August 12, 2011

Tim Price Nails It Again

If you are not reading Tim Price's stuff, please start now:

Conventional thinking has it that the financial crisis began in September 2008 with the failure of Lehman Brothers. We believe that conventional thinking is missing the point. As economist Tim Lee of pi Economics indicated several years ago, subprime, for example, was never THE problem, it was merely the first and worst part of the debt edifice to collapse. The reality, we would suggest, is that the world is drowning in debt of dubious provenance which will never be paid back in full. Instead of addressing the debt burden, the politicians of the western economies (where most of this debt is sitting) have repeatedly tried to kick the can down the road, because they are more in thrall to the electoral calendar than to a day of reckoning they are trying to hospital-pass down to the next generation. At the same time, since 1971 the world’s central banks have operated to a purely fiat money system, in which currency is backed not by precious metal but by faith in government and nothing more. We believe that this experiment in unbacked currency may be moving to some form of ultimate resolution or recalibration. Having the US dollar as the global reserve currency is incompatible with having US Treasury bonds representing the de facto riskfree rate, given that the accumulated debt burden of the US is bigger than that of any other sovereign power, and is still expanding when it should be contracting. Meanwhile the euro zone for the last decade has attempted its own science project, of trying to operate a common currency bloc without full political or fiscal union. This is unworkable.

In supposedly ‘rescuing’ the banks by gifting their bad debts to the taxpayer, western governments merely converted a private sector solvency problem into a public sector solvency problem. Whereas banks were too big to fail, governments and their finances are now probably too big to save. The problem of debt service would have been problematic even if western economies were growing at something close to their pre-crisis rate, but with austerity having become the new black, it is now closer to being an existential problem eroding public confidence in both markets and money, because at near zero GDP growth, governments will soon struggle just to service their historic debts, let alone take out new ones or undertake new bail-outs, which we should perhaps call fail-outs, in that they are now predestined to fail.

It has taken just a few reported instances of sub-par growth in the western economies for the marginal investor to grasp the situation. It is not a subprime debt crisis or a euro zone debt crisis or a US debt crisis. It is a global sovereign debt crisis and since government bonds are the largest asset class in the world, there will inevitably be fall-out in other markets when a sufficient number of investors starts to appreciate that the emperor is wearing no clothes. Equity markets have been pumped up by otherwise ineffective money printing, given the spurious quasi-scientific gloss of quantitative easing, which has done precisely nothing to improve the economy on the ground. Investors have been conditioned to call for more, even as the process has been revealed to be an exercise in magical thinking, whereby temporarily boosted financial assets somehow mysteriously trickle down wealth into the real economy. Quantitative easing has one specific side-effect, which is to savage the currencies of whichever administration practises this dark art. Choose your poison. Global investors have a fairly limited choice: they can hold US dollars (with a reserve currency status that the Fed is doing its damnedest to destroy), or they can hold euros (a currency that may break apart if euro zone politicians continue to avoid taking hard choices, and with other people’s money). Rational investors have been voting in favour of harder currencies, in the form of gold, for roughly the last decade and the logic for that currency preference is as indisputable now as it ever has been. Gold is the premier stateless currency and is guaranteed to see its supply rise at a slower rate than that of any paper currency, which is what the trend of the last decade really represents. Other than gold and silver, investors have so far correctly identified the superior currencies of the world as stores of value on a relative basis, a club that includes the Japanese yen and the Swiss franc.

Open Challenge to Rachel Maddow

August 8, 2011

Best of Mind Control

I have recently become fascinated with mentalism.

Check out what a mentalist like Derren Brown can do:

August 4, 2011

Larry Summers Needs a History Lesson

From David Henderson over at EconLog:

But for Hitler and the military buildup up he caused, FDR would have left office in early 1941 a failure, with American unemployment above 15 percent.

This is from Lawrence Summers, "More Stimulus Needed For Jobs Crisis," in theHuffington Post, June 13, 2011. This article is Larry's attempt to justify large increases in government spending to increase employment. There is a huge factual problem with Larry's statement.

Larry is assuming that there was a big military build-up in 1940. 1941 doesn't count because the election that, by his hypothesis, would have driven FDR from office was in November 1940. But there was no big military build-up in 1940. Alexander Field, in his book, A Great Leap Forward, points out that even with a broad measure of military spending that includes Lend-Lease and the government's Defense Plan Corporation, a subsidiary of the Reconstruction Finance Corporation, spending in 1940 and 1941 was only 5 percent of the cumulative defense spending that occurred between 1940 and 1945. And certainly 1941 spending wasn't below 1940 spending. Which means that military spending in 1940 was less than 2.5 percent of overall military spending between 1940 and 1945.

August 1, 2011

The Sane Among the Crazies

I think it's really sad that this guy is seen as the crazy one in Washington:

When a cut is not a cut
By Rep. Ron Paul (R-Texas) 

One might think that the recent drama over the debt ceiling involves one side wanting to increase or maintain spending with the other side wanting to drastically cut spending, but that is far from the truth. In spite of the rhetoric being thrown around, the real debate is over how much government spending will increase.

No plan under serious consideration cuts spending in the way you and I think about it. Instead, the "cuts" being discussed are illusory, and are not cuts from current amounts being spent, but cuts in projected spending increases. This is akin to a family "saving" $100,000 in expenses by deciding not to buy a Lamborghini, and instead getting a fully loaded Mercedes, when really their budget dictates that they need to stick with their perfectly serviceable Honda. But this is the type of math Washington uses to mask the incriminating truth about their unrepentant plundering of the American people.

The truth is that frightening rhetoric about default and full faith and credit of the United States is being carelessly thrown around to ram through a bigger budget than ever, in spite of stagnant revenues. If your family's income did not change year over year, would it be wise financial management to accelerate spending so you would feel richer? That is what our government is doing, with one side merely suggesting a different list of purchases than the other.

In reality, bringing our fiscal house into order is not that complicated or excruciatingly painful at all. If we simply kept spending at current levels, by their definition of "cuts" that would save nearly $400 billion in the next few years, versus the $25 billion the Budget Control Act claims to "cut". It would only take us 5 years to "cut" $1 trillion, in Washington math, just by holding the line on spending. That is hardly austere or catastrophic.

A balanced budget is similarly simple and within reach if Washington had just a tiny amount of fiscal common sense. Our revenues currently stand at approximately $2.2 trillion a year and are likely to remain stagnant as the recession continues. Our outlays are $3.7 trillion and projected to grow every year. Yet we only have to go back to 2004 for federal outlays of $2.2 trillion, and the government was far from small that year. If we simply returned to that year's spending levels, which would hardly be austere, we would have a balanced budget right now. If we held the line on spending, and the economy actually did grow as estimated, the budget would balance on its own by 2015 with no cuts whatsoever.

We pay 35 percent more for our military today than we did 10 years ago, for the exact same capabilities. The same could be said for the rest of the government. Why has our budget doubled in 10 years? This country doesn't have double the population, or double the land area, or double anything that would require the federal government to grow by such an obscene amount.

In Washington terms, a simple freeze in spending would be a much bigger "cut" than any plan being discussed. If politicians simply cannot bear to implement actual cuts to actual spending, just freezing the budget would give the economy the best chance to catch its breath, recover and grow.