Monty Pelerin's World

Economics, Finance and Politics Through The Prism of Classical Liberalism

March 2010 - Posts

Healthcare Deform

Healthcare Deform

I received the following email from a friend. I don’t know the doctor but thought his take on the new healthcare reform was worthwhile. His predictions seem reasonable to one not in the medical profession.

I am not inclined to pass along each and every message received over the internet.  This one is for real and from a long-standing friend of mine, Lee Waller. He is also a friend and acquaintance of many of those receiving tis message.   Lee, in turn,  is a friend of Dr. Salvatore Moscatello, who is a Gastroenterologist in Charleston, S. C.  The predictions do not speak well for our healthcare going forward.  It is unfortunate that we will lose a professional like Dr. Sal, an individual who not only is held in high regard by those in the medical field, but one who contributes substantially to other humanitarian causes, civic and social endeavors.

Just thought I would pass this mail on.  Sal has been my neighbor for the last 14 years and I know him to be an honest person.  I realize everyone may not agree with him….but unless you happen to be a Dr. in Private practice I suspect he has more knowledge of the subject than you or I do.  In any event I wanted to pass this  analysis on……..everyone will have to decide for himself/herself if our country now has agood deal or not.

Subject: healthcare predictions

Hello Everyone-

Well, the the initial firestorm about the Healthcare Bill Has been extinguished. Now, the ashes must be cleared and a road forward constructed. In
this debate, there was little, if any, substative contributions from REAL practicing physicians as to the merits of this grand plan and how it would
effect the day-to-day doctor patient relationship that has been the bedrock of medical practice from ancient times(Hippocrates).  These 10 predictions
are from me to help you understand where we will be once Mr. Obama leaves office in Jan. 2017(an 11th prediction!!) in the healthcare marketplace
right here in America at that time-
1. up to 200,000 physicians will quit or retire. the average age of the practicing physician in America is 49. Each one of these doctors will take 4 jobs w. them.  The New England Journal of Medicine(liberal as it comes in medicine) actually predicted 250,000 doctors leaving. Well, you do the numbers. I will be one for sure.
« Continue reading Healthcare Deform »

The Fat Lady is Resting

The Fat Lady is Resting

There is a dangerous complacency regarding this economic crisis. Many believe we have seen the worst and are back to business as usual. The stock market has made a miraculous recovery. Some say it is off to the races once again.

This crisis is not over. It has barely begun.

Watch the currency and debt markets. They are apt to signal when and where this crisis surfaces next.

Europe has a serious problem with Greece. Some have suggested that their problems are so severe that the EU may break up over this and other sovereign financial issues (think also Portugal, Spain and Ireland). If a break-up occurs, it is unlikely that the Euro continues to exist. More likely is a return to individual currencies.

This risk should put downward pressures on the Euro and Euro debt. Yet, as reported in theWall Street Journal:

Something troubling has occurred in the market for default protection on the debt of the world’s biggest borrower.

As the folks at Standard Poor’s Valuation and Risk Strategies division noted in a research note Monday, the difference between the spread on U.S. sovereign credit default swaps and an equivalent benchmark for AAA-rated euro-zone sovereigns flipped into positive territory March 12. As U.S. CDS spreads expanded to their widest levels in two years, that cross-region gap blew out to 5.7 basis points last Friday before narrowing to 4.7 Tuesday.

Wider CDS spreads indicate that sellers of insurance against a particular issuer’s default are charging more for it. In effect, the positive U.S.-versus-euro zone spread means investors think the risk of a U.S. default–however remote–is greater than that on euro-denominated sovereign debt.

As if this signal were not enough, a separate piece in the Wall Street Journal that same day spoke about the weaknesses in Treasury auctions:

It was an “ugly auction,” said Ward McCarthy, managing director of the fixed-income division at Jefferies & Co. “You’re starting to see a bit of a Treasury market protest. There’s a very legitimate concern that Washington is pushing the envelope too far in terms of the U.S.’s ability to carry all this debt.”

Furthermore, David Rosenberg expressed his concern in his March 29 post:

Last week’s bond auctions did not go well. It seems that Japan and China did not show much interest. The lack of bids was no better underscored than in the 7-year Treasury note auction where the median yield was 3.29% versus 3.05% a month earlier. April is a cruel month for the U.S. Treasury market, with 10-year yields rising in each of the past 4 Aprils and in 6 of the past 7, and by an average of 25 basis points. (As Alan Greenspan said on Bloomberg News last week, higher yields are “the canary in the mine”.)

These are danger signals for the US and the world. The US (and European) welfare states are unsustainable. Markets are going to destroy them. Are these the first cracks starting to appear?

This economic mess is not over. It has barely begun. The Fat Lady has not left the building. She is resting. She knows she will be singing soon and long.

Related posts:

  1. BIS Worried Central Banks Have Put Countries at Risk (6.314)
  2. Treasury Bonds without a Safety Net (6.049)
  3. Investors Beware (5.312)
  4. Australia Concerned About US Default (5.274)
  5. Exit Strategy or Going All In? (4.747)

We’re Not Going to Take It Anymore

We’re Not Going to Take It Anymore

Related posts:

  1. Nothing Matters (4.992)
  2. Ron Paul Interview (4.839)
  3. Wisdom – Friedman on Free Trade (4.757)
  4. Health Care In A Nutshell (4.464)
  5. Banksters Called Out (4.458)

Have We Lost our Minds?

Have We Lost our Minds?

Give me an excuse, any excuse to raise taxes. All I need is the slightest rationalization and I will propose a tax. That is the extent of the wisdom of elected officials at all levels of government. They are broke and like a cornered, wounded animal, will do anything to survive. Anything, that is, except recognize that government is not sustainable at these bloated levels and needs to be reduced dramatically.

Here is the latest wisdom: “Growing concerns about the dangers of indoor tanning beds are leading to new taxes — and possibly new restrictions — designed to curb the practice among young people.” (USA Today, Monday)

What does not provide an excuse for raising taxes?

Driving kills, so increase taxes on “excessive driving.” Eating kills, so increase taxes on “excessive calories.” Having babies sometimes kills and always raises medical costs, so let’s tax pregnant mothers. Playing football increases the risk of death and injury, so let’s tax high school football players (or their parents). Crossing the street raises your chance of injury — tax it! Exhaling increases CO2, so tax breathing. Exercising causes heavier breathing, so tax it even more. Living healthy increases Social Security payouts so tax it. Education includes risks that staying at home would not, tax parents to reflect the risks.

Hopefully we have reached the nadir this madness. Collectivism, the notion that you are owned by the State and your life is to be lived as it sees fit, must end now.

How long will it be before the American people say “enough” to the boobs in office? Will we ever return once again to sanity?

Probably not until the government and the economy completely collapses and we have to rebuild from the foundation up.

Related posts:

  1. USA as Japan – Our Lost Decade (5.804)
  2. Where We Lost Our Economic Footing: Keynes vs Mises (5.678)
  3. The Inevitability of Higher Interest Rates on Treasury Bonds (4.088)

Dems Ready to Demand Higher Corporate Earnings

Dems Ready to Demand Higher Corporate Earnings

According to the Wall Street Journal, the first cost increases of ObamaCare have already shown up:

Yesterday AT&T announced that it will be forced to make a $1 billion writedown due solely to the health bill, in what has become a wave of such corporate losses.

Democrats decided to raise taxes on companies that do the public service of offering prescription drug benefits to their retirees instead of dumping them into Medicare. We and others warned this would lead to AT&T-like results, but like so many other ObamaCare objections Democrats waved them off as self-serving or “political.”

On top of AT&T’s $1 billion, the writedown wave so far includes Deere & Co., $150 million; Caterpillar, $100 million; AK Steel, $31 million; 3M, $90 million; and Valero Energy, up to $20 million. Verizon has also warned its employees about its new higher health-care costs, and there will be many more in the coming days and weeks.

Apparently Democrats are so upset, they have called special hearings where the corporations will be required to explain why they incurred these losses.

Henry Waxman and House Democrats announced yesterday that they will haul these companies in for an April 21 hearing because their judgment “appears to conflict with independent analyses, which show that the new law will expand coverage and bring down costs.”

Incredibly, this moronic quote from Waxman is quite revealing regarding the IQ and/or integrity of our politicians in Washington. Is Waxman too dumb to understand that the costs of the Obamacare reforms will bury this country in additional costs? Perhaps he is so arrogant that he believes the lies of “independent analyses” can be obfuscated with a hearing filled with Washington double-speak. Regardless, political cover is no solution for economic catastrophe.

Apparently Waxman believes that company CEOs, in some fashion, are trying to spite Obama. These CEOs have taken write-downs that amount to 15 – 20% of their annual earnings. They risk declines in their stock prices of similar magnitudes. Because there are many more companies that will have to take these write-downs, there is a risk of a major market adjustment to reflect the lower earnings. Does any CEO want to see a major decline in his stock or in the overall stock market?

If all of this is potentially negative for the CEOs, why are they writing down earnings? They are forced to by existing law. If they did not, they would be in violation of SEC reporting requirements and accounting rules. They, not political lackies, have made the ultimate and objective “independent analyses” of Obamacare. This judgment was not political but economic.

The irony here is too sweet!  When have you heard Waxman and other Democrats upset because corporate earnings were too low? Never! Their position is always that corporations are making too much money. What a political world we live in! And what a mess the Dems have created. Sir Walter Scott described it well when he said:

Oh what a tangled web we weave when first we practice to deceive.

In order to protect the lies under which their ill-fated health-care abortion was passed, it appears Dems are willing  to intimidate CEOs to lie about corporate earnings.  No sane CEO will acquiesce. It is against SEC law and violates proper accounting principles.

Usually when Dems want to prosecute (persecute?) businessmen, it is because earnings are too high. Apparently, the ends do justify any means if you are a crazed ideologue.

Stay tuned, this “minor glitch” is just the start of such political contortions. The passage of time is unlikely to help the Democrats. It will only unveil more and more inconsistencies, inanities and duplicity.

Wisdom: Friedman on Fed

Wisdom: Friedman on Fed

Milton Friedman on dangers of allowing the Federal Reserve so much power:

“The power to determine the quantity of money… is too important, too pervasive, to be exercised by a few people, however public-spirited, if there is any feasible alternative. There is no need for such arbitrary power… Any system which gives so much power and so much discretion to a few men, [so] that mistakes – excusable or not – can have such far reaching effects, is a bad system. It is a bad system to believers in freedom just because it gives a few men such power without any effective check by the body politic – this is the key political argument against an independent central bank.”

Welcome to Capital Controls

Welcome to Capital Controls

Capital Flight

Welcome to Capital Controls.

It is likely that capital has been moving out of this country since the Obama Administration revealed its true colors. Steps like these are taken by dying, desperate countries. As people start to emigrate (i.e., a “brain drain”), look for laws to prevent that.

Once a government enters a downward spiral like the US and opts for such blatantly unconstitutional acts, there is no telling where or how far it will go. Hopefully the election of 2010 will bring politicians to their senses. If not, it is likely stronger actions by the populace will be taken.

The excerpt below is from Zerohedge. For those interested, read the full article.

On March 18, with very little pomp and circumstance, president Obama passed the most recent stimulus act, the $17.5 billion Hiring Incentives to Restore Employment Act (H.R. 2487), brilliantly goalseeked by the administration’s millionaire cronies to abbreviate as HIRE. As it was merely the latest in an endless stream of acts destined to expand the government payroll to infinity, nobody cared about it, or actually read it. Because if anyone had read it, the act would have been known as the Capital Controls Act, as one of the lesser, but infinitely more important provisions on page 27, known as Offset Provisions – Subtitle A—Foreign Account Tax Compliance, institutes just that. In brief, the Provision requires that foreign banks not only withhold 30% of all outgoing capital flows (likely remitting the collection promptly back to the US Treasury) but also disclose the full details of non-exempt account-holders to the US and the IRS. And should this provision be deemed illegal by a given foreign nation’s domestic laws (think Switzerland), well the foreign financial institution is required to close the account. It’s the law. If you thought you could move your capital to the non-sequestration safety of non-US financial institutions, sorry you lose – the law now says so. Capital Controls are now here and are now fully enforced by the law.

Social Security -- From Political Penthouse to Dog House

Social Security -- From Political Penthouse to Dog House

The darling of the politicans in Washington has become not-so darling. Social Security, for decades a hidden slush fund that allowed pols to spend beyond what they taxed, has turned into an albatross. The Ponzi Scheme has unraveled.

According to the NY Times, less than two years ago, Social Security Trustees projected the fund would have income exceeding expenses until 2037:  “The trustees did foresee, in late 2008, that the recession would be severe enough to deplete Social Security’s funds more quickly than previously projected. They moved the year of reckoning forward, to 2037 from 2041.”

Last year the crossover estimate was revised to 2017. Surprise! Surprise! The program is now in deficit. From this point on, there is nothing for politicians to “steal” from the “trust fund.” Instead, they will have to use general tax revenues to fund Social Security shortfalls. The fund has flipped from a cash-generator to a cash-eater.

How important was this source of revenue to politicians? An earlier post indicated: “The size of the slush fund was substantial. Over $5 Trillion was removed and spent. To put this into perspective, this amount was enough to cover total Federal spending for the first four years of the first Clinton Administration.”

This year the need is reasonably small. Next year the shortfall will be larger, ditto every year thereafter. The rate at which the deficit grows is mind-boggling. After all, the present value of the shortfall is estimated at $17.5 Trillion. That means the rate at which taxes will have to be increased to pay for government programs and the shortfalls need to increase at a mind-boggling rate.

Welcome to the collapsing world of government. Welcome to the beginning of the end of the welfare state here and around the world. The bills for all the good intentions are coming due. There is no way they can be paid.

Remember when George Bush wanted to privatize Social Security? Back then, it was probably reasonable to change the fund and not renege on promised benefits. Now it is probably not possible, such is the rate of deterioration in the fund.

At some point the privatization idea will be raised again. This time it will receive “broad political support.” There will be no principle involved. As a slush fund, the program had value for pols. As a cash drain, it is a liability that cuts into the “profitable” part of their criminal enterprise.  It will be exorcised in some fashion.

It will likely be dumped on the American people, in the same fashion that bad banking loans have been.

Related posts:

  1. Social Security: So Simple A Caveman Could Run It. (17.529)
  2. Political Cannibalism Democrat Style (8.564)
  3. Moral Hazard Destroys Social Capital and Cooperation (6.159)
  4. Political Turnaround Specialists Needed (5.257)
  5. Drain The Political Swamp (5.161)

Healthcare and Detroit: Murdered by Government

Healthcare and Detroit: Murdered by Government

The recent passage of Obamacare is madness not seen before in this country. Any cursory review of government indicates that it fails at everything it does. It destroys rather than heals.  Just a few examples are the following:

  • Social Security is insolvent.
  • Medicare and Medicaid are insolvent.
  • The Post Office, despite being a monopoly, is incapable of paying for itself.
  • Amtrak is in similar condition.
  • The War on Drugs has served to enrich organized crime while drug use has risen.
  • The War on Poverty has destroyed the black family and created more poverty.

Now we finish the country off with Obamacare. It will bankrupt the government and destroy the economy.

The following article deals with your future healthcare and the death of the city of Detroit. The problems in Detroit are the same type of problems that healthcare in this country will experience. They have the same administrator.

Health Care and Detroit: Killed By Government

by Gary North
by Gary North

To understand what is going to happen to America’s health care delivery system, we must first understand what has happened to Detroit.

Detroit is dying. Yes, I know that there are lots of books on “The Death of. . . .” That word sells books. But Detroit really is dying. It is the first metropolis in the United States to be facing extinction. We have never seen anything like this in American history. It is happening under our noses, but the media refuse to discuss it. To do so would be politically incorrect. Two factors tell us that Detroit is dying. The first is the departure of 900,000 people – over half the city’s population – since 1950. It peaked at 1.8 million in 1950. It is down to about 900,000 today.

In 1994, the median sales price of a house in Detroit was about $41,000. The housing bubble pushed it up to about $98,000 in 2003. In March 2009, the price was $13,600. Today, the price is $7,000. Check the price chart.

« Continue reading Healthcare and Detroit: Murdered by Government »

Michael Kinsley’s Intuition is better than “Expert Opinion”

Michael Kinsley’s Intuition is better than “Expert Opinion”

In an article in Atlantic Monthly entitled My Inflation Nightmare, Michael Kinsley worries about the future of the economy. He fears that inflation, perhaps hyperinflation, is a likely next stage in the economic crisis. His fears contradict respected liberal economists, Paul Krugman and Larry Summers. They argue that deflation is the likely outcome.

Mr. Kinsley defers to their expertise and exhibits proper liberal loyalty by modulating his position. He apparently trusts these economists more than his own intellect and instincts. He remembers being stigmatized as a “fiscal sado-conservative” (whatever that means) when he strayed from the liberal position once before.

Mr. Kinsley should realize that it was these and similar experts that got us into this mess. Neither saw it coming, despite their expertise and mathematical Keynesian models. One is an ideologue and the other an employee of the Administration. Does Mr. Kinsley believe they could publicly speak out against inflation, even if they believed it to be a certainty?

Kinsley’s intuitive conclusion is grounded in “the realm of psychology.” If, by that, he means human behavior and motives, he is on sounder ground than most so-called economists. Proper economics always has been the study of human action. Abstract mathematical models, introduced in the Keynesian Revolution, banished human and political motivations from consideration. Economics was then reduced to a sterile black-box contraption, at least in the minds of “sophisticated” Keynesians.

The key insight and worry in Kinsley’s article is that “no one in a position to act has proposed a realistic way out of this debt.…”  Is it possible no one understands the problem? Perhaps they have been too busy to deal with it. He muses about this issue in a way that suggests he may know the answer but not want to reveal it. Quite simply, the issue is ignored because there is no politically palatable solution!  It is impossible for the US Government to honor its obligations.

To understand the predicament, numbers are necessary. The Federal debt, approximately $12.5 Trillion, represents funded debt. The unfunded promises associated with Social Security, Medicare and Medicaid represent an additional liability of $106 Trillion, according to trustee estimates.

A $106 Trillion cash infusion is required today to make these programs solvent. But the entire net worth of the entire country is only about $55 Trillion. If the US government confiscated every single asset in this country, these programs, would still be insolvent. And so would every citizen and corporation in the country. Quite simply, these programs promise twice what the country is worth!

In “Spiraling to Bankruptcy” various methodologies were used to illustrate Federal insolvency. Because large numbers are incomprehensible, they were translated into everyday examples. One example used the analogy of a family:

The Federal Government collects about $2.5 Trillion in total revenues a year. That is from all sources of taxes and fees. Think of that as an individual’s annual gross salary. The debt owed by the Government can be looked at as a great big mortgage. Thus, we have a family that has a mortgage 44.8 times greater than gross salary. That would be the equivalent of a man earning $50,000 gross salary having a mortgage of $2,240,000! An interest-only mortgage at 6% would require the family to pay annual interest of $134,000 per year. A conventional mortgage would be much higher. The example becomes even more ludicrous when one recognizes that taxes, food, clothing, savings, etc. all have to be subtracted from gross pay to determine what is left for debt service.

When we shift back to the Federal Government, the family analogy becomes even more absurd. The Federal Government has nothing left from their “gross pay.” Their “living expenses” actually exceeded their gross pay by $1.2 trillion last fiscal year. That is, they spent almost 50% more than they made. Comparable behavior is budgeted for the next ten years.

Mr. Kinsley’s formal training in economics may be limited, but his instincts are sound. None of the above is economics; it is simple math and the math is irrefutable. That is the reason that “no one in a position to act has proposed a realistic way out of this debt.…” Other than default, there is no way out.

The government is in what is known as a Debt Death Spiral. They are unable to pay the actual and implied interest on their debt. Each year the unpaid balance is added back to the amount owed, making the problem worse next year. This debt spiral grows exponentially. There is no way to escape the certain mathematical end.

Jose Pinera described the problem and the solution:

The welfare state has really become an arbitrary “entitlement state,” where everyone uses the state to rob someone else, and politicians from the right and the left play the transfer game to win elections. This crisis may serve to reveal the true nature and enormous flaws of the welfare state. Sooner or later, [states] will have to dismantle it and move toward a paradigm of personal responsibility — that is, a system of personal accounts for pensions, health and unemployment benefits.

The political class is unwilling to accept the Pinera solution. They consider the Ponzi-scheme social programs sacrosanct. “Vote for me and I will take benefits away from you” has never been a winning political strategy.

Mr. Kinsley’s fears that government will resort to inflation to mitigate the problem are correct. Bernanke must continue quantitative easing (“printing money”) because not doing so would shut the government down.  Inflation will occur, but it is no solution. It is merely a holding-action charade, a “pretend and extend” strategy that markets will eventually disrupt.

Ultimately Pinera’s solution will be imposed here and in Europe where conditions are just as perilous. It will be painful for Mr. Kinsley and those of the liberal persuasion. But, unless someone repeals the laws of mathematics, it is the only solution. No sane economist can argue against mathematics.

While President Obama inherited a mess, he has done yeoman’s work in worsening matters. To think that we can add another massive entitlement on top of this situation is utter madness. The first euthanasia patient under the new health care program is apt to be the Federal Government itself.

When the history books are written a century or so from now, it is likely that the Twentieth Century will be referenced as “The Myth of Government.” Hopefully the Ponzi nature of government is understood in time to return government to the role intended by our Founding Fathers.

The fate of civilization depends upon such a correction.

This article was originally posted on PajamasMedia

Related posts:

  1. IBD’s Schizophrenic Opinion (6.334)
  2. Spiraling to Bankruptcy (6.139)
  3. Wisdom: Eisenhower and Michael Crichton on Science (5.939)

Another Analysis of Obama

Another Analysis of Obama

Mary Ellen Synon from Brussels provides this analysis of Barack Obama and her perception of how he views the world. It is a thought-provoking analysis based upon his roots or lack thereof. Her analysis appears to be consistent with his behavior to date. If correct, the implications are significant for Western democracies.

Obama turban smallNow that President Obama has done enough back-room deals to get the Democrats’ health care legislation through the House of Representatives, he can resume making plans for a visit to his childhood home, Indonesia. The trip was on for this week, but the White House cancelled it so Obama could stay in Washington to push through the Bill.

Once he lands at Jakarta, capital of the world’s largest Muslim state, he probably won’t make the same mistake he made a few years ago in Kenya, when he let himself be photographed wearing a turban. Still, he may find it hard to resist the urge to go native.

One of the reasons a lot of Americans find Obama oddly foreign is that he had an oddly foreign childhood: his formative years were spent in Indonesia. His half-sister, Maya Soetoro Ng, was born there. The rest of Obama’s childhood was spent in Honolulu, a Pacific Ocean capital soaked in East Asian culture.

« Continue reading Another Analysis of Obama »

Beggar-thy-Neighbor Pressures Increase

Beggar-thy-Neighbor Pressures Increase

The forces of the worldwide recession are starting to be felt in defensive moves. According to Bloomberg: “Initiatives to curb imports are rising around the world, threatening ‘disastrous consequences,’ the head of the Organization for Economic Cooperation and Development said today.”

The same motivations produced the Smoot-Hawley legislation during the 1930s that exacerbated the Great Depression. While economists pretty are pretty much in agree on the harmful effects of such actions and policies, they are tempting for politicians to employ as “protectors” of local jobs and industries.

Just as harmful is the weakening of one’s currency so as to make exports cheaper to foreigners and imports more expensive. The US has stepped up its pressure on China to let the yuan float. That is a way to devalue the dollar vis a vis the yuan. All countries seem to prefer weaker rather than stronger currencies. Yet this “beggar thy neighbor” cannot work for all.

Protectionism, whether in the form of tariffs or currency manipulation, will cause world trade to shrink. To the extent that occurs, the nations of the world will be made worse off.  If there is a race to devalue currencies, that will rise inflation around the world.

Despite these knowns, politicians will do what is in their best interests, not yours or neighboring countries.

More of Washington's Charade

More of Washington's Charade

The Fantasy World as Seen by The Federal Reserve and The Washington Post

Is our populace considered so ignorant that they can be told anything? Or, is it possible that our leaders are so dumb as to not recognize reality? Neither hypothesis (and they are not mutually exclusive) is flattering or hopeful. Yet, those are the only hypotheses that appear plausible based on Bernanke’s Thursday testimony and the reporting of it.

An article in the Washington Postattributed to “Staff Writer” (I would not want my name attached to it either) reported:

The Federal Reserve is open to selling some of the securities now on its books as part of its withdrawal from its unconventional efforts to prop up the economy, Chairman Ben S. Bernanke said Thursday, in a change of tone on how the Fed will execute its exit strategy from crisis-era interventions.

What an amazing insight! What the Fed bought is toxic waste. The banks couldn’t give this junk away, yet the Fed paid face value. Who wouldn’t want to get that off their books? The more difficult question is what fool(s) would want to put it on their books. Who would buy the crap (and at what price)?

The Post article reported that Bernanke testified before the House Financial Services Committee that the Fed “has the option of redeeming or selling securities….” While technically a correct statement, the reality is that there are no buyers that would be willing to pay anywhere near what the Fed carries these assets on their books.

“We can always sell assets,” Charles Plosser, president of the Federal Reserve Bank of Philadelphia, said in an interview last week. “I think we need to be open to that. In the long run, the Fed needs to get back to a balance sheet . . . that looks like all Treasurys, and is at a much smaller level. . . . Ultimately we have to shrink the balance sheet.”

The observations made by Plosser are akin to motherhood and apple pie. Virtually no one (except a few oddball Keynesians or monetary cranks) would disagree.  The issue, of course, is how this can be done. The answer is that it cannot be done now or probably any time in the near future. There are several reasons for this:

  • Selling the assets in a free market will not bring anywhere near their face value. As of December 2009, the Fed’s balance sheet had exploded to $2.3 Trillion in assets. (It is probably larger today.) Prior to the crisis, the Fed had $800 billion of assets. To return to pre-crisis levels would mean selling $1.5 Trillion in assets. To return to a balance sheet of “all Treasurys” would requires a sale in excess of $2.0 Trillion and a purchase of about $500 billion of Treasurys. The graph below shows the Fed Balance Sheet from December:
  • It is impossible to accurately estimate what the Fed can sell these assets for. If they were to get 50% of what they paid, then there would be a permanent increase in the money supply of between $750 billion and $1 Trillion. That represents an increase of 100% plus from the start of the crisis.
  • The economy is nowhere near a point where the Fed can drain liquidity from the system. It is likely we will have a double-dip in the economy despite all of their stimulus. My prediction is that there balance sheet continues to grow. It is unlikely there will be a “good time” to remedy this problem within the next ten years.
  • Another reason to believe that there is unlikely to be any reduction in the Fed’s balance sheet is the continuing need to finance government spending that is projected to exceed tax revenues by $10 Trillion over the next ten years. Given the deteriorating condition of the government balance sheet, it is unlikely that debt markets will be able to tapped to fill the shortfall. That either leaves the Fed as a buyer of Treasuries or the dismantling of the welfare state as we know it.

The charade that the stimulus is temporary and can be withdrawn in some orderly manner continues to be perpetuated by both the Fed and its accomplices in the media. Neither position is plausible. It is likely also that neither are possible. My guess is that the Fed balance sheet crosses $3 Trillion in assets before it ever drops to $1.5 Trillion. We will be lucky to ever see $1.5 Trillion again. We also will be lucky if we never exceed $3 Trillion. Interesting and treacherous times are upon us.

Global Economy Spins Out of Control?

Global Economy Spins Out of Control?

The Daily Bell often has interesting articles. Here is one that is one that might be of interest to you. Read it in conjunction with John Mauldin’s letter which was posted today also.

Global Economy Spins Out of Control?

Tuesday, March 23, 2010 – by  Staff Report
Angela Merkel

The stage is set for a showdown between Angela Merkel (left) and Jose Manuel Barroso, the European commission president, after the German chancellor said a bailout for Greece should not be on the agenda of this week’s EU summit in Brussels. Barroso had called for the eurozone countries to use the two-day meeting to agree to a co-ordinated package of loans that could be quickly put in place if the Greek government decided it needed help to reduce its ballooning budget deficit. He warned that the financial markets were being unsettled by the lack of clarity. But Merkel said in a radio interview that Greece was not in danger of default and aid for the country would not be a topic at the summit, which starts on Thursday. “There’s no looming insolvency,” Merkel told Deutschlandfunk. “I don’t believe that Greece has any acute financial needs from the European community and that’s what the Greek prime minister keeps telling me.” She said it was the persistent speculation about a possible bailout that was creating the volatility in the financial markets and warned against raising “false expectations” that other eurozone economies would come to Greece’s rescue. The euro took a tumble last week, dropping to $1.35, amid all the talk about a possible bailout. “I don’t see that Greece needs money at the moment and the Greek government has confirmed that. That’s why I’d urge us not to stir up turbulence in the markets by raising false expectations for Thursday’s council meeting,” Merkel said. – UK Guardian

Dominant Social Theme: It will come right eventually, won’t it?

Free-Market Analysis: Is the world spinning out of control? Europe, America and Asia face significant challenges and it is not at all clear that these are currently being surmounted. This article will take a brief look at the world’s trouble spots and then suggest what can be done –if anything – both from an investment perspective and a sociopolitical one. (Yes, dear reader, in this single article, we are capable of doing such a thing, sure we are!)

To read rest of article, click here.

Signs of A Dying Country

Signs of A Dying Country

Surprise, surprise! Who could have known that everything done so far would not work and would make things worse?

Most non-Keynesian economists could have told you. Likewise most other human beings with an IQ above 100, not on the government payroll or flacking for them might also have told you.

Despite all the cheerleading from “pundits” and political hacks, conditions are not improving. This chart shows Net Private Investment for the past 70 years. The media focused on the recent little blip and headlined a “recovery” from the prior month. There was a slight improvement, but we are still near 70 year lows.

A more meaningful analysis would look at the chart from the perspective of the rather consistent decline over this period. Virtually each peak is lower than the prior one, and each trough is also. Rather than optimism from the recent blip, a serious underlying problem is apparent. The economy is dying slowly. It is ratcheting toward ruin. The Europeanization of America is producing the same effects it did in Europe.

Keynesian solutions became fashionable in the 1960s with the Kennedy “best and brightest” economic team. Ever since that time, every economic problem was met with a Keynesian response. Every response grew the size and role of government. We used debt and monetary injections to sustain bad investments. Over time, the effectiveness of each stimulus diminished, requiring larger and larger doses. The internals of the economy became weaker in each cycle.

The above chart shows capital decumulation or as Ludwig von Mises describe it, “eating the seed corn.” Capital creation is necessary in order for an economy to grow and living standards to increase. Only dying economies show patterns like this.

Charts pertaining to GDP growth, weekly wages, etc. show the same ominous decline. For example, real weekly wage rates are below where they were in 1964 and have been since 1977. The employment chart to the right shows employment as a percentage of the population. It shows the same pattern as private investment and other internal economic indicators.

We are experiencing an economic crisis that started in the 1960s and dramatically accelerated in the 1970s. The economy now rests on a foundation of sand. Weaknesses can no longer be covered up via debt and government spending. That is the cause of the problem, not the solution. Continuing to perpetuate this charade will make matters worse. The problem is secular and results from a leviathan government. The solution is to diminish the government sector so that the private sector can return to former productivity levels. That is the only way to improve the living standards of the country.

It is unlikely that solution will be tried or even recommended until the economy collapses. A major crisis is the only way to effect the political change necessary to solve the economic problems.

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