After bailouts and printed money equivalent to double-digits of the GDP have been injected into the economy, the government managed to boost the GDP figure by 5.7%.
That's like burning your neighbor's house down because you ran out of wood for your fireplace.
What's odd is how unimpressed the Keynesians are with this result:
As expected, a big GDP number, signifying nothing much. It’s an inventory blip: topline growth at 5.7 percent, but only 2.2 of that is final demand. ... And I find myself wondering why I even bother reading the actual numbers; the Goldman Sachs prediction was almost exactly right.
It was a tad strange to have had inventories contribute half to the GDP tally, and at the same time see import growth cut in half last quarter. Normally, inventory adds are at least partly fuelled by purchases of foreign-made inputs. Not this time. Strip out inventories and the foreign trade sector, we see that domestic demand growth in the fourth quarter actually slowed to a paltry 1.7% annual rate from 2.3% in the third quarter. Some recovery. Based on some simulations we ran, demand growth with all the massive doses of fiscal and monetary stimulus should already be running in excess of a 10% annual rate. So, the real question that nobody seems to ask is why it is that underlying demand conditions are still so benign more than two years after the greatest stimulus of all time. The answer is that this epic credit collapse is a pervasive drain on spending and very likely has another five years to play out. ... If you believe the GDP data — remember, there are more revisions to come — then you de facto must be of the view that productivity growth is soaring at over a 6% annual rate. No doubt productivity is rising — just look at the never-ending slate of layoff announcements. But we came off a cycle with no technological advance and no capital deepening, so it is hard to believe that productivity at this time is growing at a pace that is four times the historical norm. Sorry, but we're not buyers of that view. In the fourth quarter, aggregate private hours worked contracted at a 0.5% annual rate and what we can tell you is that such a decline in labour input has never before, scanning over 50 years of data, coincided with a GDP headline this good. Normally, GDP growth is 1.7% when hours worked is this weak, and that is exactly the trend that was depicted this week in the release of the Chicago Fed’s National Activity Index, which was widely ignored. On the flip side, when we have in the past seen GDP growth come in at or near a 5.7% annual rate, what is typical is that hours worked grows at a 3.7% rate. No matter how you slice it, the GDP number today represented not just a rare but an unprecedented event, and as such, we are willing to treat the report with an entire saltshaker — a few grains won’t do.
The State of the Union Address and Rebuttal are political pageant, where the President delivers a long winded speech in which they give an optimistic (read:warped) view of the country policy they have no chance of enacting, and the opposition delivers an equally insubstantial rebuttal. As such should a listener have no better use for their time, it is best the read the transcript instead of listening or watching so that they pick the kernels of content from the stinking mass instead of having it shoved in their eyes and ears. Alternatively you could get roughly the same effect as taking the speeches in whole by downing a pint of absinthe and eating a jar of marshmallow fluff while listing to "Mighty Mighty Bosstones." (50,722)
The following is an excerpt from this article written by Alan Greenspan in 1967--four years before the end of the gold standard (by Richard Nixon).
Recently, Greenspan told Ron Paul he still stands by every word of this.
A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World War I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion. But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline — argued economic interventionists — why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely — it was claimed — there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. ... Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale. ... In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.
For those of you who don't know, Glenn Beck is a "conservative" commentator who has apparently recently discovered libertarianism. He gets on the air 5 days a week on Fox News and rants about the 'classical liberals' who we call the founding fathers. Whenever I see his show (not often), I think that it's too bad he wasn't ham-fistedly proselytizing about these things when Bush was in office, he might have actually earned himself some credibility. Beck is well-known for finding and airing buried footage of people in the administration and upper echelon of the democratic party making communist / socialist / fascist / racist / statist / scary-as-hell statements. He then spins these soundbytes into vast conspiracy theories and cries about it. With real tears. On the air.
Devil's advocate: According to Beck, he criticizes republicans too... But only if their names rhyme with Teddy Roosevelt (Seriously??) or John McCain
I've seen a few of these soundbytes made by Obama's various "czars" as well as some of the more central voices of the administration. What strikes me is not that these people exist or that their statements are so unapologetic, it's that the rest of the media aren't airing some of these clips. I'm left thinking "Are these people too insignificant to report or are these ideas just so innocuous to the press that they're not worth noting?"
The press historically gives a free ride to its favored politicians. The American public were denied critical information about FDR and Kennedy--particularly the juicy personal tidbits that would've ruined them. Even Bush was allowed to get away with a heck of a lot until the 9/11 fever broke and the press went rabid once again.
It would seem, however, that even the new liberal messiah can't walk on water forever. Left wingers around the country are waking up to the fact that their former lover and nobel laureate is actually a fraud and a danger to freedom--even as they (the left) narrowly define it. Obama has broken key campaign promises that have driven all but the most vapid party hacks from strong approval to apathy or disillusionment if not outright rage ($5 says they'll vote for him in 2012 regardless; but we're talking politics here, not reality).
With all this, Glenn Beck's muckraking over Obama's appointees is starting to bubble up from the depths of the journalistic septic tank that is "Fixed News" into the liberal press.
One of my favorite examples is a Salon article about Cass Sunstein ("one of Barack Obama's closest confidants"). It talks about 'his' idea to use government funds to pay agents to infiltrate internet chat-rooms and forums to spread the word of the state and to bolster confidence in the government. This isn't a new idea, of course, but it certainly should hit a nerve with the same groups that were upset about Bush's "propaganda" (which the article also goes into at length almost out of nowhere, proving once again that "leftwing" reporters can't say bad things about democrats without scrambling to assert "... But Bush was worse!!").
Interesting historical note: The first official propaganda ministry in the western world wasn't in Fascist Germany or Italy, it was in the United States under the progressive President Woodrow Wilson.
The Salon article goes on to point out the hypocrisy of certain liberal pundits in not jumping on this and other scaryisms drizzling out of the mouths of the Obama administration along side the drool and edamame particulates. They pass over these omens of statism while at the same time dubbing those who don't "Purveyors of Becksh*t-nuts Conspiracy Garbage."
To keep an even keel about politics (if that's even possible), I think it's necessary to look to people who actually endorse the person/group in question to see if your concerns are valid. Obviously most people just assume they're on the "right" side until the evidence piles up to the point of suffocation. However, when you see these 'sheeple' start to defy their shepherds and say the same incendiary stuff you've been saying, that's when you know you're not crazy--at least if you go by George Orwell's definition of insanity as being "a minority of one" ... although in politics it's usually the majority that's crazy, so who knows. (51,716)
This may be black and white enough to actually convict the bastard. We'll see how ballsy the Obama administration is and if they'll refuse to convict their lapdog or if they'll be forced to capitulate to what's bound to be a public outcry.
Apparently Geithner and the Federal Reserve Bank of New York knew about and possibly coerced AIG into illegally omitting some of the items on their balance sheet, particularly those belonging to [you guessed it!] GOLDMAN SACHS.
It would seem that now Obama can stop blaming poor people for the housing bubble collapsing. There is not now nor has there ever been a "Sub-prime Mortgage Crisis." It was an "ARM Mortgage Crisis."
New data suggests that adjustable rate mortgages are foreclosing for both prime and sub-prime at the same rate.
Naturally it spun a better tale to say that the deadbeats who were too poor or too drug-addled or too jailed to be recipients of the "prime" moniker were the bastards responsible for our recession. Unfortunately for us, the problem is not that simple/ridiculous.
It wasn't just that "poor people got drunk," it's that "everyone got drunk" at the same time.
Not only does this point to the devastatingly largeness of the bubble but it also begs the question even more: How did this problem get so big? What fundamental factor do all these people, neighborhoods, banks, and interest rates all have in common?
The supply of credit, maybe? Thanks Greenspan. For everything. (59,376)
As I've stated before, I'm a libertarian and a medical student currently seeing patients in the field. As such, I'm uniquely annoyed by all the goings-on in DC lately. I'm sure most people reading this think it's all over--that the socialists/corporatists in power have "won" and that there's no use even talking about it anymore. Of course if we've learned anything from these systems of central planning, we know that eventually, they all fall down. If the current health bill passes, it's likely to actually make our unsustainable system even worse for all the same reasons it's currently failing (which this article is about). The debate is not over, it's just been put on hold for a few years--until the government's new plans to screw up their mess even further can come into fruition.
I propose a different approach: not more government, but less government. Then there's the obligatory argument about the number of uninsured being "too high." I posit that the best way to reduce that number is to make healthcare less expensive and more accessible rather than just accept the huge costs and setup government programs to cover it. The easiest and most effective way to reduce prices is the free market.
84% of Americans already have some form of health insurance. If the free market were allowed to reduce costs by say, 30%, how would that "84%" figure grow?
Our system fits the classic Harry Browne line, "Government is good at one thing: It knows how to break your legs, hand you a crutch, and say, 'See, if it weren't for the government, you wouldn't be able to walk.'" The Government is responsible for the high cost of healthcare and therefore the high number of uninsured, and the only way to fix their mess is to get them to stop doing what they're doing.
I know many people reading this will say "but we already have a free market, and clearly it's expensive and ineffective!" Of course, those same people really don't know what a "free market" is--that is, a market where the government does not regulate, subsidize, or fix prices. Our medical system, though not outright socialist or fascist, is about as close to capitalism as the Titanic is from docking in New York.
Most people don't understand how cheaply healthcare could be done if we allowed the industry to evolve like other industries. Many of the things we as doctors do require equipment and drugs that are either cheaper than dirt or have alternatives that are. The high cost of doctors' time could be supplanted in most cases by trained nurses or even the injured/sick individual themselves. The folly of those who don't see this is a failure of imagination. Rest assured, however, Medicine is no different from other industries (eg Unlicensed individuals service their own cars all the time, and most medical procedures are far less dangerous or could at least be made that way by the demand to do so). Given the opportunity to evolve, quality care would be as ubiquitous as color televisions
I imagine a country where an uninsured person living in poverty will be diagnosed with cancer, and even the most bleeding-heart socialist will unsympathetically say "Well why the hell didn't you buy health insurance? It's cheaper than your smoking habit. Here's $10, go get some chemotherapy"
Indirect Health Care Subsidies - Tax Incentives
59% of Americans with health care receive it through their employer. The reason the employer does this is because the government taxes cash reimbursement (wages) not only through the Federal Income Tax (Median ~20%), but also Unemployment (6%), Medicare (6%), and Social Security taxes (12%). Paying for employee healthcare incurs none of these taxes. Therefore, the government is effectively partially paying for employee healthcare by so heavily taxing other forms of compensation.
This is an indirect subsidy which, again raises prices universally. In addition, like the direct subsidy, recipients of this care will use much more of it because they are not responsible for paying the premiums. (* See explanation below)
The way to end this is more complicated than ending a direct subsidy--if we continue taxing wages**, we must then start to tax all forms of employee compensation, including health care. This would start to push people towards paying their premiums directly instead of getting insurance through their employer. Sounds like a bad thing, but theoretically you could reduce the federal income tax (and other wage taxes) to match the massive influx of revenue generated by this tax.
Also, remember that "15% of Americans are uninsured" statistic? Well 1/3 to 1/2 of all people currently uninsured are uninsured because they're in between jobs that provided them with insurance. If they paid for their insurance themselves, they'd have it now. Therefore, we could eliminate the number of uninsured by 33-50% almost immediately by simply transferring the employer's policy to the employee. Eliminating the tax incentive to do otherwise would certainly fix the problem.
** Optimally, we would tax neither wages nor other forms of compensation, but that's even more of a pipe dream than any of the other things I've mentioned.
Direct Health Care Subsidies - Medicare & Medicaid
28% of Americans with health insurance have it totally paid for by the government. This is an obvious subsidy and leads to higher prices for those who do not enjoy this subsidy. Moreover, recipients of this care will use much more of it because they are not responsible for paying the premiums. (* See explanation below)
Indirect Governmentally Managed Care - Tort
This argument you've surely heard before: Health Care Providers change their care to accommodate an altered risk/benefit ratio strictly because they're afraid of getting sued. It's unknown how much this actually contributes to costs, but there are a few studies that show it being greater than 25%. That's not including the change in the culture of medicine, which may actually bring quality down in the end.
Several states have started implementing tort reform and not surprisingly it's been a complete success.
Direct Governmentally Managed Care - Health Care Regulations
Americans are universally turned off by managed care, yet they are inexplicably in favor of Government managing their care through regulations.
Health Care is one of the most regulated industries in the United States. From compulsory licensing of physicians to the drug approval process, the market is mired in government ineptitude, sloth, and corruption. Nearly every step of patient care is delivered exactly according to government edicts.
Giving people a choice between licensed and unlicensed physicians (for instance, allowing a nurse to write prescriptions and perform simple procedures without a doctor) would drastically reduce costs and therefore insurance premiums.
In addition, giving people a chance to buy drugs that haven't been through the FDA's 12-year process would save thousands of lives and allow the market to find better and faster ways of ensuring drug safety. Meanwhile, the actual FDA could be privatized and run by Ralph Nader (or some other ostensibly incorruptible person) and its approval being available for people who are untrusting of drug companies.
* 3rd Party Payer - The Bugbear of Subsidy
73% of all Americans (87% of the insured) not only receive a government subsidy for care (directly or indirectly) but are also not responsible for paying their own premiums. This is the biggest reason prices are rising both through the indifference and profligacy of the recipients (nobody "shops around" for care before they get it) as well as recipients actually taking worse care of themselves as they are not responsible for the bills that come of it.
For instance, if a private insurance company were to give breaks for people who ate right and exercised, this would start a trend that may even fix America's obesity problem. It sounds far-fetched, but that's only because you have no idea how much the actuarial tables would change for a healthy population as opposed to ours (with 1/3 of Americans being overweight and another 1/3 obese). The premiums for these "fit" people, especially in their later years, would be halved.
The current incentive structure encourages the opposite--if you're not fat, you're not getting your money's worth for healthcare. After all, by taxation or reduction in cash wages, you are paying the premiums to be fat whether you want/need to or not. It could be that our "good" healthcare is what's killing us.
The Current Healthcare Bill (Dec 23, '09) Is More of the Same
The current healthcare bill will expand all of the problems with American healthcare--direct subsidy, indirect subsidy, direct regulation, and indirect regulation:
Direct Subsidy - This bill mandates that everyone pay a private corporation for healthcare. In addition, it increases Medicaid and pays for private health insurance for people who 'can't afford it'. I thought they called this Fascism. It'll be interesting to see how they determine who gets paid and who doesn't--who draws the line between 'fully paid' and 'forced into poverty by paying obscene premiums'.
Indirect Subsidy - This bill gives money to [small?] businesses who can't afford to provide healthcare to their employees. Government giving money to private corporations... I couldn't fathom how corruption could ensue!
Direct Regulation - This bill adds at least a thousand pages of healthcare regulation, especially on insurance companies. Insurance companies make a tiny profit margin as it is. Take it away, you don't increase competition, you bankrupt competition. Many think this new bill will be a boon to insurance companies because of the compulsory addition of 30+million new customers. I'd advise those who believe this to look at the remaining 1,000+ pages of the bill and see if that makes you want to start an insurance company.
Milton Friedman was always railing against 'central planning' for its inherent immorality. However, he also said that we were lucky in that these systems had the added detriment of inevitable failure. Our healthcare system is like Frankenstein--sewn together from all manner of dead and dysfunctional parts, then artificially reanimated and left to run amok. Eventually, the people will grow wary of its rampage and destroy it. The question is: how many people will die in the interim. (100,795)
I normally shy away from talking about monetary policy. To me it's self-explanatory that falling/rising prices are either caused naturally and innocuously by the market or forced up/down by the government's intentional/unintentional detrimental manipulation of the market.
To me, that's where the subject ends. Obviously, most economists these days have a different view. Modern economic theory states that prices fall during recessions and thinks therefore falling prices cause recessions. It's akin to saying people with the flu have fever, therefore the fever must cause the flu. Fever can cause its own problems, but your body does it for a reason.
The "exit strategy" talk is spawned by the economic enigma I call the "Chinese Finger Trap". Essentially, the Fed is printing tons of money to stimulate the economy as it's both fun and entertaining (similar to sticking your fingers in the finger trap). However, if they keep doing that, eventually life's going to really suck (due to inflation, speculation on inflation, and all manner of evil). Therefore, at some point, they have to take their fingers out.
The problem is, of course, the deeper they get themselves into the trap, the harder it is to pull out without doing some damage. In the event Bernanke stops printing money, those pitiful, beleaguered financial institutions will have no source of funds for their poor investments, demand (and therefore prices) for those investments will fall, and the balance sheets for these companies will look like Bernanke's afterbirth.
The "Exit Strategy" is a myth--that somehow there's a way out of the trap other than tearing your own fingers off. Of course the metaphor ends there, as the toy is fairly harmless, this game is not.
This video specifically attacks the myth and pretty well beats this dead horse until tender and delicious. It's also a meager 25 minutes long, which is pretty amazing considering it totally eviscerates modern pop-econ.
We are trying out the economics of fascism without having suffered all the social and political ravages. - George Soule (famous writer for The New Republic) on the New Deal
George Soule was an influential writer in the early 20th century progressive movement and proponent of the New Deal. (60,547)
I recently completed Bob Murphy's Politically Incorrect Guide to The New Deal. Subsequently, I found out that the advocates for monetary intervention (eg Krugman, Bernanke, and yes, Milton Friedman) have twisted history and that I had been unwittingly duped by it. They would have you believe that The Fed did essentially nothing to correct the massive monetary contraction at the beginning of the Great Depression. In fact, the Fed of 1929 and the 1930's expanded the money supply more than any American central bank ever (until Greenspan/Bernanke). Krugman, Bernanke, and Friedman basically either deny this or pretend like the actions of the Fed at the time were "too little, too late." The facts, however, speak for themselves.
Though my article about The Great Depression contains this error, I left it in there for simplicity's sake and included this correction as a footnote.
(excuse this boring personal note) I was extremely lucky to be taught economics by a monetarist. My economics textbook subtly jabbed at Keynesianism throughout the book, and compartmentalized Keynes and his balderdash in a single chapter called "Chapter 11--John Maynard Keynes" (I'm almost positive that was on purpose). At the time, I would chat with my friends, some of whom had taken Econ101 taught by a Keynesian. My Friends were always talking about Aggregate Demand and Animal Spirits. I thought that maybe I'd missed that lecture and always wondered what the heck they were talking about. I later rediscovered economics and chuckled my way though a rundown of Keynes' theories and fallacious supporting arguments.
Unfortunately, monetarism was also wrong in many ways. While being unabashedly free-market in most things, I followed what I was taught for a long time and balked at the idea that the Fed could do any wrong. I was a huge fan of Alan Greenspan and even posted a couple favorable articles on this site about him. I now see these essays as akin to the innocent inhabitants of Russian gulags, convinced that "Uncle Stalin" was unaware of their predicament, sneaking letters out of the camp to him for help, apparently thinking that he loved the people so much he would close the camp immediately if he only knew (when, of course, it was he and his goons that built the gulags put them there in the first place). It was actually a lecture by Tom Woods (an Austrian Economist) I watched in 2008 that floored me and ended up changing my mind.
Nowadays, looking at the world of economics through this new lens, it's actually a lot scarier to think that not even Friedman was truly laissez faire. The only well-known anti-Fed advocate seems to be Ron Paul. Obviously this movement is gaining steam. However, the Federal Reserve is now more powerful than the US Government, and with basically the entire economics profession vying to keep it that way, it seems like it's really going to take something big to even introduce the concept of sound money back into the public mind-set. (50,287)
Dr. Thomas E Woods covers a random bunch of topics in this fascinating talk.
Why child labor isn't so bad Why the monocle-wearing robber-barons were American Heroes Why the Native Americans were the scourge of the environment... until they adopted capitalism Why poverty is not the fault of low-paying employers Why the government can't create, but can only destroy Why even the poor are getting richer Why the Wild West was actually fairly mundane
Krugman: "...if I were a politician, I’d focus on providing real improvements in peoples’ lives, rather than seeking deficit reductions the public won’t even hear about."
Good thinking. I'm glad there's a nobel-prize winning economist that has the guts to defy reality, history, and common sense, and proclaim that there are no real downside to deficits. Courage in the face of overwhelming fact and moral bankruptcy is admirable! ... Or is it despicable... ?
What happens when half the budget goes to paying interest payments alone? I guess those "real improvements in people's lives" really just amounted to a short-term spending-spree that ends in long-term debt, with compounding interest payments. (64,700)
This is one I uploaded in 2004. I'd forgotten how excellent it was.
BOOK FORUM Tuesday, December 14, 2004 12:00 PM (Luncheon to Follow) Featuring Judge Andrew P. Napolitano, Senior Judicial Analyst, Fox News, and Author, Constitutional Chaos: What Happens When the Government Breaks Its Own Laws (Nelson Books, 2004); Gene Healy, Senior Editor, Cato Institute, and Editor, Go Directly to Jail: The Criminalization of Almost Everything (Cato Institute, 2004); and moderated by Tim Lynch, Director, Cato's Project on Criminal Justice The Cato Institute
In Constitutional Chaos, Judge Andrew Napolitano maintains that most Americans take their constitutional rights and liberties for granted and are largely ignorant of how the government breaks its own laws and gets away with it.
In Go Directly to Jail, Cato Institute senior editor Gene Healy shows how the government has been criminalizing more and more citizen conduct. With more than 4,000 federal offenses on the statute books and thousands more buried in the Code of Federal Regulations, Healy points out that there are good reasons to be alarmed by the government’s perfectly “legal” restrictions, investigations, and prosecutions.
[slide 1]Spending, Printing, and Debt are all interrelated. As I illustrated in part one, poor fiscal policy can lead to a inflation and even hyperinflation. I will briefly review this again.
[slide 2] Everybody knows that the more our government spends, the more indebted it becomes. This is because tax revenue doesn't come close to our spending. [slide 3] What most people don't know however, is that some of the fiscal shortfall is paid for by printing money. The government does not do this directly, as I will explain later, [slide 4]however the net effect is identical, and that is inflation.
[slide 5] Inflation decreases the value of currency, including the currency loaned out by lenders. [slide 6] The interest on bonds and loans then increase to entice the lenders back into lending. [slide 7] Higher interest rates mean higher service must be paid on any future debt. Since government bonds are mostly short term nowadays, this effects spending within a matter of months.
[slide 8] More spending leads to more debt, [slide 9] more debt leads to more interest payments, and [slide 10] you can see we're trapped in a vicious cycle.
[slide 11]You're probably wondering why, if this is going on, are we seeing some of the lowest interest rates ever.
[slide 12]Interest rates are determined by 3 things: The supply of loans, demand for loans, and inflation.
[slide 13] In an effort to stabilize the economy, The Federal Reserve is currently printing trillions of dollars and pumping it directly into the banks. [slide 14] In the short term, this will reduce interest rates. [slide 15] In the long term, however, all this newly printed money will lead to MASSIVE inflation. Eventually, interest rates will rise to an equilibrium with infaltion. At this point, we will be in a state of stagflation. [slide 16] The only way to get us out of [slide 17]it will be to do what we did the last time,[slide 18] and that's to stop printing money. This will lead to a record increase in interest rates, far greater than those we saw in the 1980's.
[slide 19] The high interest rates will lead initially to fewer people being able to take out loans to buy homes and cars. This will lead to a sharp and dramatic fall in home prices--possibly the lowest home prices ever. Since banks have tens of thousands of homes on their balance sheet, this will lead to massive mark-to-market losses. This, combined with the inability to loan money, will lead to massive bank failures and recession.
In addition, the government will be forced to raise interest rates on treasury bonds. You should know where it goes from here: The more debt service, the more spending, and therefore the more borrowing and printing. This will lead to a viscous cycle further exacerbating the situation.
[slide 20]To give you some perspective on the fiscal situation, the debt service for 2009 will be under $300 billion. The deficit will be about $2 thousand-billions. Keep in mind the current deficits include defense, social security, medicare, those enormous bailouts, as well as lots of other things.
After 2009 ends, the national debt will be at around $13 thousand-billion.
Interest rates will easily reach 15% at some point within the next few years, but let's be optimistic and say it happens in 2010. 15% of 13 trillion dollars is nearly $2 thousand-billion. Keep in mind, the deficit for 2010 would have to include all the other fiscal shortfalls we had in 2009.
[slide 11] Because of the nature of the relationship between these forces, many believe that a high rate of inflation and maybe even hyperinflation could occur quickly and without much warning from the economic numbers.
[slide 12] Unlike the stagflation that occurred during the late 1970's and early 1980's, we will not be able to escape from the inflation by borrowing money instead of printing it. Instead, the only option will be to do what many have suggested for years and just [slide 13]cut spending.
[slide 14a] As I explained in part 2, cutting spending has always been unpopular, which is why the government budget rarely does anything but grow. Americans overwhelmingly agree that they want to keep expanding [slide 14a-ss]social security, [slide 14a-med]medicare, and [slide 14a-sd]a strong defense--all while paying low taxes.[slide 14b] It is undeniable that this situation is unsustainable. What's scary is imagining what it will take for this cycle to meet its end.
[slide 15] During the Great Depression, many unusual laws and regulations were enacted in an attempt to restore our economy. This is likely to be repeated in our current crisis, however, like then it will be disastrous.
[slide 16]In the 1930's under presidents Hoover and Roosevelt, government grew enormous and struggled to find revenue. [slide 18a - US import tax w/hoover face] Herbert Hoover enacted record tax increases on income and imports. The Smoot-Hawley Tariff passed in 1930 was the largest peacetime tax increase on imports in American history. [slide 18b - foreign import tax] This lead to a retaliation in the form of import taxes in other countries and therefore ultimately meant a reduction in US exports. In 1932, Hoover doubled the income tax, raising the tax rate on the wealthy especially.
[slide 17a-'it all started with tires'] Already, we can see that our current president is following the historical example set by Hoover. Obama has increased income taxes on those he deems 'wealthy' and recently, he sparked an international trade dispute by placing a 35% import tax on tires. [slide 17b-retaliation] Like the Smoot-Hawley tariff, this assault on free trade was met with threats of reciprocation in tariffs. If these countries follow through, this would have a devastating effect on our already vulnerable economy.
[slide 18] When FDR took office in 1933, he continued to increase taxes and spending, but not before he issued an executive order to confiscate all privately owned Gold. In total, 500 tons of gold were taken from private United States citizens.
[slide 19] Based on these facts, it's logical to assume that when facing a severe enough recession, government may again attempt to seize property in order to fund the ever-expanding government without having to inflate the currency.
[slide 20] Historically, countries that have attempted to seize the wealth from the wealthy end up experiencing what is referred to as "capital flight." This is where rich people lead a mass-exodus out of the country in an attempt to evade persecution. [slide 21] To prevent the wealthy from simply leaving, laws may be enacted to keep their fortunes here, and possibly to prevent the sale of certain types of property like large homes and to forestall high-volume stock trades.
------------------------- [slide 23] It should be noted, however, that our current crisis is very different from the one in the 1930's. Back then, the dollar was still on the Gold standard and therefore the government was limited in its ability to print money, that is no longer the case today.
[slide 25]I believe that eventually the rate and cause of inflation will be recognized by the media, political candidates, and most importantly, the American people.[slide 26] As Reagan identified the stagflation in the 1970's and ran on a platform to shrink government and curtail inflation, I believe that so too will the candidates of 2012 or 2016.
[slide 27]Of course, the sacrifice endured by people participating in the 1980's economy will pale in comparison to the sacrifices of our generation. [slide 28] In the 1980's, Reagan's government was cowardly and irresponsible. Instead of cutting spending and suffering the consequences, he was able to issue a record amount of debt to therefore defer his fiscal crisis to another generation. [slide 29] Unlike the 1980's, our current government will not have the credit rating to issue as many bonds.
[slide 31]Unfortunately, the elderly who rely on the government for support will suffer the most during this transition. After decades of politicians telling them not to save for retirement, America will finally wake up one morning to find no government check in the mail box. This will be devastating for these retirees who are no longer able to earn a decent wage. If we acted today on a campaign to taper-off the citizenry from these programs before they disappear, it would drastically reduce the suffering of these people. [slide 32] I do not, however, feel this is possible under the current mindset.
[slide 30]Regardless of our history, I think it will be politically possible for the necessary spending cuts to take place after we slam into the tip of the inflation iceberg. (82,370)
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 Morgenthau, Jr. (1939) Secretary of The Treasury for FDR Speaking to the Ways and Means Committee
About 6 months ago, while watching every video on the Ludwig Von Mises youtube channel, I stumbled across a meandering, rambling, unscripted, incendiary, merciless rant by some dude named Peter Schiff.
He is the CEO of Euro-Pacific Capital which, as the name suggests, makes investments anywhere but the USA (heavily in Canada though).
Schiff is born-and-bred libertarian, with his dad (Irwin Schiff) being so awesomely looney that he's actually been in and out of jail for the past 60 years for civil disobedience in the form of not paying federal income taxes. He recently was sent to jail once again, at age 84. He will be there until 2016.
Schiff is far more pragmatic than his father. He reluctantly bows to governmental and social pressures by following laws and recognizing social mores (like not being an aging jailbird struggling hopelessly to slay goliath using a couple books and the constitution).
The latter, in my opinion, is evidenced by him running as a Republican in the Connecticut senate race instead of the obvious and more applicable "Libertarian" moniker.
I. Euro-Pacific Capital
My current mutual fund has adopted a rather unorthodox strategy of measuring a prospective investments growth in terms of the size of the fire that could be stimulated by shoveling my money directly into it. I've decided, therefore, to shift the few dollars I have left to another company and possibly owning stocks directly. I've been following Schiff's public statements on Youtube for the past few months, and was highly entertained by his entrance into the Republican senatorial primary, so I looked up Euro-Pac and found there was a branch office nearby... "Well... why not?"
EPC is a smaller company, so I expected some moderate-rent digs, even though this was the 'rich' side of town.
So I walked into this beautiful, lavish office building with this ultra-hot receptionist at the front desk (and an idle secondary receptionist just adjacent to the primary one, in case one surpassed thermal tolerances and needed to be swapped out). They called the representative down to meet me and as he escorted me through the labyrinth of people and cubicles, I finally asked, "is this all Europac?" "No," he replied "just this part up here." He gestured towards this bundle of much smaller, windowless closet-esque offices ahead of us. I'm down with minimalism, but it was ironic given the lobby with the fembots and whatnot
What first jumped out at me were the items on the desk which were obviously permanent fixtures: calendar, plant, computer, and a copy of Peter Schiff's new book. In fact, though there were not many 'personal items' in the office, among the few were FIVE different books by Peter Schiff, including two duplicate copies. There were no other books on the shelves of the office, as if to say no other book authored by man or ape need be read.
In fact, the first words out of the guy's mouth were "So, where did you hear about Peter?" My reply was "Wait, why would you guess I heard about this place through him?" We kind of chuckled and he responded with "Well that's kind of 'our thing'." ... or something to that effect.
I knew Schiff was a walking advertisement for his own company, but I didn't actually realize his company was his company. It's almost like being a EPC client is like being granted membership into the Peter Schiff Fan Club or maybe even the Cult of Peter.
At several points in the discussion when poking around for different investment ideas, the broker introduced a stock by saying "This is what Peter likes" or "Peter's real big into..."
It was a little aggravating, as you can imagine. Is Peter handling my account personally? Will he call me every month with suggestions and updates? Will he blow me if he accidentally co-mingles my money with his Thai Hooker fund?
Schiff's employees bear striking resemblance to the Oompa Loompas, who practically worshiped the eccentric Willy Wonka and labored as slaves, catering to his every whim... Okay maybe it's not that bad, but if his reps all had orange skin and green hair I think I'd be morally obligated to give him all my money.
All that said, their rates seemed very reasonable apart from their first-ever mutual fund which was hatched about 2 months ago. Said fund is exclusively Chinese stocks, so their excuse was naturally something along the lines of "there are a bunch of fees and exchange difficulties yadda yadda It's freakin China--literally". I suppose that's reasonable explanation, but the fund would have to yield roughly 6% just to overcome the fees.
I have some real trepidations about China. I mean, it's freakin China. I don't know anything about China, and I'm willing to bet a lot of white investors don't either. For the time being I'll wait until it actually has a past-performance to look at.
Euro-Pac does specialize in a lot of strategies I'm leaning towards. They're able to purchase currencies, stocks in essential goods and services, commodities and do it all in foreign denominations immune to American inflation. They don't just do Asia, either; they're big into Australia, New Zealand, Europe, and Canada. The MERK hard currency fund (symbol MERKX) can be accessed through there and it does extremely well.
Even though I have some misgivings, this firm is still my top candidate for my next investment firm. I mean, even if Schiff takes his antics to their logical conclusion and he and his company go all Heaven's Gate on me, I'll still own the stocks so it won't leave me broke.
Update: Apparently Fidelity has some really good international common stock mutual funds as well.
II. Irwin Schiff
I was going to start off trying to persuade you to respect this True American Patriot™ (forgive the hackneyed language, but I use this term sparingly). However, that's really not the way I feel about Irwin Schiff.
Here's the deal as I see it: If you don't think Irwin Schiff is a terrific bad-ass, you're an idiot.
There's really no way around it. This guy recognized that the income tax violates a HANDFUL of the amendments known as "The Bill of Rights." He then devoted his whole life proving not only that to be true, but also that even in the weighty tome that is the personal income tax code, there exists no line that says you actually have to pay it.
Of course, as a practical matter, since everyone believes this to be true, the government doesn't even have to be right.
In one of the many cases against Irwin Schiff, the prosecution and even the judge (carefully selected by the government to see this case) told the jury essentially that even if no particular statute could be found, Irwin Schiff could still be held in violation of it. And they won with that. Because that's how it works.
So to sum up: You may think Irwin is a cooky libertarian nut who has a fetish for prison. However, he's been in and out of jail for DECADES defending the Bill of Rights (albeit futilely). He sacrificed greatly for something he believes in, and that's something that will almost certainly never be said about any of us. By anyone. Ever.
Unless the next recession occurs before the Republican primary, He's F$cked.
I'm not saying it's impossible. I'm saying (again, forgive the cliche) the paradigm has not shifted... yet.
Some are still confused as to whether or not we're out of the woods economically speaking. The economy is THE ONLY issue Schiff could be potentially popular on. When (or if) it becomes well known that we are actually in the middle of a depression, Schiff's record will be a tremendous boon and could propel him to the front.
The problem is time: We had this first recession and the next one is sure to follow. However, will it be deep and alarming enough for people to actually drastically reconsider their political approach? Will it be in time for Schiff to win the Primary? Who knows?
Happy Note
On a happier note, I'm going to talk about prostate cancer.
Prostate cancer is one of many cancers that is actually fairly preventable through changes in lifestyle and such.
Who do you think are least likely to get prostate cancer (other than women, smartass)?
Prostate cancer survivors.
After years of tear-jerking pleas from doctors, cheeseburger binges, and pretending to be an obese couch-ornament, they all at once change their ways. Men who survive prostate cancer tend to change their whole lifestyle after their little 'brush with death', now realizing the full consequences of their actions.
I believe this depression--this 'brush with death'--may actually purge the notions of keynesianism and monetarism from the minds of short-sighted, self-indulgent, opportunistic politicians (and the people that elect them). After decades of printing and borrowing trillions to support decadence and irresponsible non-investments, America will "go on a diet." Either that or we'll meet a horrible f$ckin end; how should I know? Someone call that soothsayer Schiff. (67,646)
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It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World War I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.
For those of you who don't know, Glenn Beck is a "conservative" commentator who has apparently recently discovered libertarianism. He gets on the air 5 days a week on Fox News and rants about the 'classical liberals' who we call the founding fathers. Whenever I see his show (not often), I think that it's too bad he 
Interesting historical note: The first official propaganda ministry in the western world wasn't in Fascist Germany or Italy, it was in the United States under the progressive President Woodrow Wilson.
It would seem that now 
As I've stated before, I'm a libertarian and a medical student currently seeing patients in the field. As such, I'm uniquely annoyed by all the goings-on in DC lately. I'm sure most people reading this think it's all over--that the socialists/corporatists in power have "won" and that there's no use even talking about it anymore. Of course if we've learned anything from these systems of central planning, we know that eventually, they all fall down. If the current health bill passes, it's likely to actually make our unsustainable system even worse for all the same reasons it's currently failing (which this article is about). The debate is not over, it's just been put on hold for a few years--until the government's new plans to screw up their mess even further can come into fruition. 
Our system fits the classic 
Direct Health Care Subsidies - Medicare & Medicaid
The current healthcare bill will expand all of the problems with American healthcare--direct subsidy, indirect subsidy, direct regulation, and indirect regulation:
Trial and Error
The "exit strategy" talk is spawned by the economic enigma I call the "Chinese Finger Trap". Essentially, the Fed is printing tons of money to stimulate the economy as it's both fun and entertaining (similar to sticking your fingers in the finger trap). However, if they keep doing that, eventually life's going to really suck (due to inflation, speculation on inflation, and all manner of evil). Therefore, at some point, they have to take their fingers out.
(excuse this boring personal note) I was extremely lucky to be taught economics by a monetarist. My economics textbook subtly jabbed at Keynesianism throughout the book, and compartmentalized Keynes and his balderdash in a single chapter called "Chapter 11--John Maynard Keynes" (I'm almost positive that was on purpose). At the time, I would chat with my friends, some of whom had taken Econ101 taught by a Keynesian. My Friends were always talking about 
