Monthly Archives: January 2012

The Destructive Keynesian End-Game

The U.S. debt has ballooned from $1 trillion in 1981 to $15 trillion today.  Annual deficits under President Obama routinely exceed $1 trillion.  Regardless of the Party in power the ruling class continues to employ the “kick the can down the proverbial road” tactic.  The tactic implies an infinite road with no end.  In reality, the road is more like a runway with a definitive end point and we are nowhere near take-off speed. 

Consider these ten facts: 

1) U.S. debt to GDP ratio is over 100%.

2)  The U.S. borrows ~41 cents of very dollar is spends.

3)  Mandatory spending (i.e. entitlement programs + debt interest) exceeded federal revenues in 2011 ($2.384 trillion vs. $2.177 trillion).

4)  In 2011, the U.S. borrowed money to pay for all discretionary ($496 billion) and non-discretionary ($891 billion) spending.

5)  Real inflation rates from 2000 through 2011 were between 5 and 10%.

6)  Real unemployment rates according to the Bureau of Labor and Statistics averaged 16.02% in 2011.

7)  The labor participation rate is at a thirty year low of 63.9%.

8)  The top 10% of taxpayers paid 70.47% of all federal income tax revenue in 2009 while the bottom 50% paid less than 3%.

9)  The base money supply (M0) has expanded from $1 trillion in late 2008 to $2.7 trillion today.  The broadest money supply measurement (M2) expanded from $3.7 trillion in early 2008 to $9.7 trillion today.

10)  There are $8.23 trillion of deposits at bank and savings institutions and $111 billion on deposit at the Federal Deposit Insurance Corporation.

The amount of systemic leverage is astounding.  Today, there is roughly $62 trillion of government (local, state, federal), private sector, and household debt outstanding.  Additionally, there are $8.23 trillion in deposits at bank and savings institutions bringing the total outstanding claims on base money (real dollars) to $70 trillion.  The ratio of claims on money to actual printed money (M0) is 26 to 1.

Moreover, most leading economic indicators published by the federal government are deceptive at best and outright lies at worst.  The Consumer Price Index (CPI) and the Gross Domestic Product (GDP) are manipulated statistics reported in nominal terms.  In the early 1980s the government revised inflation calculations.  More significant modifications occurred in the early 1990s and today the CPI is meaningless.  If 1980 inflation calculations were applied to the years 2000, 2004, 2008, and 2011 the real inflation rates would be 9%, 9%, 10%, and 9%, respectively.  In fact, from the year 2000 through 2011 the real inflation rate is bounded in the range of 5% on the low end to 11% on the high end.

The GDP is also manipulated to provide the appearance of real economic growth when it is merely monetary policy and banking lending policies (i.e. fractional reserve banking) generating the illusion of growth through debt and credit expansion rather than measuring true productive economic output.

The ruling class should drop all pretenses of impartiality and simple consolidate all this under a Department of Disinformation.  When it comes to propaganda the ruling class would make Joseph Goebbels blush.

Not to worry.  The U.S. isn’t the only country in this predicament.  European countries are in similar or worse predicaments than the U.S., and recently it was reported that the Japanese debt is about to exceed one quadrillion yen.  That’s right, a quadrillion.  The only question is how long before the term quadrillion is introduced into the vernacular of the ruling class and the main stream media here in the U.S.  

Paul Brodsky of QB Asset Management Company wrote an article titled Change we Can Believe In.  Brodsky wrote:

The Greek, Italian, Spanish, Irish, U.K., French, Japan, and U.S. debt and economic situation is a manifestation of the same problem:  There can be no political solution for extinguishing debt other than formal currency devaluation via asset monetization that would collateralize systemic debt.  Public and private sector debt is irreconcilable across all major established economies without more money “manufactured” to repay it, a process that diminishes the value of currencies and savings.

This is where the runway is coming to an end.  There is simply too much systemic debt across all major economies.  Many people fail to connect the dots.  All public and private sector debt in the U.S. is denominated in the same currency as wealth/savings.  Regardless of which political party you support both parties are leading the American people down the same path of destruction albeit at slightly different speeds.

Government’s primary methods to raise revenue are through taxation or borrowing. According to 2008 IRS data income tax returns filed with an adjusted gross income of $1 million or more paid $249 billion in federal taxes.  The total taxable income for the same group was $938 billion.  Even if the government taxed all income above $1 million at 100%, revenues would increase by $689 billion.  However, many of those people will simply curtail their production as there is no incentive to generate additional income if government confiscates 100% of it. 

Clearly the government cannot tax its way out of the debt problem.  The government could continue to borrow money to fund deficit spending but this simply exacerbates the situation.  If you are in a hole you don’t keep digging a deeper hole.  So, adding more debt to the existing debt is not a viable solution.

The only other option government has at its disposal is inflation.  This is where it becomes personal for everyone with a pension fund, 401K, annuity, equity investments, treasuries, municipal bonds, social security, etc.  While inflation is often treated as an economic event it is truly a political event.  For purposes of political expediency, the ruling class and the Federal Reserve will simple print more money increasing the base money (M0) supply.  When the Fed prints more money it dilutes the purchasing power of all dollars.  Since our wealth is stored in dollars the purchasing power is diminished.  Wealth simply vanishes.  The ruling class’s favorite economist John Maynard Keynes said “inflation is taxation without legislation”.

An anonymous writer under the pen name, FOFOA, aptly describes what will transpire:

Debt is the very essence of fiat. As debt defaults, fiat is destroyed. Hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today’s dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! Worthless dollars, of course, but no deflation in dollar terms! We will have hyperDEflation in everything measured against real money, GOLD, and we will have hyperINflation in everything measured against paper dollars.

It’s impossible to predict when the U.S. reaches the end of the runway.  Eventually the ruling class will no longer be able to kick the can down the runway.  A day of reckoning is coming.

This is the destructive Keynesian end-game pursed by the ruling class.

3 Comments

Filed under Economy

Do Unemployment Checks Create Jobs?

Only in today’s Orwellian political climate can a politician actually make an inane, absurd, and irrational claim that unemployment checks create jobs.  Last year, Nancy Pelosi said “unemployment checks are the best way to create jobs”.  More recently, President Obama responded to Republican efforts to approve the Keystone XL pipeline.  He said, “However many jobs might be generated by a Keystone pipeline … they’re going to be a lot fewer than the jobs that are created by extending the payroll tax cut and extending unemployment insurance”.

Undoubtedly, with statements like this it’s only a matter of time before government establishes an official Department of Disinformation.

Here are three real life experiences I’d like to share regarding unemployment benefits and/or public assistance. I personally know these people.  I’m purposely leaving out names and my relationship with each person and will be gender neutral in my references.

First Example

This person was fired from a job in the summer of 2011.  They filed for unemployment benefits and received 26 weeks of unemployment.  Recently, the person was offered a job making $12.50 per hour plus benefits.  They turned the job down for the following reasons.  First, they had 5 weeks left on their current unemployment and could file a 20 week extension (which would be automatically granted) once the original 26 weeks expired.  Secondly, they are paid $430 per week which is $10.75 hour (assuming a 40 hour work week).  The person said it wasn’t worth their time to work for such little difference and would rather not work and collect unemployment.

Second Example

The person has skills in the construction/home-improvement industry. They were laid off and collect unemployment.  The person has been offered jobs but has declined them.  Instead, they offered their skills to employers under the table at slightly lower than market rates and does not get any benefits.  The employer gets a highly skilled worker and pays less overall compensation (no taxes, no unemployment insurance, no workers compensation insurance, etc.).  The person receives untaxed earnings and collects unemployment checks to boot.

Third Example

This person is on food stamps and receives government provided medical coverage.  The person has interviewed for positions and has been offered more than one job.  Once the compensation and the cost for day care for their children are factored in they determined they are better off not working.  Their choice is to receive food stamps and government provided medical coverage instead of accepting a job.

In all three cases each person was offered at least one position that paid more than minimum wage and with benefits.  In all three cases they turned down the job offers because they knew they could continue to collect an unemployment check or continue indefinitely on government provided food stamps and medical coverage. Surely, there are many people collecting unemployment checks and working in some capacity receiving compensation under the table. 

By extending unemployment benefits to 99 weeks, the federal government disincentivizes people from finding a job.  Only the ruling class can look you in the eyes and honestly believe the lies spewing from their lips. 

Demonstrably, this illustrates the unintended consequences of government intervention.  People become accustom to government provided anything.  The recipients siren song is “more goodies for me, more goodies for free”.  These people are subservient to government.  Unemployment checks create dependency, not jobs.

Ask yourself this question. At election time will these people vote for the person (or Party) that promises to continue to provide these benefits or the person (or Party) that wants to reduce or eliminate these benefits?  In most cases they will vote for the person that promises the benefits.  And so, this completes the viscous cycle of the always insatiable government quest for more control and dominion in our lives.

I recently read an article that concisely and eloquently clarifies the mindset.  “[a]nd ensure the masses remain completely reliant on the establishment for their survival, forever tied to the rotting umbilical cord of a parasitic parent government.”   That pretty much sums it up!

Leave a comment

Filed under Economy

Abject Failure of the Welfare State

An impartial, objective analysis of government programs that have the word “public” pre-pended to the program are abject failures.  The purpose of this article is to analyze three government programs; public housing, public education, and public assistance.  The evidence overwhelming supports these government programs are abject failures.  Furthermore, if the Patient Protection and Affordable Care Act, colloquially referred to as ObamaCare, is implemented expect that program to be an unmitigated failure as well. 

Public Housing

How well has the three trillion dollars spent on public housing worked out for America, especially poor Americans?   In the book, American’s Trillion-Dollar Housing Mistake, author Howard Husock of the Manhattan Institute for Policy Research examines the reasons public housing failed:

Why is government in the housing business?  The standard answer is because the market fails to provide adequate supply, particularly to house the nation’s poor.  Thus an array of government programs from vouchers, mammoth housing construction, favorable tax policies, and top-down mandates on cities and towns take up the slack caused by “market failure”…

How did we get here?  Husock says that three “remarkably tenacious” myths perpetrate the government as “houser” argument:  1) the market will not provide housing for the poor; 2) by taking the profit motive out of the equation the state can do better than small property owners in providing housing; and, 3) the moral qualities of the poor are a product of their housing environment.

Eliminating the profit motive from the equation is eerily similar to the arguments for health care reform and the public option.  The government incorrectly and brazenly assumes that as a non-profit provider of goods and services they are more competitive than a private insurer, and better suited to meet the needs and demands of the consumer or marketplace.  The government interjects itself as housing provider, subsidizer, landlord, and property management company.  Public housing results failed miserably to meet market needs, reduce costs, or eliminate poverty.

Furthermore, specific government intervention through the Community Reinvestment Act and government sponsored entities (GSE) Fannie Mae and Freddie Mac were culpable in the sub-prime mortgage debacle in the housing market which greatly contributed to the financial industry problems in 2008 and the current economic situation.  Government mandates placed upon lending institutions modified industry business practices that required down payments, decent credit, and verifiable income from mortgage applicants.  Instead, the mandates forced lenders to provide sub-prime loans to unqualified applicants.  Fannie-Mae frequently bundled those loans and sold them to investors; which in turn used them as collateral against other securities.  All perfectly legal, and under the careful and watchful eye of numerous Congressional committees and federal agencies, led the housing market and the economy into a free fall.  All these well-intentioned regulations resulted in numerous unintended consequences.

Public Education

In 1979, President Jimmy Carter signed into law the Department of Education Organization Act.  On the day President Carter signed the bill he said…

The Department of Education bill will allow the Federal Government to meet its responsibilities in education more effectively, more efficiently, and more responsively…

Fourth, a Department of Education will save tax dollars. By eliminating bureaucratic layers, the reorganization will permit direct, substantial personnel reductions. By enhancing top-level management attention to education programs, it will earn improved educational services at less cost.

The budget appropriated for the Department of Education from 1980 through 2008 as well as the high school graduation rates are summarized below.

Appropriation Year

Amount
(in Thousands)

Constant
2000 Dollars
(in Thousands)

On-Time Public High School Graduation Rate

1980

14,011,052

29,190,219

72.20%

1990

24,345,321

31,986,872

73.70%

2000

38,447,366

38,447,366

71.70%

2008

68,574,592

55,368,173

73.40%

Sources:  National Center for Education Studies, Department of Education – Budget History  Note:  2008 graduation rate is from 2006 as that is the last actual, non-projected year available.

Any fair-minded person would generally accept high-school graduation rates as a reasonable barometer to measure the impact of federal government education spending.  In 2000 constant dollars the Department of Education budget has nearly doubled from 29 billion dollars in 1980 to 55 billion dollars in 2008, while the on-time public high-school graduation rate is flat. According to the goals outlined in President Carter’s statement I categorically state they have not eliminated bureaucratic layers, they have not substantially reduced personnel, nor have they improved services at less cost.  On a side note, the American Recovery and Reinvestment Act of 2009 appropriated an additional 98 billion dollars to the Department of Education. 

Furthermore, the educational landscape is the cluttered with two major labor unions; the National Education Association (NEA) and the American Federation of Teachers (part of the AFL-CIO).   According to the NEA’s 2007 LM-2 filing with the Department of Labor they had nearly $353 million in receipts, expended $32 million in political activities and lobbying, and expended $80 million in contributions, gifts, and grants.  A partial list of recipients include; ACORN, Campaign for America’s Future, GLSEN (Gay, Lesbian and Straight Education Network), National Council of La Raza, USAction, and Women’s Voice, Women Vote.  The NEA’s Oregon affiliate stated…

The major purpose of our association is not the education of children, rather it is, or ought to be the extension and/or preservation of our members’ rights.

Undoubtedly, the only correlation between federal education spending levels and public high-school graduation rates is increased spending doesn’t improve graduation rates.  Union leadership obstructs real meaningful educational reforms as the union’s primary objectives are counter to improving our children’s education.  The political reality aligns union leadership with high-level government politicians and bureaucrats to control and define society through the auspices of better education for our children, while confiscating more of our hard-earned money.  Quite simply, parents working within their local communities and states are better equipped to address educational needs and implement appropriate solutions.  Lastly, there is the unconstitutionality of federal involvement in education, but that is an entirely beyond the scope of this article.

Public Assistance (Welfare)

Public assistance (a.k.a. Welfare) is a monumental government failure.  A Heritage Foundation Report titled “Obama to Spend $10.3 Trillion on Welfare:  Uncovering the Full Cost of Means-Tested Welfare or Aid to the Poor” by Robert Rector, Katherine Bradley, and Rachel Sheffield states this on welfare spending…

There are 70 federal welfare programs across 14 different federal agencies (one of which was public housing).  In fiscal year 2008, total government spending on means-tested welfare or aid to the poor amounted to $714 billion.  This equates to roughly $16,800 for each poor person in the United States.  Welfare spending was 13 times greater in FY 2008, after adjusting for inflation, than it was when the War on Poverty started in 1964.  Means-tested welfare spending was 1.2 percent of gross domestic product (GDP) in 1965 and in 2008 it is 5 percent of GDP. 

 Since the beginning of the War on Poverty, government has spent $15.9 trillion (in inflation-adjusted 2008 dollars) on means-tested welfare.  In comparison, the cost of all other wars in U.S. History was $6.4 trillion (in inflation-adjusted 2008 dollars).  Do not conclude that I support all war efforts just because I’m comparing public assistance costs to the cost of all wars.  It is meant merely to be a point of comparison.

Under President Obama, government will spend more on welfare in a single year that President George W. Bush spent on the war in Iraq during his entire presidency.  While campaigning for the presidency, Obama lamented that “the war in Iraq is costing each household about $100 per month.”  Applying the same standard to means-tested welfare spending reveals that welfare will cost each household $560 per month in 2009 and $638 per month in 2010.

According to President Obama’s budget projections, federal and state welfare spending will total $10.3 trillion over the next 10 years (FY 2009 to FY 2018).  This spending will equal $250,000 for each person currently living in poverty in the U.S., or $1 million for a poor family of four. 

Call me skeptical, pessimistic, or whatever you’d like, but centrally planned, government run social programs are abject failures.  The evidence bears this out.  This is why we must bind the federal government to its legitimate constitutional authority and return to federalism.

Leave a comment

Filed under Economy, Public Policy

Giving Government Sanction over Life, Liberty, and Property.

Society is premised upon certain bedrock principles; life, liberty, and the pursuit of happiness.  Life is the right of all rights and man is the rightful owner of his physical, spiritual, and emotional life.  Every man is the rightful owner of his body and his life.

Accordingly, every man is responsible for sustaining his life.  In other words, every man has the natural right to his own self-preservation.  To preserve his life man employs his physical and/or intellectual abilities to produce a good or service.  What man produces is his property and man participates in the voluntary exchange of goods and services in a free-market system called capitalism to ensure his own self-preservation.

Private property rights is the implementation of man’s right to preserve his own life.  To confiscate a man’s property is to reduce or eliminate his ability to preserve his life.  Likewise, dependence upon the government to preserve life is to voluntarily enslave oneself to the ruling class and grant them sanction over your life.

Government uses force and coercion to confiscate property from its rightful owner and redistributes it to those that otherwise have no rightful claim to that property.  According to some this is considered charitable or compassionate.   However, if one man where to take another man’s property it is illegal and immoral. Likewise, if government acts collectively to take property it is also illegal and immoral.

To give sanction to government force and coercion over a man’s life, liberty, and property is to give sanction to legal plunder.  More importantly, it gives another man dominion over you; to control your freedom, your personal and economic choices, and your dreams. In essence, government control over your life.

Free market participants require both producers and consumers to co-exist for the mutual benefit of each other.  One man produces a good another man desires and a mutually beneficial exchange occurs.  The exchange may be a direct system known as barter or an indirect system of exchange where some form of specie/currency is used.  A good is exchanged only if it pleases the producer and the consumer.  The producer cannot force the consumer to purchase his goods.  Therefore, the producer must not only produce a good desirable to others in society, but the good must be of sufficient value and quality to attract consumers.

One essential aspect of free markets is not only the opportunity to succeed but the opportunity to fail.  In a recent interview with the BBC, Kyle Bass of Hayman Capital Markets said “Capitalism without bankruptcy is like Christianity without Hell”.  Free markets depend upon both success and failure for the market to function properly.  Failure is an option and a very necessary option in a free market system.

Government intervention into free markets perverts and retards the voluntary exchange of goods and services between members of society.  On a more basic, human level government intervention effects man’s ability to exercise his economic liberty and to pursue happiness.  Government restricts and/or prohibits self-preservation to varying degrees.  The perversion of free markets, especially the banking system, is a primary example.  This directly impacts man’s ability to preserve his life.

The country has not operated in a truly free market system for over one hundred years.  Government intervenes in every major industry including, but not limited to; banking, health care, transportation, energy, mining, finance and insurance, agriculture, manufacturing, and mass media. Moreover, government intervenes by picking winners and losers which further erodes free market principles.  Some examples are;  government grants, subsidies, tax provisions, and regulations.  Lastly, government bailouts are the antithesis of free markets.

Government intervention in one specific part of the free market system is germane to the economy as a whole; the banking system.  Consequently, government’s actions jeopardizes our liberty and property.  Let me explain.

Our economy is one based on indirect exchange where a good or service is purchased using currency.  The Federal Reserve Note is a fiat currency.  A fiat currency has no intrinsic value and, in fact, its only value is that it allows consumers to procure things of real value. 

Consider the concept of wealth.  Wealth is nothing more than your surplus production of goods and services.  Today, people either produce a good or provide a service and in exchange are paid compensation.  Each person then exchanges their compensation for goods and services they desire.  Any excess compensation not otherwise used to procure goods and services is your surplus (savings).  Generally, a person’s savings is their wealth.  Historically, savings are deposited at banks and in return the bank pays you interest on your savings.  Alternatively, savings could be invested in equity or bond markets, commodities, real estate, etc. Nevertheless, in most cases wealth is denominated in our currency.

In a free market interest rates for savers and borrowers float freely based on supply and demand and other factors.  Productive output grows through private investment of excess savings or equity on corporate balance sheets.  However, government sets the interest rates through the Federal Reserve Bank instead of the free market.  Interest rates effect credit and borrowing, savings, liquidity, employment, and the flow of private capital. 

Interest rates affect government activities as well.  Profligate government spending results in annual deficits that must be funded.  Government borrows money by selling securities to buyers of our debt.  Those buyers receive a return on investment based on interest rates established by the government.  As annual deficits become more commonplace the long-term accumulation is the outstanding national debt. 

Individual wealth is at risk because the currency most wealth is denominated in is the very currency the national debt is denominated in.  At minimum, the currency functions as both an indirect medium of exchange and a store of wealth/purchasing power.  The inherit danger to the people is the fact that our wealth is denominated in the same currency as our debt. 

Remember, government has three methods to raise revenue; tax, borrow, and inflate.

The government cannot tax or borrow their way out of a $15 trillion debt.  The only viable option the government has is to inflate the money supply.  Besides interest rates, the government also controls the money supply.  This is the very clear and present danger Americans face.  As government inflates the money supply each unit of currency loses its purchasing power.  A larger money supply makes it easier for the government to pay off/down the $15 trillion debt.  Government uses dollars nominally and has no concern with the wealth or stored purchasing power of a dollar.  However, remember most Americans wealth is also denominated in the same currency as the debt.  Wealth is the store of purchasing power and the government intends to take every action within its powers to save the banking system, which means they will sacrifice our wealth to do so.

Your wealth is the product of your life’s effort to sustain your life.  As government inflates the money supply and destroys your wealth, government has dominion over you. Government created a conflict between the banking system and individuals.  We know that government will intercede to save the banking system at our individual expense.  We the people are the sacrificial lambs in this arrangement. 

The current interest rate policy is to keep interest rates artificially low so the interest payments due on the debt are minimized.  However, this affects savings and investment, especially for lower income earners.  A bank savings account pays no more than 1% interest.  This is the nominal return and does not factor in inflation.  The real return is negative because inflation is 4-6% (depending on the source).  So, a person earning $25,000 a year that is able to save $1,000 is actually losing wealth (property) by saving it.  The government discourages savings to promote consumption.  Too add insult to injury, the government then taxes the saver on the interest earned even though they are losing wealth/purchsing power due to monetary policy. 

Today, economic growth is based upon credit expansion.  Consumers and businesses alike are encouraged to borrow; either to spend or to expand business.  Government deficits routinely exceed $1 trillion which requires the government to borrow money that is then sent overseas to China and other countries creating huge trade imbalances.  Since the world is run on fiat currencies there is no real clearing mechanism for the imbalance, so the Chinese buy our debt.  While this cycle tempers domestic inflation to a degree, it creates an unsustainable debt the country cannot repay.

Society is divided into two camps; those that cherish individual liberty and freedom, and free markets vs. those that give sanction to an all-powerful, centralized government and central planning.  Enshrined in our founding documents are the natural rights to life, to liberty, and to the pursuit of happiness.  The proverbial line in the sand was drawn and is quickly eroding under the constant pressure to obliterate our natural rights and confer, explicitly or implicitly, upon government the power to exercise dominion over life, liberty, and the pursuit of happiness. 

Society must return to its founding principles:  Constitutionally limited government!  Federalism!  Individual responsibility!  Private Property Rights!  Free Markets!

What say you?

2 Comments

Filed under Economy, Philosophical