Monty Pelerin's World

The charade gets more binding as Treasury rates increase. Bernanke believes this might be “because of a lack of confidence by creditors in the long-term fiscal stability of the government….[my emphasis]” Well, duh, why might he think that? Could it be because the US is insolvent and going deeper into a hole every single day? Could it be because the feckless credit ratings agencies have warned of a downgrade? Perhaps it is just warnings from our major creditors such as China that has clued him in.

Bernanke’s testimony is always for the tourists. He cannot express what he presumably knows. At least one hopes he has more sense than he expresses. Thus one must read between the lines and deconstruct his words, recognizing they are Fedspeak and not forthright.

The post below appeared in Zerohedge. It translates “Bernankespeak.”

From The Daily Capitalist:
Chairman Bernanke reaffirmed again the Fed’s commitment to low interest rates because the U.S. economy is still weak. Bernanke also said that the federal government’s fiscal situation “looks dark” and that he is worried about the ability of the Treasury to sell debt:
“Interest rates might rise because of a lack of confidence by creditors in the long-term fiscal stability of the government,” and “high interest rates tend to slow the economy,” he said.
Today’s auction of paper by the Treasury saw rates creep up. Not a good sign for them.
Bernanke ticked off the latest positive signs in the economy, but was cautious about the sustainability of the perceived recovery. In his written testimony before Congress today, he said:
At its meeting last week, the FOMC maintained its target range for the federal funds rate at 0 to 1/4 percent and indicated that it continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.
Let me translate:
Business is still lousy, credit has dried up and we can’t shake it loose, and unemployment remains a huge problem for us. We keep trying to inflate but nothing works. So, we’ll just keep doing what we’ve been doing. We can’t think of what else to do right now.
The rest of his testimony dealt with the issue of how to drain the money pond once recovery starts to kick in. When you have no new ideas on how to spur the economy or free us from the “liquidity trap,*” you talk about exit strategy.
As I’ve said before, their exit strategy is a big gamble for the Fed. If banks decide they want to lend, they will because they need to service their customers and make money. Getting interest on their deposits with the Fed might not be sufficient to overcome their business requirement to generate loans.
Watch for a hasty retreat from any tightening in Q3 or Q4 when the numbers go south.

* I believe that the so called liquidity trap is something the Fed and Treasury created with the bailouts, TARP, TALF, mark-to-make-believe, and extend and pretend. Credit will remain stuck until banks rid their balance sheets of bad debt, which now is mostly CRE related

The end of bloated government is near. It is inevitable because it is not sustainable. Taxpayers will not continue to support inefficiencies and waste and inflated staffing and wages. They are unable to. The economy is down and likely will remain so for several years. People are hurting and will continue to be under economic pressures.

Government at all levels will fight the inevitable. Some, primarily at the municipal and state levels are beginning to recognize the future. They don’t have the luxury of a printing press like the Federal government. But market forces and public dissatisfaction will eventually bring national politicians to their senses or their early retirements. Hopefully not too much damage occurs before this happens.

Mish provides a nice collection of links that indicate what is happening at lower levels of government. Could anyone even imagine these cutbacks just three years ago?

This is a visualization of what the Fed is doing:

The chart is from a Martin Weiss article dealing with Bernanke and Fed irresponsibility.

The current path is unsustainable and must be stopped. There are only three options according to Thomas Hoenig, President of the Federal Reserve Bank of Kansas City. Weiss describes the Hoenig’s three options,

Path #1 — Monetize. The government runs massive deficits and borrows without restraint. At the same time, the Federal Reserve monetizes the debt — finances it by running the nation’s printing presses. This is the path of least resistance for politicians … and of greatest danger to the nation.

Yet, unfortunately, as evidenced by the explosion in the monetary base illustrated above, it’s also the speedway down which the Fed is now racing.

Path #2 — Policy stalemate. As in path #1, the government runs massive deficits and borrows without restraint. But the Federal Reserve refuses to finance it. Instead, the Fed lets the natural supply and demand for debt drive interest rates higher.

Soon, the government finds it is too expensive — or nearly impossible — to borrow. And ultimately, Washington has no choice but to slash spending despite any near-term consequences.

This is what’s happening to many governments around the world right now — not only in Greece, but also in California, Arizona, New Jersey, Massachusetts, plus scores of other state and local governments across the USA. In the final analysis, Washington cannot avoid a similar day of reckoning.

Path #3 — Fiscal discipline. The government takes strong pro-active steps to reduce the deficit. This is, of course, extremely tough politically in the absence of a massive fiscal and financial crisis. But unless pursued promptly and aggressively, the government winds up forced to do it anyhow — albeit with more urgency and greater trauma for the country and its people.

I have speculated in “Obama’s Ides of March” that Bernanke will choose Path #1. To do otherwise would be to shut the government down. I do not believe they can borrow the amounts required at anywhere near reasonable interest rates. Path #2 drives interest rates up so high that any chance of an economic recovery is quashed.

Path #3 is the only solution. It will be the last one tried and done so when our situation is much worse.

‘Rithmetic Is Getting Harder

Little did Richard Feynman know when he made his humorous observation how bad things were going to get:

There are 10^11 stars in the galaxy. That used to be a huge number. But it’s only a hundred billion. It’s less than the national deficit! We used to call them astronomical numbers. Now we should call them economical numbers.

No, we have not discovered more planets. It is economics, or rather politics that creates the need for larger numbers. Printing money ensures that our numbering system will grow. In words attributed to Ludwig von Mises:

Government is the only agency which can take a useful commodity like paper, slap some ink on it, and make it totally worthless.

How many of these numbers will our grandchildren know in their lifetimes?

A comment by uno to an article on Zerohedge
on Tue, 03/23/2010 – 15:49
#273684

Next:

1,000 X 1 billion = 1 trillion (1012)
1,000 X 1 trillion = 1 quadrillion (1015)
1,000 X 1 quadrillion = 1 quintillion (1018)
1,000 X 1 quintillion = 1 sextillion (1021)
1,000 X 1 sextillion = 1 septillion (1024)
1,000 X 1 septillion = 1 octillion (1027)
1,000 X 1 octillion = 1 nonillion (1030)
1,000 X 1 nonillion = 1 decillion (1033)
1,000 X 1 decillion = 1 undecillion (1036)
1,000 X 1 undecillion = 1 duodecillion (1039)

Other very large numbers are:
One googol = 10100
One googolplex = 10googol
One googolplexian = 10googolplex

A new data point now to be supplied byZerohedge on a daily basis.

Emphasis added by me. The largest deficit in history was the profligate George Bush. His record, $455 Billion in 12 months. That looks like small change now. We added half of that in just the  past three weeks!

We truly are Spiraling to Bankruptcy. Head for the bunker. This cannot hold together much longer.

Why not add on a massive new entitlement. That will surely help matters.

Just in case some people forget what the trade off to the market melt up is, today we are starting a periodic daily report of the Treasury’s total debt subject to the statutory limit. Today’s total: $12,607,140,000,000. We started March at $12,383,717,000,000. We started the fiscal year (October 1) at $11,853,434,000,000. We have added $223 billion of debt in the last three weeks, and $755 billion in just 5 months. As a reminder, the debt limit is $14.3 trillion. We are $1.7 trillion away from the limit. At March’s run-rate of about $300 billion per month, the debt ceiling will be breached by October 2010. If somehow the government manages to reduce the monthly issuance to “just” $200 billion, we have eight and a half months until breach, or January 2011.

It is difficult to determine when we have reached or passed the “tipping point” regarding inflation or hyperinflation. This post from bearish news is an excellent one for anyone concerned about hyperinflation.  It reviews Peter Bernholtz’ results from studying many national hyperinflations:

Hayman Advisors provided a good summary of Bernholz’s research in their October letter (viaFS):

“ There have been 28 episodes of hyperinflation of national economies in the 20th century, with 20 occurring after 1980. Peter Bernholz (Professor Emeritus of Economics in the Center for Economics and Business (WWZ) at the University of Basel, Switzerland) has spent his career examining the intertwined worlds of politics and economics with special attention given to money. In his most recent book, Monetary Regimes and Inflation: History, Economic and Political Relationships, Bernholz analyzes the 12 largest episodes of hyperinflations – all ofwhich were caused by financing huge public budget deficits through money creation. His conclusion: the tipping point for hyperinflation occurs when the government’s deficit exceed 40% of its expenditures.”

The US will have a deficit exceeding 40% this year.

There are links in the article to investment strategies to protect oneself from high inflation, including specific funds. A good read.

According to the latest CBS polling, Nancy Pelosi has an 11% favorability rating and Harry Reid an 8%. Those are amazing results. Given the American educational system, one would think that Osama bin Laden would poll that high.

Root Canals and Colonoscopies would likely outpoll these two.

This email probably sums up the mood of much of the country. I know nothing about the individual who wrote it or what party he belonged to. That doesn’t matter. Both parties are to blame for creating the condition this country finds itself in. It didn’t start with Obama. This guy pretty much says it all.  Robert  A. Hall is a Marine, Vietnam veteran, who served five terms in the Massachusetts State Senate…

This is a long artical but well worth the read! “I’m 63 and Im Tired” by Robert A. Hall

I’m 63.  Except for one semester in college when jobs were scarce and a six-month period when I was between jobs, but job-hunting every day, I’ve worked, hard, since I was 18. Despite some health challenges, I still put in 50-hour weeks, and haven’t called in sick in seven or eight years. I make a good salary, but I didn’t inherit my job or my income, and I worked to get where I am. Given the economy, there’s no retirement in sight, and I’m tired. Very tired. I’m tired of being told that I have to “spread the wealth” to people who don’t have my work ethic. I’m tired of being told the government will take the money I earned, by force if necessary, and give it to people too lazy to earn it. I’m tired of being told that I have to pay more taxes to “keep people in their homes.”  Sure, if they lost their jobs or got sick, I’m willing to help. But if they bought McMansions at three times the price of our paid-off, $250,000 condo, on one-third of my salary, then let the left-wing Congress-critters who passed Fannie and Freddie and the Community Reinvestment Act that created the bubble help them with their own money. I’m tired of being told how bad   America  is by left-wing millionaires like Michael Moore, George Soros and Hollywood Entertainers who live in luxury because of the opportunities   America  offers. In thirty years, if they get their way, the United States  will have the economy of   Zimbabwe , the freedom of the press of   China , the crime and violence of Mexico , the tolerance for Chris tian people of   Iran , and the freedom of speech of Venezuela . I’m tired of being told that Islam is a “Religion of Peace,” when every day I can read dozens of stories of Muslim men killing their sisters, wives and daughters for their family “honor”; of Muslims rioting over some slight offense; of Muslims murdering Chris tian and Jews because they aren’t “believers”; of Muslims burning schools for girls; of Muslims stoning teenage rape victims to death for “adultery”; of Muslims mutilating the genitals of little girls; all in the name of Allah, because the Qur’an and Shari’a law tells them to. I’m tired of being told that “race doesn’t matter” in the post-racial world of Obama, when it’s all that matters in affirmative action jobs, lower college admission and graduation standards for minorities (harming them the most), government contract set-asides, tolerance for the ghetto culture of violence and fatherless children that hurts minorities more than anyone, and in the appointment of U.S. Senators from Illinois. I think it’s very cool that we have a black president and that a black child is doing her homework at the desk where Lincoln  wrote the Emancipation Proclamation. I just wish the black president was Condi Rice, or someone who believes more in freedom and the individual and less arrogantly of an all-knowing government.I’m tired of a news media that thinks Bush’s fundraising and inaugural expenses were obscene, but that think Obama’s, at triple the cost, were wonderful; that thinks Bush exercising daily was a waste of presidential time, but Obama exercising is a great example for the public to control weight and stress; that picked over every line of Bush’s military records, but never demanded that Kerry release his; that slammed Palin, with two years as governor, for being too inexperienced for VP, but touted Obama with three years as senator as potentially the best president ever. Wonder why people are dropping their subscriptions or switching to Fox News?  Get a clue. I didn’t vote for Bush in 2000, but the media and Kerry drove me to his camp in 2004.   I’m tired of being told that out of “tolerance for other cultures” we must let   Saudi Arabia use our oil money to fund mosques and madrassa Islamic schools to preach hate in   America , while no American group is allowed to fund a church, synagogue or religious school in   Saudi Arabia  to teach love and tolerance. I’m tired of being told I must lower my living standard to fight global warming, which no one is allowed to debate. My wife and I live in a two-bedroom apartment and carpool together five miles to our jobs. We also own a  three-bedroom condo where our daughter and granddaughter live. Our carbon footprint is about 5% of Al Gore’s, and if you’re greener than Gore, you’re green enough.I’m tired of being told that drug addicts have a disease, and I must help support and treat them, and pay for the damage they do. Did a giant germ rush out of a dark alley, grab them, and stuff white powder up their noses while they tried to fight it off? I don’t think Gay people choose to be Gay, but I damn sure think druggies chose to take drugs. And I’m tired of harassment from cool people treating me like a freak when I tell them I never tried marijuana. I’m tired of illegal aliens being called “undocumented workers,” especially the ones who aren’t working, but are living on welfare or crime. What’s next?  Calling drug dealers, “Undocumented Pharmacists”?  And, no,  I’m not against Hispanics. Most of them are Catholic, and it’s been a few hundred years since Catholics wanted to kill me for my religion.  I’m willing to fast track for citizenship any Hispanic person, who can speak English, doesn’t have a criminal record and who is self-supporting without family on welfare, or who serves honorably for three years in our military…. Those are the citizens we need. I’m tired of latte liberals and journalists, who would never wear the uniform of the Republic themselves, or let their entitlement-handicapped kids near a recruiting station, trashing our military. They and their kids can sit at home, never having to make split-second decisions under life and death circumstances, and bad mouth better people than themselves. Do bad things happen in war?  You bet. Do our troops sometimes misbehave?  Sure. Does this compare with the atrocities that were the policy of our enemies for the last fifty years and still are?  Not even close.  So here’s the deal. I’ll let myself be subjected to all the humiliation and abuse that was heaped on terrorists at Abu Ghraib or Gitmo, and the critics can let themselves be subject to captivity by the Muslims, who tortured and beheaded Daniel Pearl in Pakistan, or the Muslims who tortured and murdered Marine Lt. Col. William Higgins in Lebanon, or the Muslims who ran the blood-spattered Al Qaeda torture rooms our troops found in Iraq, or the Muslims who cut off the heads of schoolgirls in Indonesia, because the girls were Chris tian. Then we’ll compare notes. British and American soldiers are the only troops in history that civilians came to for help and handouts, instead of hiding from in fear. I’m tired of people telling me that their party has a corner on virtue and the other party has a corner on corruption. Read the papers; bums are bipartisan. And I’m tired of people telling me we need bipartisanship. I live in   Illinois , where the “Illinois Combine” of Democrats has worked to loot the public for years. Not to mention the tax cheats in Obama’s cabinet. I’m tired of hearing wealthy athletes, entertainers and politicians of both parties talking about innocent mistakes, stupid mistakes or youthful mistakes, when we all know they think their only mistake was getting caught. I’m tired of people with a sense of entitlement, rich or poor. Speaking of poor, I’m tired of hearing people with air-conditioned homes, color TVs and two cars called poor. The majority of Americans didn’t have that in 1970, but we didn’t know we were “poor.” The poverty pimps have to keep changing the definition of poor to keep the dollars flowing. I’m real tired of people who don’t take responsibility for their lives and actions. I’m tired of hearing them blame the government, or discrimination or big-whatever for their problems. Yes, I’m damn tired. But I’m also glad to be 63. Because, mostly, I’m not going to have to see the world these people are making. I’m just sorry for my granddaughter.

“House Democrats approved a far-reaching overhaul of the nation’s health system on Sunday, voting over unanimous Republican opposition to provide medical coverage to tens of millions of uninsured Americans after an epic political battle that could define the differences between the parties for years.” (New York Times, Monday)

The so-called healthcare reform bill has passed. Left in place, it fundamentally changes the entire nature of the US. We are no longer free people. That the bill could even be considered seriously suggests that we had lost much of our freedom before its passage. Dr. Edward Vieira described the situation:

On the face of it, then, the present national-health care bills, being (in Madison’s formulation) “[proposed] laws not obligatory on the legislature, as well as on the people”, are the products and the making of nothing less than tyranny. As the English political philosopher John Locke defined it: “Tyranny is the exercise of Power beyond Right, which no Body can have a Right to. And this is making use of the Power any one has in his hands; not for the good of those, who are under it, but for his own private separate Advantage.”

Now what?

Attempts will be made to repeal the bill, or at least the worst parts of it. These will play out slowly in the court system. There will be an election in November where people can express their anger through conventional channels. It is likely that the Democrat Party will suffer the consequences of their egregious act by losing majorities in one or both houses of Congress. There may be isolated acts of social unrest or violence before or after the election.

On a day to day basis, life will go on. Pundits will discuss matters as if they were no more important than the news from your local paper — a student wins a scholarship, a zoning fight erupts over a proposed Walmart, etc. etc. The media will deal with court challenges, social unrest, and other incidents as isolated events with no relationship to the bigger picture of history. The small details of daily living will blur the contextual importance of what has occurred.

Yet things have changed, and it is unlikely they can ever return to their previous state. The noblest experiment in human liberty and dignity has died. The “Shining City on the Hill” is gone. The US has turned into just another quasi-free state, much like the sclerotic, dying welfare states of Old Europe. It is likely finished as a beacon of opportunity and liberty. Our grandchildren’s grandchildren will learn of their prior heritage and wonder what happened. The “British stiff upper lip” is apt to be adopted to hide the reality of the fall from greatness.

As you read this, capital flight is occurring or contemplated. New investments will not be made here but abroad. Individuals are exploring ways to off-shore savings in order to protect themselves. Our best and brightest will evaluate opportunities elsewhere, probably in the direction of China and Asia. Resources – capital, talent and funds – will flow from West to East at an accelerated rate. Older doctors will contemplate earlier retirements. Younger ones will explore overseas opportunities. The US will become the provider, rather than receiver, of what used to be called the “Brain Drain.”

In a larger sense, nothing much has changed for the US. The course we were already on has not been altered by the new legislation. Only the speed at which we approach the final destination has been increased. Our fate was sealed decades ago by profligate spending and the Ponzi schemes of Social Security, Medicare and Medicaid. These social programs alone determined our destination as described in “Spiraling to Bankruptcy.” Their mismanagement ensured the demise of our way of life.

For at least two decades our government has been a “dead man walking.” Rather than recognize its terminal condition, it continued to behave irresponsibly by piling more and more burdens on itself and its people. Now, the final weight has been imposed on an already dying patient. Ironically, healthcare reform will prove to be the equivalent of sovereign euthanasia. A sick government will be put out of its misery. The “Death Panel” will be financial markets. They will refuse to cooperate with the madness. The welfare state is about to be unplugged from its life support system – other people’s money. In the words of Margaret Thatcher: “The trouble with Socialism is, sooner or later you run out of other people’s money.”

When the death of the patient will occur is difficult to project. That it will occur is inevitable. The new entitlement signals to China and other US benefactors that there is no hope of fiscal sanity or solvency for the Federal government. Their hands, not ours, are on the plug. They decide when and how to unplug the terminal patient.

It is a moot point as to whether the “benefits” of health care reform are ever seen. They are not due to kick in for several years. New taxes, however, will kick in immediately (and the Bush tax cuts are due to expire at the end of 2010). Tax increases will devastate the economy, almost assuredly leaving us in the current recession or worse. As it becomes apparent there is no recovery or fiscal discipline, the US government will be seen as hopelessly bankrupt. It is likely then that our benefactors pull the life support plug, long before the health care “benefits” are implemented.

Then it is over. We either drastically reduce the welfare state (Social Security, Medicare, the new healthcare program, etc.) or resort to printing money to fund it. Either entitlements are cut drastically or hyperinflation appears. We will be either Greece on steroids or Weimar Germany.  Neither choice is a good one. That is what happens when problems are ignored and allowed to grow beyond manageable bounds.

This transition stage will be ugly, producing dramatic social unrest and probably violence. One can only hope that we emerge on the other side with our country and government still intact.

Titanic

The great ship Titanic was thought unsinkable. So too is the great ship of government. The latter belief is as wrong as the former one was. Like the Titanic, government is in dangerous waters and will soon hit one or both of two massive icebergs. When the Titanic struck ice, it was a tragedy. When the government hits its obstruction(s), there will be danger but also opportunity.

The political class in Washington appears to have no idea of the danger. They persist in their “full speed ahead” approach to spending and expanding the role of government. Are they truly unaware? Perhaps they foolishly believe they can talk or legislate around the gaping hole that is about to be opened in the ship of state?

The two dangers ahead are citizens and markets. Either has the force to take down a government, any government. Both have destroyed governments before. One or the other will destroy government as we presently know it.

Citizens

In a recent piece entitled 2010 will be a watershed election mounting voter dissatisfaction with both political parties was discussed. It was pointed out that 71% of voters were dissatisfied with Congress. Only 10% approved of their performance. Arguably the 2008 election was a referendum against Republicans rather than an endorsement of Democrats. It is likely the 2010 election will be just the opposite – a referendum against the Democrats:

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.

Libertarian Albert J. Nock viewed government as a predatory scam. He opined:

Lincoln’s phrase, “of the people, by the people, for the people” was probably the most effective single stroke of propaganda ever made in behalf of republican State prestige.

It is likely that the upcoming election will change parties, but little else. That will cause many to accede to Nock’s cynical view of government.

So what change do people want? There is no single answer. The Tea Party movement, while not representative of all of the anger, has certainly struck a chord amongst many at the expense of both major political parties. Their primary demand is a return to Constitutional government. The message: “leave me alone; get out of my life.”

A true return to the Constitution, would produce profound changes in government. It would require elimination of many programs, agencies and departments. Government’s role would be severely reduced. Lower spending and taxes would result.

While that likely would satisfy the Tea Party, it is unlikely to satisfy the politicians or the beneficiaries of the programs that would be eliminated. Approximately 50% of the population pays no income tax, a condition that creates a natural constituency for ever-increasing government. If something is “free,” demand tends toward infinity.

Perhaps the 50% figure is not as daunting as it first appears. Many in this group are also sympathetic to the Tea Party movement. Young and old alike participate in rallies. Both groups likely pay no or little income tax. While the elderly are concerned about their Medicare and Social Security, they are also concerned about their grandchildren.

History tells us that eventually the people get their way, even in totalitarian states.  No government can ignore an angry populous. Ultimately the people rule, one way or another.

It is dubious that the vote can be used to effect change. Politically, the problem seems intractable. How does one take away entitlements?  Is it feasible to run for office on a platform of “Vote for me and this is what I will take away from you?”

At this point, it appears more likely that the second force, markets, will produce a crisis before some clash between the people and the government.

Markets

The reality of financial markets is dead ahead. In Spiraling to Bankruptcy, details of the government debt problem were outlined and the debt death spiral was discussed:

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

Our government is insolvent. It is able to pay its bills only because Ben Bernanke’s willingness to finance government debt. While this might be a short-term expedient, it further weakens the private economy. In Crowding Out Your Future, James Turk stated:

Instead of depositor money being used to stimulate economic activity in the private sector by lending to businesses and consumers, the banks are helping to fund the growing federal deficits.  This re-allocation of resources has a negative long-term impact on the economy.  Depositor money is not being used for productive purposes like building manufacturing plants and making other investments that will create jobs and grow the economy.

Bernanke has said that he intends to terminate quantitative easing (buying government debt) in March. That promise is unlikely to be kept. (See Obama’s Ides-of-March Is Near.) Foreign investors are cutting back on funding government debt, putting even more pressure on Bernanke.

Bernanke is in a no-win situation. If he honors his promise, government will be unable to raise funds without dramatic rises in interest rates. That woudl worsen housing, employment and any reasonable hope for a recovery.

If Bernanke continues QE, then the Fed will be seen as a rubber stamp for government. Once that is fully understood, it will be obvious that the US intends to try to inflate its way out of its predicament.  Inflation would occur, probably exceeding the late 1970s rates.

Our country faces two problems, neither of which can continue. The first is a government that is out of touch with its citizens. The second is an unsustainable financial condition. The Chinese curse of “living in interesting times” is certainly upon us.

The next several years are going to be exciting and painful. An inevitable crisis will reshape the government. Moving back toward the Constitution is preferable because it may solve both problems. Not doing so is apt to anger citizens, producing an even greater crisis in the future.

Keynesian economics is mostly a fraud and always has been. It has little theoretical basis and no empirical support. I have posted on this topic before, most recently here.

Unfortunately, our school system has convinced the public that government is the source of most good and can solve all problems. Generations of children have been taught that Franklin Delano Roosevelt “saved” us from the Great Depression. All of the history textbooks proclaim this. Yet, his Treasury Secretary clearly contradicted this myth:

We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong … somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises … I say after eight years of this Administration we have just as much unemployment as when we started … And an enormous debt to boot! — Henry Morganthau, Treasury Secretary May 1939

Morganthau’s statement is the equivalent of Ben Bernanke and Tim Geithner stating that “everything we have done has done no good.”  If only current political appointees could be so honest, but the Keynesian myth must continue at all costs. It is the source of government power and spending. It is the source of economist income and prestige.  It is the foundation supporting the myth of government.

In Keynesian Economics and the Wizard of Oz Dan Mitchell does an excellent job of exposing what more and more observers believe to be a fraud. Mitchell states:

In the ultimate triumph of theory over reality, the Keynesians say all that matters is the macroeconomic model behind the curtain showing that more government spending leads to more jobs and growth. Consider the recent report from the Congressional Budget Office (CBO), which claimed that Obama’s stimulus created at least one million jobs. As Brian Riedl of the Heritage Foundation noted:

CBO’s calculations are not based on actually observing the economy’s recent performance. Rather, they used an economic model that was programmed to assume that stimulus spending automatically creates jobs — thus guaranteeing their result. …The problem here is obvious. Once CBO decided to assume that every dollar of government spending increased GDP…, its conclusion that the stimulus saved jobs was pre-ordained.

But surely this can’t be true, you may be thinking. Our public servants in Washington would not make important policy decisions based on a model that automatically produces a certain result, would they? Peter Suderman of Reason pulls aside the curtain:

…those reports rely on assumption-packed models that effectively predetermine their outcomes; what they say, in essence, is that the stimulus worked because we assume it did. …

Economics is a complex behavioral science. Like all behavioral sciences, it is difficult to provide data that supports or refutes hypotheses. Hypotheses in the physical sciences can be definitively tested because experiments are repeatable. Yet even here, political views can corrupt. The global warming scam is evidence of that.

The behavioral sciences are not nearly as precise and are open to “fudging” conclusions. Anyone can rent an economist that will provide the desired conclusions.  President Dwight D. Eisenhower issued a general warning in his Farewell Address:

The prospect of domination of the nation’s scholars by Federal employment, project allocations, and the power of money is ever present – and is gravely to be regarded.

Any economist who works for the government must compromise his integrity. He becomes part of a political team with political goals. Either he or his scientific integrity must go when it conflicts with these goals.

This post appeared on American Thinker

A reasoned view for high inflation is made on Zerohedge.

My opinion is that hyperdeflation (if it is defined as 5% or more) does not occur. The level of inflation could be hyper, however. I agree that “Monetisation is now the policy lever of first resort” and that governments will default on a rather massive scale.

Albert Edwards Predicts Deflation Followed By Double-Digit Inflation As “Governments Opt To Default, And Monetization Is Policy Lever of First Resort”

Submitted by Tyler Durden on 03/16/2010 10:44 -0500

As if we needed any more confirmation that deflationary pressures continue to prevail and to swamp the broader economy, here is SocGen’s Albert Edwards with his most recent (and humorous: we had no clue that the “UK?s ONS statistical office has just decided to throw canned fizzy drinks out of the UK?s CPI basket and replace them with small bottles of mineral water”) menu prescriptions for the near- to mid-term future.

First an appetizer, here is a look at US consumer leverage trends. Yes, good point: what leverage?

« Continue reading Inflation or Deflation – Considered Again »

President-of-the-World Obama is at it again. Apparently he feels the problems in this country are too small for him, or they have all been solved. His wisdom and greatness are too important to be squandered on only one nation. They must be made available to save the entire world.

In his latest initiative, Obama takes “I’m from the Government, and I’m here to help you” across national borders. Breitbart reports on the call for a conference on entrepreneurship:

The White House on Friday announced a “summit on entrepreneurship” to build economic ties with the Islamic world, part of President Barack Obama’s outreach to Muslims.

The White House said it has invited participants from more than 40 countries over five continents for the April 26-27 conference in Washington.

Don Quixote

On one level, this initiative is laughable, undoubtedly worthy fodder for several Saturday Night Live and Jon Stewart skits. On another, it reflects a serious situation — the continuing delusional nature of Obama and his Administration.

The lighter aspects.

The “summit” represents more TV face-time for the President, a Pavlovian response by the White House to all problems. The public has soured on what is seen as Obama’s endless campaigning. They want constructive action rather than continued platitudes and campaign slogans.”Talk is cheap” is an axiom the White House does not seem to get.

Approval polls are in free-fall. Obama, at this stage, is well ahead in his race to displace President Jimmy Carter as the worst president of the past several generations. He shows all of Carter’s ineptitude, without Carter’s sincerity. Desperation regarding the unpopular healthcare bill is making Obama look like the next Joe Isuzu, the fictitious liar in Isuzu commercials. Truth must not stand in the way of a sale.

Does the White House not understand how farcical their actions have become? Are they clueless or incompetent? Both hypotheses fit the facts. Making a definitive choice between them (both could be valid) is not possible at this point.

Now, we have Obama about to pretend that he is Peter Drucker, world’s greatest management guru. Here is a man with zero business experience, surrounded by advisers with similarly deficient experience. Yet, Obama and his advisers believe that he is competent to lecture the world on entrepreneurship.

Would it be impolite to ask what he has done to further entrepreneurship in this country? Have any of his prescriptions and proposals helped entrepreneurs? If so, which ones? If foreign leaders care at all about their economies, they will separate themselves from this conference. Investment and hiring in this country stopped when Obama’s “solutions” rolled out.

The delusional aspects.

We have a President who believes he is always the smartest man in the room, no matter what room. Actually, he is always the least experienced and probably least qualified in any room. The fact of the matter is that he has no experience in anything.

What is known of his background includes stints as a “community organizer” and adjunct professor. What skills are required to be a community organizer? What experience is gleaned? No experience that is useful or transferable to an executive role.

Obama’s short stint as a professor of Constitutional Law was unremarkable in any academic sense. No evidence of writing or publishing can be found. The most notable aspect was his interpretation of the Constitution. He views the Constitution as a “living document,” open to changes that produce “social justice.” In effect, other than as a quaint artifact of history, for Obama the Constitution does not exist.

Despite this vacuous background, Obama believes he knows more about medicine than doctors, more about business than businessmen and more about creating jobs than entrepreneurs. This sad litany could be continued ad nauseum. There is no evidence within the past year that Obama does not believe he has more to contribute than anyone else on any topic in any field.

A rational man with such limited background would defer to those wiser than he. Instead, Obama presents himself to be an expert on all things. Does he not see how ridiculous this makes him look in the eyes of the public? What must audiences of doctors, businessmen or entrepreneurs think about this man-child with zero experience? One can only imagine the disgust and anger they must feel.

“Don’t worry, I stayed in a Holiday Inn Express last night” may work for TV but not as a governing strategy. Yet, Obama must believe that he received more than a good night’s sleep. In his mind, he appears to believe he is something special, something larger than his office. A messianic image was part of his campaign. It appears that he bought the image. “The One” is an image clearly in conflict with reality. The polite word for such behavior is “delusional.”

I am not a psychologist or psychiatrist and do not pretend to have such skills. But any observant person will see the President’s behavior as bizarre, if not outright dangerous. James Lewis detailed the President’s extreme narcissism as have others. In Lewis’ words:

The question is what real damage Obama may do to the country. This man has been entrusted with the greatest power in the world.

The issue can be understood on a human as opposed to a clinical level. What would you do if your best friend believed that he was more knowledgeable than astrophysicists, oncologists, economists, businessmen, or scientists? What if he believed this so strongly that he felt he was entitled to “teach” practitioners in these fields? As a friend, you would presumably get him professional help. Our President is behaving like your friend.

To be sure, other Presidents have rebuked industries or professions. Eisenhower came down hard on the military-industrial complex; Kennedy did so with the steel industry. Others have chosen whipping boys for both good reasons and political ones. None, however, presumed they were smarter than everyone else. Other than Obama, no one believed they had unique knowledge that it was applicable everywhere and could improve everything.

The President’s behavior is clearly delusional and likely messianic. While he sees himself as some modern-day, handsomer version of Yoda, more of the rest of the nation are beginning to see him as a sick puppy holding the highest office in the land. He appears to be marching to a tune that is only audible to him. Where are his friends, and why do they not intervene? Are they afraid to confront him with reality?

For the sake of the nation, if not for the sake of the man, someone must confront this problem.  Delusional behavior is dangerous under any circumstances. It is potentially devastating when it afflicts the head of the world’s most powerful country.

Does Obama not have a friend who will intervene? Are they all such political toadies and ideologues that they will sacrifice him and the country to achieve their goals?

This post appeared on American Thinker