Hypocrisy is a Two Way Street
Arguing over debt limits is nothing new. Neither is the hypocrisy. It’s not about doing the right thing. It’s about politics. Always has been (see Debt Crisis Déjà Vu by Howard Kurtz posted 7/12/2011 on The Daily Beast).
Democratic Sen. Kent Conrad is losing patience with arguments for raising the debt ceiling.
“The question is: Are we staying on this course to keep running up the debt, debt on top of debt, increasingly financed by foreigners, or are we going to change course?” he asked.
But Republican Sen. Chuck Grassley says there is no alternative, with lawmakers facing “a choice between breaking the law by exceeding the statutory debt limit or, on the other hand, breaking faith with the public by defaulting on our debt…”
“To pay our bills,” said John Kerry, who had just lost his presidential bid, “America now goes cup in hand to nations like China, Korea, Taiwan, and Caribbean banking centers. Those issues didn’t go away on Nov. 3, no matter what the results.”
And always will be. Parties typically stand by their president. As the Republicans stood with George W. Bush in 2006. Who then made the same arguments that the Democrats are making now. And the Democrats are making the same arguments now that the Republicans made then. Nothing ever changes. Just their principles change to suit the politics.
In fact, every Senate Democrat—including Barack Obama and Joe Biden—voted against boosting the debt ceiling, while all but two Senate Republicans voted in favor. It was Bush’s fourth debt-ceiling hike in five years, for a total of $3 trillion.
Eric Cantor and John Boehner voted then to raise the ceiling, and on other occasions during the Bush administration; now they’re leading the opposition. Obama, who warned Tuesday in a CBS interview that he can’t guarantee Social Security checks will go out after the August 2 deadline, has said his 2006 vote was a mistake.
Obama and Biden were against raising the debt limit then because it was fiscally irresponsible. They’re for it now. Even though the debt is higher. And more fiscally irresponsible.
Obama said his 2006 vote was wrong? I guess we can forgive him being that he was young and inexperienced coming into the U.S. Senate. Of course, he was even more young and inexperienced as far presidents are concerned. So perhaps his policy is wrong, too, like that 2006 vote. The stimulus. The auto bailout. The Wall Street bailout. All that Keynesian tax and spend. Perhaps when he grows up and learns from experience he will be saying he was ‘wrong’ a lot more often.
Monetary Policy fails to Eliminate the Business Cycle
And speaking of all that Keynesian policy, how has it worked? (see Bernanke: Fed May Launch New Round of Stimulus by Jeff Cox posted 7/13/2011 on CNBC).
Federal Reserve Chairman Ben Bernanke told Congress Wednesday that a new stimulus program is in the works that will entail additional asset purchases, the clearest indication yet that the central bank is contemplating another round of monetary easing…
Markets reacted immediately to the remarks, sending stocks up sharply in a matter of minutes. Gold prices continued to surge past record levels, while Treasury yields moved higher as well.
It hasn’t been working. But never say die. Just because QE1 and QE2 failed it doesn’t necessarily mean QE3 will fail. But it will. And it will further depreciate the U.S. dollar. Which is why gold prices and Treasury yields are up. They’re priced in dollars. So when you make the dollar smaller, you need more of them to buy things priced in dollars.
The Fed recently completed the second leg of its quantitative easing program, buying $600 billion worth of Treasurys in an effort to boost liquidity and get investors to purchase riskier assets…
“The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support,” Bernanke told the House Financial Services Committee on the first of two days of Capitol Hill testimony.
Bernanke also said it was possible that inflationary pressures spurred by higher energy and food prices may end up being more persistent than the Fed anticipates.
So the Fed is looking at policy to fight both inflation and deflation. Interesting. Because you use monetary policy to fight one with the other.
This is the Business Cycle that Keynesian economics purportedly did away with. As inflation starts rising you contract the money supply via higher interest rates. As deflation reduces asset value you lower interest rates to stimulate borrowing and asset buying. There’s only one problem to this Keynesian economics theory. It doesn’t work.
Playing with interest rates to stimulate borrowing does stimulate borrowing. People take advantage of low rates, take out loans and buy assets. Like houses. In fact, there is such a boon in the housing market from all this stimulated borrowing that house prices are bid up. Into a bubble. That eventually pops. And a period of deflation sets in to correct the artificially high housing prices resulting from artificially low interest rates.
The Dollar Loses against the Embattled Euro
So how bad is the depreciation of the dollar (see Bernanke says more support possible if economy weakens posted 7/13/2011 on the BBC)?
The dollar extended earlier losses against the euro following Mr Bernanke’s comments, with the euro rising more than a cent to $1.4088.
The Eurozone is teetering on collapse with the Greek crisis. Especially if their problems spread to the larger economies of Italy and Spain. Further pressuring the Euro. The Euro had been falling against the dollar. It’s not anymore. Not because the Euro is getting stronger. But because the dollar is getting weaker.
Tax, Borrow, Print and Spend Keynesians love to Spend Money
And the safe haven from a falling dollar? Gold (see Gold hits record high on Bernanke, euro worries by Frank Tang posted 7/13/2011 on Reuters).
Gold surged to a record above $1,580 an ounce on Wednesday as the possibility of more Federal Reserve stimulus coupled with Europe’s deepening debt crisis gave bullion its longest winning streak in five years…
Gold benefits from additional U.S. monetary easing because such a move would likely weaken the dollar and stir inflation down the road.
“The worst thing for gold would be to have the economy doing well enough that the Federal Reserve starts to normalize monetary policy, or conditions in the European Community begin to settle down,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott, a broker/dealer with $54 billion in assets.
That’s right. Gold loves bad monetary policy. And it loves Keynesian economics. Because the weaker the dollar gets the more expensive gold gets in U.S. dollars. Gold says, “Print on, Chairman Bernanke. Keep printing those dollars. I’ve never felt so alive and powerful.”
Gold is a tangible asset. Dollars are just pieces of paper. Gold gets more valuable during periods of inflation because you can’t print gold. That’s why Keynesian governments refuse to reinstitute the gold standard. Because having the power to print dollars lets them spend more money than they have. And tax, borrow, print and spend Keynesians love to spend money.
Democrats Screwing Seniors and Veterans to get their Way
One government advantage of printing money is reducing the value of dollar-priced assets. Such as government debt. Economists call it monetizing the debt. By making the treasuries and bonds people invest their retirement in worth less, it costs less to redeem them. This is bad for retirees who have to live their retirement on less. But screwing retirees helps the government to spend more.
Despite this the debt is at a record level. They still need to borrow more. Screwing retirees just isn’t paying the bills anymore. So President Obama, the Democrats and the Republicans have been bitterly arguing about raising the debt limit. But making little progress (see Obama walks out of tense debt meeting: aide by Andy Sullivan, Reuters, posted 7/13/2011 on the Chicago Tribune).
President Barack Obama abruptly ended a tense budget meeting on Wednesday with Republican leaders by walking out of the room, a Republican aide familiar with the talks said.
The aide said the session, the fourth in a row, was the most tense of the week as House of Representatives Speaker John Boehner, the top Republican in Congress, dismissed spending cuts offered by the White House as “gimmicks and accounting tricks.”
Gimmicks and accounting tricks are all the Democrats want to offer. Because they just don’t want to cut back on spending. It’s not who they are. Big Government tax, borrow, print and spend Keynesians who love to spend money (see Eric Cantor: Obama abruptly walked out of debt meeting by Jonathan Allen posted 7/13/2011 on Politico).
President Barack Obama abruptly walked out of a debt-limit meeting with congressional leaders Wednesday, throwing into serious doubt the already shaky debt limit negotiations, according to House Majority Leader Eric Cantor (R-Va.) and a second GOP source.
Cantor said the president became “agitated” and warned the Virginia Republican not to “call my bluff” when Cantor said he would consider a short-term debt-limit hike. The meeting “ended with the president abruptly walking out of the meeting,” Cantor told reporters in the Capitol.
That bluff would be, off course, not printing Social Security checks or paying the military. The Education Department will probably get paid. But seniors will get screwed. As those serving in the military. And veterans. Because when all else fails, take hostages. Threaten their wellbeing unless you get what you want.
The Democrats believe it’s all their Money
Why is there such a divide between the Republicans and the Democrats? It’s because of their underlying philosophies. Republicans believe that this is a nation of ‘we the people’. Whereas Democrats believe it’s a nation of ‘we the government’ (see We have a taxing problem, not just a spending problem by Ezra Klein posted 7/12/2011 on The Washington Post).
The Bush tax cuts were not supposed to last forever. Alan Greenspan, whose oracular endorsement was perhaps the single most decisive event in their passage, made it very clear that they were a temporary solution to a temporary surplus. “Recent data significantly raise the probability that sufficient resources will be available to undertake both debt reduction and surplus-lowering policy initiatives,” Greenspan said in 2001.
Okay, so maybe he wasn’t so clear. But everyone knew what he meant. And, broadly speaking, they agreed. We had a big surplus. It was time to do something with it. Brad DeLong, a former Clinton administration official and an economist at the University of California at Berkeley, didn’t want to see the surplus spent on tax cuts. He wanted to see it spent on public investments. “Nevertheless,” he wrote in 2001, “it is hard to disagree with Greenspan’s position that — if our future economic growth is as bright as appears likely— it will be time by the middle of this decade to do something to drastically cut the government’s surpluses.”
The Democrats believe it’s all their money. Any money they let us keep is ‘government spending’ in their world. That’s why they call all ‘tax cuts’ government spending. And not simply returning money to its rightful owners.
But the Republican Party refuses to let any of them expire. And forget admitting that tax cuts meant for surpluses don’t make sense during deficits; they refuse to admit that tax cuts have anything to do with deficits at all.
It’s this belief that stands in the way of a debt deal. “We have a spending problem, not a taxing problem,” Republicans say. If the federal government defaults on Aug. 2, that sentence will be to blame. What a shame, then, that the sentence is entirely, obviously, wrong.
Obviously? What is obvious is that this person ignores the economic prosperity caused by JFK‘s tax cuts. Ronald Reagan‘s tax cuts. And George W. Bush’s tax cuts. Tax cuts stimulate economic activity. More economic activity means more tax dollars flowing into Washington. As history has proven. And yet the economically naive hang on to Keynesian theories despite their history of failure. Because they think they are oh so smart. When in reality they’re not. Just lemmings unquestioningly following the party line.
The Democrats favor unlimited Taxing, Borrowing and Printing
The budget debate over raising the debt ceiling is not a financial debate. It’s a political debate. Currently, the politics have the Republicans opposing the increase. And the Democrats favoring it. This is actually more in line with their underlying philosophies. Democrats believe it’s all their money and they want to keep more. The Republicans believe the money belongs to the people who earned it and are trying to let them keep more of it. So you would expect the Democrats to be in favor of unlimited taxing, borrowing and printing. And Republicans in favor of less taxing, borrowing and printing. Which is the case in the current budget debate.
The question now is who will blink first? The Republicans fearing another 1995 government shutdown? Or the Democrats who are doing the preponderance of bluffing? (There’s almost $200 billion in cash coming into Washington each month. If they don’t pay seniors and veterans, people will want to know who they felt was important enough to pay.)
The stakes have never been higher. What happens in the current debate could very well determine the outcome of the 2012 election. Oh, and the future of America.