardless of his decision. To understand why, some numbers are necessary. Government needs funding this year of $2.0 Trillion (that includes the Federal budget deficit, off-budget spending and state and local needs). Private industry needs about $0.5 Trillion. Part of the funding will come from the country’s savings. Total gross savings (new savings) is estimated to be $1.5 trillion. Assuming all savings is available, a shortfall of $1.0 Trillion exists.

This shortfall can be met from two sources:

  1. Foreign lending
  2. Quantitative Easing

Another possible source could result from a reallocation of existing savings as would happen in a major stock market decline. That outcome cannot be quantified. Furthermore, a stock market rise would produce a drain of funds from debt markets. Either effect is one-time, therefore not a continuing source of funding.

As the need for foreign investment increases, foreign willingness to lend is declining. Two reasons are apparent: worries about the sustainability of our deficits/dollar and large foreign needs for capital at home. Martin Crutsinger reports:

The government said Tuesday that foreign demand for U.S. Treasury securities fell by the largest amount on record in December with China reducing its holdings by $34.2 billion. The reductions in holdings, if they continue, could force the government to *make higher interest payments at a time that it is running record federal deficits.

The Treasury Department reported that foreign holdings of U.S. Treasury securities fell by $53 billion in December, surpassing the previous record of a $44.5 billion drop in April 2009.

Accuracy in fund flows is difficult to obtain. Foreign investment of all types appears to have increased about $500 billion last calendar year. If all that was for government debt, then our Fed would have bought, directly or indirectly, another $500 billion. That amount of QE is significant, representing about 25% of government tax receipts. It represents a rise of over 60% in Fed assets using a pre-crisis base. In a normal economy, a monetarist would likely claim that continuation of that expansion rate would result in annual inflation of at least 60% per year. Another 140% increase resulted primarily from Fed purchases of distressed assets from the banking industry.

Foreign funding was insufficient last year and will be even more so this year. The deficit will be larger and foreign funding will be smaller. QE must be larger. There is no way to fund these deficits without QE.

The problem is bigger than the numbers above might suggest. Budget forecasts show that the problem increases over time. In addition, 40% of existing debt matures in the next year. That means $2.8 Trillion of debt has to be refinanced. The Treasury must sell on average $90 billion of debt a week! In five weeks, we need to sell $450 billion. That is equal to the largest full-year deficit in history, until Obama’s first year.

There are no plans to curb spending or cut deficits. President Obama just increased the debt ceiling by $1.9 Trillion. To outsiders, we appear like a banana republic with ICBMs. Does anyone seriously believe that funding based on “the kindness of strangers” is workable much longer?

Bernanke has two options, neither of them good. He can do what he promised and stop QE. Or he can renege on his promise. Either alternative has radically negative consequences for the country, Bernanke’s role in history and Obama’s Presidency. If he stops QE, he fulfills his role as an independent central banker. Presumably, that action stops the decline in the dollar and reduces the risk of future inflation. It was the course that Paul Volcker chose in the late 1970s.

Volcker’s action was bold, highly controversial and highly criticized. His action had the support of President Reagan who was willing to face short-term unpopularity to fix the economy. Bernanke’s task is harder than Volcker’s. Volcker stopped the economy dead in its tracks. If Bernanke ends QE, he will stop both the economy and the Federal Government dead in their tracks.

Obama Tending to Lepers?

Without QE, the government will be unable to honor its obligations. Non-payment of Social Security or Medicare or Federal payroll or welfare checks or retirement checks, or military payroll etc. etc. would show up almost immediately. That would jeopardize foreign (and domestic) purchases of additional federal debt, exacerbating the problem.

Bernanke’s second option enables the government to continue operating irresponsibly until market forces eventually stop the profligate behavior. Market discipline would likely be imposed in the form of a collapse of the dollar or raging inflation (or both).

Under either scenario, the Obama Presidency is destroyed. Obama probably prefers the second option, because it might extend the period before sovereign bankruptcy. However, it might not extend it very much. Foreign bankers have chastised our behavior regularly. If the Fed is perceived as “The Great Enabler” rather than as protector of the currency, a run on the dollar and the dumping of Treasuries could result.

From Bernanke’s standpoint, it is not clear which option he might prefer, or if he even has a choice given Congress’ involvement. If he behaves like a central banker and pulls the biggest punch bowl in history away, it would force the government to address its problems before they became more serious.

History will not look kindly on this period regardless of Bernanke’s decision. Bernanke never had a chance for a favorable legacy. If he plays his role as a central banker, history may be less unkind, stating that “he did what he had to do.” If he chooses to continue QE, it likely will judge him as the “Great Enabler,” rating him even less favorably than his predecessor.

For Obama, he loses either way. He inherited a difficult situation, but then, via foolish policies, turned it into a terminal one. At this point, Jimmy Carter may be the happiest person in the country. His lead position in the Pantheon of Shame is in jeopardy to Obama.

For the country, times equivalent to the Great Depression are likely ahead. My guess is that Bernanke chooses (or is forced into) continuing QE. Courage is a rare and dangerous commodity in Washington. Hard decisions only occur in crisis.

When the country is perceived and treated by the world community as the wastrel it has become, then remedial action will take place. Hopefully, something is still salvageable.

Monty Pelerin originally posted this on American Thinker

What Crisis is Being Solved?

What Crisis is Being Solved?

According to calculations by Robert Barro, Harvard University economist, the stimulus package harmed the economy. Mr. Barro, concluded in the WSJ:

… viewed over five years, the fiscal stimulus package is a way to get an extra $600 billion of public spending at the cost of $900 billion in private expenditure. This is a bad deal.

The fiscal stimulus package of 2009 was a mistake. It follows that an additional stimulus package in 2010 would be another mistake.

When in a hole, government, like everyone else, should stop digging. Apparently stopping is not a viable option.

Since the 1960s, government has claimed the ability to manage the economy. Some economists were bold enough to state that the business cycle had been tamed. Keynesian economics was the key that opened the door to full employment, low inflation and general economic bliss. With these tools, we were told, prosperity was assured.

It is unclear whether our leaders believed their own propaganda. The media did, or at least became willing accomplices. Newspapers report in a manner that supports the myth of government controlling the economy. Statements along the following lines are not uncommon: Clinton “gave” us a good economy, Bush “gave” us a bad one and Obama inherited Bush’s mess.

The reality is that government cannot give us anything without first taking it. They can make things worse with bad policies, but they cannot create wealth or growth. These come from the hard work and production of the private sector. Period.

After many years of claiming responsibility for the good times, government is faced with both an economic and a political crisis. If they were responsible for the good, then certainly they must be responsible for the bad. The false myth, helpful in the good times, has become a liability now. One can imagine a conversation at the highest levels of government going along the following lines:

Politician: “We have to do something to remedy this economic downturn.”

Economist: “Actually, sir, there is nothing that we can do. Attempts to intervene will make matters worse. The best solution is benign neglect. Any attempt to stimulate a recovery will be counterproductive.”

Politician: “I know that! You convinced me last week. But we have to do something!”

Economist: “Doing ‘something’ will make the economy worse.”

Politician: “We convinced the rabble that we control the economy. They believe we can solve the problem, so design a stimulus for me. The bigger it is, the better.”

Economist: “But it will harm the recovery.”

Politician: “They don’t know that. Better to give them what they want, harmful or not. It will help me. I will look compassionate and involved. They will never know.”

As  pointed out long ago by H. L. Mencken, the American people will get what they want, “good and hard.” There is no better example of his wisdom than what is happening now.

Monty Pelerin originally posted this on American Thinker

Wisdom: Marxian Political Observations

Wisdom: Marxian Political Observations

Groucho Marx, circa 1931
Image via Wikipedia

As an economist, I am frequently asked about the economics of Marx. I generally nod approvingly, which usually pleases or perplexes the inquirer. It is only after some discussion does it become apparent that I am talking about Groucho Marx and not Karl Marx.

Groucho Marx was an American original. Regarding economics, Irving Berlin once quipped: “If Marx had been Groucho instead of Karl, the world would be in less of a snarl.”

In reality, Groucho’s political leaning was rather pronounced to the left. But his observations and quips about the world and political scene were spot on.  There are probably few quotes better than the following to describe out current political scene, especially its practitioners:

Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies.

The secret of life is honesty and fair dealing. If you can fake that, you’ve got it made

There’s one way to find out if a man is honest – ask him. If he says, “Yes,” you know he is a crook.

Those are my principles, and if you don’t like them… well, I have others.

Who are you going to believe, me or your own eyes?

Healthcare Won’t Die, But Democrats May Drop Like Flies

Healthcare Won’t Die, But Democrats May Drop Like Flies

With his family by his side, Barack Obama is s...

There apparently is no limit to President Obama’s hubris and arrogance. He has gotten message after message on health care reform, yet insists on pushing forward with it. Polling data is overwhelming. Recent elections were likely referendums on his health care plan.

From a political standpoint, there can be no more toxic issue for Democrats. Rasmussen’s latest poll (2/21) reports: “Forty-one percent (41%) Strongly Disapprove giving Obama a Presidential Approval Index rating of -19. The Approval Index has been lower only on one day during Barack Obama’s thirteen months in office (see trends). The previous low came on December 22 as the Senate was preparing to approve its version of the proposed health care legislation. The current lows come as the President is once again focusing attention on the health care legislation.”

Just as discouraging must be the drop in the President’s Strongly Approve rating to only 22%, the lowest yet recorded. The population of messianic followers appears to be dwindling.

Below the surface, Congressional tectonic plates are likely shifting. The old bulls in Congress have always had inflated impressions of their value to the world. To them, a President of either party is merely a means to accomplish their agendas. If the President is of the opposing party, destroy him. If of your party, ride him.

When Obama was seen as a magical asset, they were willing to go along and treat him with respect. As the public increasingly views “The One” as some pampered, arrogant man-child with no experience and dangerously impractical ideas, his usefulness diminishes.

It is likely that some of his Congressional contemporaries realized this risk prior to the election.  After all, they served with him for some period of time. Perhaps they believed that his magic could fool the public forever. If it could, then his election would both advance the Party and their own personal agendas.

Now it appears Obama’s value is diminished if not completely gone. His presence actually threatens the “family business” of the Congressional bulls.  Survival trumps loyalty every time, especially in politics. From a survival standpoint, these old bulls might start treating the President of their own party like he was George Bush. It appears he may be that much of a threat to some of their political actuarial tables.

For political pundits, the next three years is apt to be like one continuous Super Bowl.  It may turn out to be a political version of the infinite loop expressed on screen in the movie Groundhog Day.

Monty Pelerin posted this on American Thinker today

The Economic Crisis is Only a Symptom

The Economic Crisis is Only a Symptom

There are few economic problems that don’t originate in politics.

Originally, economics was known as political economy because the early practitioners understood the importance of institutions on economics. One of the early journals of economics was started in 1892 at the University of Chicago entitled The Journal of Political Economy.  It is still one of the most prestigious journals in the field of economics.

Citizen faith in government has deteriorated recently as shown in virtually every political poll. Rasmussen found: “…63% of likely voters believe, generally speaking, that it would be better for the country if most incumbents in Congress were defeated this November.” Gallup had the federal government ranking ahead of only socialism in terms of positive image:

People know something is wrong. They know economic conditions have taken a turn for the worse. They sense that they don’t matter much, at least in the eyes of their government. Furthermore, many believe that government is out of touch and corrupt. Politicians are viewed more as a ruling class than representatives of the people.

History is replete with examples of the rise and fall of empires. Is there some mysterious, material force that produces “cycles of civilization?” History seem to support such a contention, but coincidence and correlation is not causation. Societies rise and fall as the result of policies, laws, customs and traditions. Man creates the forces that drive civilizations.

Over the centuries, brighter folks than our elected officials experimented with virtually every combination and permutation of laws and customs. Ideas that worked were adopted, while those that didn’t were abandoned. It was in the context of this evolutionary cauldron that “best practices” were discovered and civilizations advanced. Those that abandoned “best practices” deteriorated.

Our learned Founders knew history and the nature of man. They created a Constitution that represented 2,000 years of wisdom and experience. Their remarkable achievement enabled a fledgling nation to rise quickly to a world power with wealth, freedom and living standards that were unsurpassed.

Now we appear to be on the downside of our historical run. An enormous economic crisis engulfs our country and the world. Has our time of leadership come and gone? What happened?

At the risk of appearing simplistic, I argue that the driving force for our success was our conception of limited government. Our Founders knew the tendency of rulers and constructed a framework designed to protect citizens from government. This setting maximized individual freedom, encouraged initiative and rewarded success.

Slowly but incessantly the remarkable document that was our Constitution was weakened. Now, few politicians understand it; even fewer believe it has any bearing. Politicians suffer from what Friedrich Hayek termed “the fatal conceit.” As David Brooks described it:

In moments of government overconfidence, officials come to see society not as a dynamic and complex organism, but as a machine, which can be rebuilt. In such moments, governance and engineering merge into one.

Our Constitution has been reduced to a quaint artifact of history. It no longer provides protection from government. Politicians still take an oath to uphold it. Yet that oath is little more than the tradition associated with assuming office. Our Constitution’s role in government appears to be no more important than the Queen is to England’s government.

Virtually everything that our Parliament of Whores has imposed over the last century was rejected by our Founders. The Founders were not “unjust” or “unfair” or “uncaring.” They were practical and refused to adopt policies that history had shown harmful. While today’s politicians cannot explain or account for the complex set of traditions, customs, rules and laws that evolved over time, they believe they can make changes that will be improvements.  What hubris!

Hayek said: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”  Apparently he was wrong because our politicians have not learned from their many failures.  Greater intrusions into the economy and lives of citizens continue at accelerating speed.

Our serious economic crisis can be attributed to the abandonment of Constitutional principles that began long ago. Establishment of a central bank was anathema to our Founding Fathers. Arguably the establishment of the Federal Reserve in 1913 was unconstitutional. Thomas Jefferson warned against empowering banks:

I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a moneyed aristocracy that has set the Government at defiance. The issuing power should be taken from the banks and restored to the people to whom it properly belongs.

President Andrew Jackson concurred with Jefferson’s views:

The bold effort the present (central) bank had made to control the government … are but premonitions of the fate that await the American people should they be deluded into a perpetuation of this institution or the establishment of another like it.

Ludwig von Mises

No serious economist can overlook the key role played by the Federal Reserve in causing the current crisis. Nor can one overlook its debauchery of the currency. One of its founding purposes was to protect the value of the currency. Since its formation, the purchasing power of the dollar has lost 96 percent. Most of that occurred after 1971 when the country left the gold standard and the Fed was without limitations.

Government was generally precluded from entering the realm of economic matters by the Constitution. Once that restriction was ignored, there was no limit to the harm that could be inflicted. Economics itself is a self-correcting system under most circumstances. However, in a world where government is unconstrained, politicians see every minor discomfort as an opportunity for an intervention and a means to gain more power.

All intervention contravenes the corrective mechanism of markets, generally worsening the original problem. This leads to demands for additional political intervention. Each one worsens the problem and weakens the economy’s ability to self-correct. Interventionism is not self-sustaining as explained by Ludwig von Mises:

An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole system of interventionism collapses when this fountain is drained off: The Santa Claus principle liquidates itself.

Our biggest problems are in areas where government intervened years ago – schools, health care, Social Security, the banking system, poverty, the Post Office, Amtrak, etc. etc. No intervention has worked. All these problems have grown worse. It is likely that Mises’ end of the Santa principle is near.

Over time, government grew into a corrupt Leviathan. Once politicians gained life and death power over the economy, their decisions took on value. As Sheldon Richman stated:  “If there are no privileges to sell, there are no privileges to buy.” Businesses don’t contribute to politicians out of admiration. They do so as a means of survival, often under extortion-type circumstances.

The elimination of Constitutional protections led to the demise of  free-market economics and the concentration of power at the Federal level. A political oligarchy, willing to serve the highest bidders, now runs the country. Recently the banking industry was their patron.

Our Founders were wise men who risked their lives to create this country. Our current political representatives are arrogant, unprincipled clowns in comparison. We must return to Constitutional protections if we are to regain our way of life and preserve our country.

Prospects look dismal.

Monty Pelerin posted this today on American Thinker


The Fed Feints

The Fed Feints

Great hoopla over the Federal Reserve’s surprise decision to raise the discount rate 0.25 % fills the media and the markets. Pundits discuss earnestly the spice has been added to the tea leaves. Barry Ritholtz lists three possible motivations behind the Fed’s move:

  1. Response to political pressures;
  2. Proof the Economy is improving;
  3. Inevitable ending of extraordinary accommodation.

The relevance of number 1 can be discounted rather quickly. Where could the “political pressure” come from? Other than lip service around election time, Congress never demands fiscal or monetary responsibility. It could refer to “hawks” on the Fed board, but they would not overrule Bernanke on anything substantive, which this move wasn’t. Thus points 2 and 3 appear to be possible motivations.

The rate move was miniscule. Its size precluded it from having any meaningful economic effect. Thus, it must be interpreted as a “signal.” But was it a signal meant to deceive? That is, was the move a “feint?”

The Fed traditionally sends a signal in advance of taking more serious economic measures. The rationale for a warning is to prepare markets for what is coming. It is believed that markets then adapt somewhat in advance of the future, stronger actions. This move was not a signal. As stated by John Williams of

… the Fed has virtually no room to tighten credit in a system where the real (inflation-adjusted) broad money supply is in severe annual contraction, and where general bank lending into the flow of commerce is not adequate to maintain economic growth.

The Fed move was a feint designed to reinforce beliefs in points 2 and 3 above. But there is no economic recovery, and the Fed cannot stop its extraordinary accommodation.

The end of March will provide the proof. That is when Mr. Bernanke promised to cease Quantitative Easing. QE will not cease. There is not enough market demand to purchase the boatload of Treasuries needed to fund government deficits. New bond issuance needs to average $90 billion dollars per week this year. $40 billion is for new debt, while $50 billion is rollover of maturing debt.

If QE stops, the government defaults on at least some of its obligations. It does not have the money to pay its commitments without these bond proceeds. If Mr. Bernanke stops QE so does the Federal government. If QE stops, so will Social Security checks and other such payments.

Games will be played to attempt to cover up the continuance of QE. These games were played this year. The ultimate test is the level of Federal Reserve assets. What Mr. Bernanke claims is irrelevant. If Fed assets are increasing, so is QE, no matter how surreptitious it may be.

Mr. Ritholtz ends his post with this appropriate quote from Ralph Waldo Emerson:

I cannot hear what you are saying because what you are doing is speaking so loudly.

The Federal Reserve was established as an independent agency with goals to protect the banking system and the purchasing power of the currency. It has failed miserably in both respects. Over time, it also lost its independence and became highly politicized.

If Mr. Bernanke were truly to obey the charter of his agency, he would not enable the government to continue its irrational and ruinous spending. The fact that the government is dysfunctional is even more reason for the Fed to act. To paraphrase Ronald Reagan:

Mr. Bernanke, tear down this government. Do what your office demands.

Mr. Bernanke will not do his duty. But that merely postpones the inevitable. Markets will perform the task, and we will all be the worse for it when they do.

Monty Pelerin posted this on American Thinker today.

Depression Diary

Depression Diary

The Great Depression: A Diary

Historical diaries are intriguing because we know how the era or big picture ended. When the period or person is significant, the day-to-day trivialities take on special meaning. While the trivialities are not too dissimilar to our own minute by minute, hour by hour and day by day events, we know that ultimately they end in bigger meaning.

The current economic malaise, with periodic optimism from the Administration and media, is lost in the day to day trivialities of life. Even for those focused on the problem, positive reports are offset by negative ones. It is difficult to know which ones to believe or even whether they are significant. There is so much “noise” that it is difficult to sort out what is real and meaningful.

The big picture is not apparent as one lives it. It is difficult to ascertain whether history is being made, or we are just dealing with the vagaries of just another slowdown.

I received an email from a friend with a book recommendation. It represents a diary compiled during the Great Depression. I have started the book and am very intrigued. The friend’s judgment is excellent so I knew I would enjoy the read. For those interested in what it is like to live through history, the book might be a good read. It might also put some of all the “noise” we seem to be getting into perspective.

A brief summary can be obtained from Public Affairs.

Friend’s comments in red below:

The Great Depression: A Diary

Brown’s first recommendation is an old story that still resonates today. The Great Depression: A Diary is a personal account of the economic disaster that took place in the 1930s.

The journal entries of Benjamin Roth, a lawyer from Youngstown, Ohio, have been resurrected and published by his son Daniel B. Roth.

“It’s a blow-by-blow account from the point of view of a professional guy. Not a sort of a Dorothea Lange character from the real underclass, but just a regular, professional guy who, day by day, chronicled his reaction to this terrible depression that settled on the land,” says Brown.

She says she found Roth’s account fascinating because he, like many people suffering in the financial tumult of the past year, did not know what the next day would bring.

“Every diary is a mystery story to the person who’s writing it,” says Brown. “We’re in the middle of our own mystery tour of this depression.”


If anyone is familiar with the book or chooses to read it, I would be pleased to obtain an opinion.

Along similar lines is a book by Benjamin Anderson, although it is written from an economic perspective.

The reporting of Benjamin Anderson on the Great Depression in his book  Economics and the Public Welfare: A Financial and Economic History of the United States, 1914-1946., is a book that I have read and recommend. While not a diary, it represents primarily contemporaneous reporting by Andersen in his role as an economic journalist. In 1920 he joined Chase Manhattan Bank and became the editor of the influential Chase Economic Bulletin where his timely analyses of the period were like a diary of the economic policies that led up to and prolonged the Great Depression.

Anderson was a man of integrity and had an Austrian Economics orientation.  A biographical sketch of Benjamin Anderson is available here.


Washington Cesspool

Washington Cesspool

Paul Volcker, former head of the Federal Reser...

Nothing has changed in Washington as evidenced by the Reuters article below.

The government is still run by the banking industry. What happened to the good old days when you bought a politician and he didn’t stay bought? That was the kind of corruption that worked, at least partially for the people. They took money, but sometimes they turned on their benefactors. Apparently not so much any more.

Is it because the banking industry pays so well for their support? Is it because touching these sacred cows would stir up such a mess that would destroy many politicians? Or is it just that our pols are comfortable the way things are and don’t want any changes?

The answers to these questions are unknown. What is known is that without putting something back in place comparable to the old Glass-Stegall rules, we have solved nothing.

If we ever get out of this mess, we will be right back on the road that led us here.

Washington is a disgrace!

The Volcker Rule: It’s not happening

Feb 16, 2010 14:07 EST

2010 election | financial regulatory reform | Paul Volcker

A few points:

1) The much-hyped Volcker Rule proposal is failing fast in the U.S. Congress. But Paul Volcker himself probably isn’t that surprised. The former Federal Reserve chairman joked he was “just a photo op” even after President Barack Obama’s public embrace of his proposal to limit bank proprietary trading. More evidence that the moment for sweeping reform has probably passed.

2) The hope for any reform at all rests with the U.S. Senate’s new negotiating tag-team of Democrat Chris Dodd, chairman of the Banking committee, and Republican freshman Bob Corker. But Corker says the Volcker Rule isn’t going to be a “major topic” for discussion. And that is probably OK with much of the committee. As one banking industry lobbyist told me, “There is just not a lot of appetite among members of the minority or the majority to add [bank trading limits]. So I just don’t think you’re going to see it.”

3) Increasingly, the Volcker Rule looks more stunt than viable solution. Though Volcker had been pushing it for months, White House advocacy surprised both the Banking committee and banking industry. A poor way to introduce serious legislation in Washington. Lame-duck Dodd, who sees reform as his legacy, hears the clock ticking. A bill not passed by early summer is probably dead for the rest of this election year. His view: The Volcker Rule is a sudden and unwelcome complication.

4) Cynics saw it as a populist, knee-jerk response to the loss of a Massachusetts U.S. Senate seat held by Democrats for more than a half century. Even some Volcker Rule advocates admitted the plan didn’t directly address the regulatory failures that contributed to America’s financial meltdown. And although the proposal was introduced in January with great fanfare by Obama – Volcker standing prominently at his side – Senate Democrats say the creation of a new consumer finance regulator is actually the issue the White House is spending political capital on.

5) It is a reality that highlights the Obama administration’s scant interest in more extreme measures to limit the size of the banking sector or its activities. And if Volcker did harbor any small doubts about that, he shouldn’t any more.

Roubini as Not Keynes

Roubini as Not Keynes

Nouriel Roubini, Turkish economist, professor ...

This video really highlights how far out of consensus I must be.

It’s been a while since we posted any Nouriel Roubini content here and, as I sat listening to the video below, all I could think was, “that makes sense,” “I’m with you on that point” and “bingo!” Then I hear the clucking from the CNBC hosts – guest or otherwise – about how these theories simply cannot be true. Theories that seem so obvious to me.

They contend that Nouriel is ignoring the evidence of recovery all around us. I feel like taking the little video player and shaking it… hello CNBC hosts, COST-BENEFIT analysis! Do you realize you are celebrating bounces off of multi-decade lows? Bounces that cost a few trillion dollars worth of stimulus/handouts/morphine to engineer? And yet they are still extremely limp? We are citing 33.4 hour work weeks as recovery when all-time lows are 33.2 hours? Is the logic just that “you need to start somewhere?”

Gosh, I can only imagine the outright cries of joy when the census workers …. [To Continue Reading]

Must Reads: How This Ends

Must Reads: How This Ends

These three articles are must reading for anyone interested in the future of the economy.  No investor or citizen should be ignorant of the possibilities raised in these articles.

Ponzi Scheme by Puru Saxena
Editor, Money Matters

Let’s face it, the government-bond market in the West is a gigantic Ponzi scheme.  Most governments in the ‘developed’ world are drowning in debt, they are running mind-boggling budget deficits and printing money like there is no tomorrow.  Furthermore, under the guise of quantitative easing, their central banks are buying their own newly issued debt!

US debt will keep growing even with recovery by Tom Raum

For the U.S., the crushing weight of its debt threatens to overwhelm everything the federal government does, even in the short-term, best-case financial scenario — a full recovery and a return to prerecession employment levels.

Sovereign Default: Stuck Between Dire and Disastrous by John Mauldin

Our economic future is more and more a product of the political choices we make, and those are increasingly difficult. We have no good choices. We are left with choosing the best of bad options.

Martenson's Forecast for How This Ends

Martenson's Forecast for How This Ends

For investors or just curiosity-seekers, how we escape from the economic mess is of interest. Jim Puplava at stated: “I believe that getting the inflation/deflation story right is the single-most important investment decision that needs to be made. It will determine the investment outcome of portfolios over the next decade.”

Investments that might be expected to do well in a deflationary environment will do poorly in an inflationary environment and vice versa. Thus, a reasoned determination of what lies ahead is critical for investing success. That determination and flexibility in case your judgment proves incorrect will be important to investment outcomes. For most investors, “buy and hold” should be considered dead. Arguably that determination should have been made a few years ago.

While no one can foresee the future, Chris Martenson has been more prescient than most. He presents a logical case for what is likely to happen below.

Austerity or Money Printing?

Wednesday, February 10, 2010, 8:42 pm, by cmartenson

I was asked to write a once-a-month Market Observation for Financial Sense.  Here’s the first one (posted today, Feb 10):

From time to time, I think it’s a good idea to stop squinting at the short-term market wiggles and pull our heads back for a wide-angle view.  Now would be a good time, so that’s what we’re going to do.  For the record, I also happen to believe that close-up market analysis loses some of its potency during times of immense official intervention.  As with any subsidy program, prices become distorted and often fail to tell the real story, which is absolutely true with respect to interest rates and, by extension, the risk premium for stocks.

Back to the story.  Where the current crisis has been described using millions of words in thousands of articles packed with arcane acronyms (such as TALF, CDO, and CMBS), perplexing regulatory lapses and with a degree of complexity that dwarfs the Apollo moon mission, I can explain why the whole thing happened using just three words.

Too.  Much.  Debt.

read more »

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