Week in Review
If President Obama and the Democrats had their way do you know what they would do? All out Keynesian economics. To the max. Huge government stimulus upon huge government stimulus. Keeping interest rates at or below zero so they can borrow as much as they’d like to pay for their deficit spending. Or just printing the money to spend. That’s what they’d love to do. Because they don’t understand economics. All they know is the politics of Keynesian economics. Power. It allows the government to spend far more than any other economic system. And that lets them buy a lot of votes.
President Obama and the Democrats look at the Chinese with awe and reverence. They would love to have the power the Chinese communists have. So they could do whatever they wanted to do. Just like the Chinese communists do. And when Prime Minister Shinzo Abe revealed his three arrows of Abenomics the left was impressed. Large-scale government spending. Aggressive monetary easing (like all that quantitative easing Ben Bernanke was doing with the Federal Reserve). And structural reforms. Government just taking over the economy to fix it and correct all the failings of the free market. This is what the Democrats want to do in the United States. Because they are so conceited that only they are smart enough to fix the problems in the economy. So how has this Keynesian assault worked in Japan? Not so good (see Blow for Abenomics as Japan’s economy grows less than expected by Rebecca Clancy posted 3/10/2014 on The Telegraph).
Revised data from the government showed that gross domestic product growth was 0.2pc in the three months to December 31 and 1.5pc for 2013…
While the data still marked Japan’s best annual performance in three years, attention will now turn to the Bank of Japan’s monetary policy statement on Tuesday, as weakening growth before next month’s tax hike may push the central bank into a fresh batch of monetary easing measures.
“With Japanese data weaker than expected and their April consumption tax hike imminent, the state of the Japanese economy is cause for significant concern,” said Rebecca O’Keeffe, head of investment at stockbroker Interactive Investor…
Mr Abe swept into power in 2012 on a promise to catapult the Japanese economy out of a decades-long slump, but his policies have met with mixed success.
The weak data hit markets in Asia, with Japan’s Nikkei closing down 1pc at 15,120.14, while China’s Shanghai Composite plunged 2.9pc and the Hang Seng dropped 1.8pc…
While authorities blame the country’s holiday season for the weak results, they add to growing worries about the Chinese economy, with the latest surveys on its key manufacturing sector showing weakness.
Abenomics didn’t work. Because Keynesian economics doesn’t work. Government spending and artificially low interest rates just don’t create robust economic activity. All they create are cronyism. Malinvestments. Asset bubbles. And more painful and longer lasting recessions. As history has shown. Especially the deflationary spiral of Japan’s Lost Decade that they’re still trying to recover from. And the Chinese may follow suit. For they have nothing but exports. And you cannot build robust economic activity on exports alone. You need a thriving middle class. Which China doesn’t have.
History has shown over and over never to vote for Keynesians. For their policies never help the people. They only help those in power. And their crony friends. Who get richer while the people get poorer. The ruling Chinese communists are doing well but the majority of Chinese are still impoverished rural peasants living on subsistence farming. And President Obama and his crony friends (especially those on Wall Street) have all been doing very well thanks to a booming stock market. While median family income has fallen during his presidency. Proving yet again the mistake it is to vote for a Keynesian.
Tags: Abenomics, Democrats, government spending, government stimulus, interest rates, Japan, Keynesian, Keynesian economics, President Obama, quantitative easing, stimulus
Week in Review
The Keynesians were applauding Shinzō Abe’s economic plans for Japan. To end the never-ending deflationary spiral they’ve been in since the late Nineties. His Abenomics included all the things Keynesians love to do. And want to do in the United States. Expand the money supply through inflationary monetary policy. Devalue the yen to make their exports cheaper. Lower interest rates into negative territory. Quantitative easing. And lots of government spending. The kinds of things that just makes a Keynesian’s heart go pitter pat.
They kicked off Abenomics in 2013. And how are things about a year later? Not good (see Japan’s deficit hits record as economic growth slows posted 3/9/2014 on BBC News Business).
Japan’s current account deficit widened to a record 1.5tn yen ($15bn; £8.7bn) in January, the largest since records began in 1985.
In further bad news, the country’s economic growth figures were also revised downwards…
The sluggish growth and growing deficit come just before a planned sales tax increase, scheduled to take effect in April.
They did weaken the yen. Making it worth less than other currencies so those currencies could get more yen when they exchanged their currencies to buy those Japanese exports. Of course, when Japanese exchanged their yen for those other currencies they got less of those other currencies in return. Requiring more yen to buy those now more expensive imports. Thus increasing their trade deficit.
Japan is an island with a lot of people. They have to import a lot of their food, energy and natural resources as they have little on their island. So the weaker yen just made everything more expensive in Japan. Which, of course, lowered GDP. As those higher prices reduced the amount of buying their consumers could do.
Japan’s greatest problem is her aging population. And they have just about the oldest population in the world. As the youth have slammed the brakes on having children. So you have massive waves of people leaving the workforce the government is supporting in retirement. And fewer people entering the workforce to pay the taxes that support those retirees. Which, of course, forces higher tax rates on those remaining in the workforce. Further reducing the amount of buying their consumers can do. And no amount of Abenomics can change that.
Abenomics did not deliver what the Keynesians thought it would. Because Keynesian economics (aka demand-side economics) just doesn’t work. If it did Japan never would have had a Lost Decade to begin with. For it was Keynesian economics that gave Japan that asset price bubble in the first place. Which burst and deflated into the Lost Decade.
What Japan needs is a return to classical economic principles. Focusing more on the supply side. Lower tax rates and reduce regulation. Let the market set interest rates. Restore the policies that introduced ‘Made in Japan’ to the world. They need to make their capitalism more laissez-faire. If they do they can create the kind of economic activity that just might be able to support the generation who created the ‘Made in Japan’ label in their retirement. But you must have robust economic activity. So robust that lower tax rates can produce greater tax revenue. The supply-side economics way.
Tags: Abenomics, aging population, Consumers, currencies, deficit, exports, government spending, imports, interest rates, Japan, Japanese exports, Keynesian, Keynesian economics, lost decade, quantitative easing, retirees, Supply-side economics, taxes, trade deficit, workforce, yen
(Originally published 2/5/2013)
The Bretton Woods System was a quasi Gold Standard where the U.S. Dollar replaced Gold
Government grew in the Sixties. LBJ’s Great Society increased government spending. Adding it on top of spending for the Vietnam War. The Apollo Moon Program. As well as the Cold War. The government was spending a lot of money. More money than it had. So they started increasing the money supply (i.e., printing money). But when they did they unleashed inflation. Which devalued the dollar. And eroded savings. Also, because the U.S. was still on a quasi gold standard this also created a problem with their trade partners.
At the time the United States was still in the Bretton Woods System. Along with her trade partners. These nations adopted the U.S. dollar as the world’s reserve currency to facilitate international trade. Which kept trade fair. By preventing anyone from devaluing their currency to give them an unfair trade advantage. They would adjust their monetary policy to maintain a fixed exchange rate with the U.S. dollar. While the U.S. coupled the U.S. dollar to gold at $35/ounce. Which created a quasi gold standard. Where the U.S. dollar replaced gold.
So the U.S. had a problem when they started printing money. They were devaluing the dollar. So those nations holding it as a reserve currency decided to hold gold instead. And exchanged their dollars for gold at $35/ounce. Causing a great outflow of gold from the U.S. Giving the U.S. a choice. Either become responsible and stop printing money. Or decouple the dollar from gold. And no longer exchange gold for dollars. President Nixon chose the latter. And on August 15, 1971, he surprised the world. Without any warning he decoupled the dollar from gold. It was a shock. So much so they call it the Nixon Shock.
To earn a Real 2% Return the Interest Rate would have to be 2% plus the Loss due to Inflation
Once they removed gold from the equation there was nothing stopping them from printing money. The already growing money supply (M2) grew at a greater rate after the Nixon Shock (see M2 Money Stock). The rate of increase (i.e., the inflation rate) declined for a brief period around 1973. Then resumed its sharp rate of growth around 1975. Which you can see in the following chart. Where the increasing graph represents the rising level of M2.
Also plotted on this graph is the effect of this growth in the money supply on retirement savings. In 1966 the U.S. was still on a quasi gold standard. So assume the money supply equaled the gold on deposit in 1966. And as they increased the money supply over the years the amount of gold on deposit remained the same. So if we divide M2 in 1966 by M2 in each year following 1966 we get a declining percentage. M2 in 1966 was only 96% of M2 in 1967. M2 in 1966 was only 88% of M2 in 1968. And so on. Now if we start off with a retirement savings of $750,000 in 1966 we can see the effect of inflation has by multiplying that declining percentage by $750,000. When we do we get the declining graph in the above chart. To offset this decline in the value of retirement savings due to inflation requires those savings to earn a very high interest rate.
This chart starts in 1967 as we’re looking at year-to-year growth in M2. Inflation eroded 4.07% of savings between 1966 and 1967. So to earn a real 2% return the interest rate would have to be 2% plus the loss due to inflation (4.07%). Or a nominal interest rate of 6.07%. The year-to-year loss in 1968 was 8.68%. So the nominal interest rate for a 2% real return would be 10.68% (2% + 8.68%). And so on as summarized in the above chart. Because we’re discussing year-to-year changes on retirement savings we can consider these long-term nominal interest rates.
Just as Inflation can erode someone’s Retirement Savings it can erode the National Debt
To see how this drives interest rates we can overlay some average monthly interest rates for 6 Month CDs (see Historical CD Interest Rate). Which are often a part of someone’s retirement nest egg. The advantage of a CD is that they are short-term. So as interest rates rise they can roll over these short-term instruments and enjoy the rising rates. Of course that advantage is also a disadvantage. For if rates fall they will roll over into a lower rate. Short-term interest rates tend to be volatile. Rising and falling in response to anything that affects the supply and demand of money. Such as the rate of growth of the money supply. As we can see in the following chart.
The average monthly interest rates for 6 Month CDs tracked the long-term nominal interest rates. As the inflationary component of the nominal interest rate soared in 1968 and 1969 the short-term rate trended up. When the long-term rate fell in 1970 the short-term rate peaked and fell in the following year. After the Nixon Shock long-term rates increased in 1971. And soared in 1972 and 1973. The short-term rate trended up during these years. And peaked when the long-term rate fell. The short term rate trended down in 1974 and 1975 as the long-term rate fell. It bottomed out in 1977 in the second year of soaring long-term rates. Where it then trended up at a steeper rate all the way through 1980. Sending short-term rates even higher than long-term rates. As the risk on short-term savings can exceed that on long-term savings. Due to the volatility of short-term interest rates and wild swings in the inflation rate. Things that smooth out over longer periods of time.
Governments like inflationary monetary policies. For it lets them spend more money. But it also erodes savings. Which they like, too. Especially when those savings are invested in the sovereign debt of the government. For just as inflation can erode someone’s retirement savings it can erode the national debt. What we call monetizing the debt. For as you expand the money supply you depreciate the dollar. Making dollars worth less. And when the national debt is made up of depreciated dollars it’s easier to pay it off. But it’s a dangerous game to play. For if they do monetize the debt it will be very difficult to sell new government debt. For investors will demand interest rates with an even larger inflationary component to protect them from further irresponsible monetary policies. Greatly increasing the interest payment on the debt. Forcing spending cuts elsewhere in the budget as those interest payments consume an ever larger chunk of the total budget. Which governments are incapable of doing. Because they love spending too much.
Tags: $35/ounce, Bretton Woods, Bretton Woods System, devalued the dollar, exchange rate, fixed exchange rate, gold, gold on deposit, gold standard, government spending, inflation, interest rate, M2, monetary policy, monetizing the debt, money supply, national debt, Nixon Shock, nominal interest rate, printing money, quasi gold standard, reserve currency, retirement savings, savings, spending, trade, U.S. dollar
Week in Review
Detroit had a massive public sector. Lots of union government jobs. With very generous benefits. Then the city began losing population. As the city shrank the public sector did not. As the city could no longer support the public sector on tax revenue they turned to borrowing. At her bankruptcy her pension obligations were in the billions. And were just unsustainable. With a lot of those retirees going to see huge cuts in their retirement benefits. A first for a public sector union. And one that may set a precedent for other impoverished cities (see Cities where poverty is soaring by Michael B. Sauter and Thomas C. Frohlich, 24WallSt.com, posted 12/16/2013 on Yahoo! Homes).
Many of these cities show a symptom of the regions hit hardest by the recession — a significant decline in real estate value. Nationally, the average home value during the three-year period of 2010-2012 was down by 9% compared to the previous three-year period. In eight of the 10 cities with soaring poverty rates, property values fell by at least 10%. Homes in Eastpointe lost nearly half of their value. In Inkster, Michigan, another city where poverty grew substantially, an average of 43.3% of homes were worth less than $50,000 between 2010 and 2012, compared to just 11.8% of homes during the 2007-2009 period…
Several of these cities were already struggling prior to the recession, in part because of their reliance on manufacturing. The industry had been declining for years, and the recession only made matters worse. In Salisbury, North Carolina, employment in manufacturing fell from 15.5% of all jobs to 8.3%. Goshen, Indiana, another city with a major increase in poverty, is heavily dependent on the auto industry — more than a third of the working population was employed in manufacturing between 2010 and 2012. According to Joe Frank at the Indiana Department of Workforce Development, this dependence had particularly dire consequences during the recession.
The Democrats are all Keynesians. Who believe in government spending. And keeping interest rates artificially low to stimulate the economy. To encourage people to buy big expensive houses. Just because interest rates are low. So people did. With mortgages so cheap everyone was getting them. And as these buyers flooded the market housing prices soared. Creating a great housing bubble. Which collapsed when interest rates rose. Resetting the rates on those subprime adjustable rate mortgages (ARMs). Raising monthly payments. Beyond what some people could afford. Forcing them into bankruptcy. Creating the subprime mortgage crisis. And the collapse of housing prices.
The UAW made American cars so expensive people started buying the less expensive imports. As most people don’t have UAW contracts giving them a fat paycheck and generous benefits. Leaving them to get by on less than UAW workers. Which meant they turned to the less costly imports. Built by companies that didn’t have those great legacy costs of years of overly generous contracts that became unsustainable. Pension costs and health care for retirees (which outnumbered active workers) forced GM and Chrysler to ask for a government bailout to avoid bankruptcy. Asking the taxpayer to help them pay the generous pensions and health care costs of others. Instead of bringing these benefits into line with the rest of America.
Democrats are Keynesians. They believe in government intervention into the private sector economy. And they protect their friends in unions to get their votes. Raising costs for everyone else. These policies, though, are just impoverishing American cities. At least the ones dominated by unions and/or Democrats.
Tags: Bankruptcy, Democrats, Detroit, government spending, interest rates, Keynesians, manufacturing, mortgage, pension, pension obligations, public sector, UAW
In 1907 the Heinze Brothers thought Investors were Shorting the Stock of their United Copper Company
Buying and selling stocks is one way to get rich. Typically by buying low and selling high. But you can also get rich if the stock price falls. How you ask? By short-selling the stock. You borrow shares of a stock that you think will fall in price. You sell them at the current price. Then when the stock price falls you buy the same number of shares you borrowed at the lower price. And use these to return the shares you borrowed. You subtract the price you pay to buy the cheaper shares from the proceeds of selling the costlier shares for your profit. And if the price difference/number of shares is great enough you can get rich.
In 1907 the Heinze brothers thought investors were shorting the stock of their United Copper Company. So they tried to turn the tables on them and get rich. They already owned a lot of the stock. They then went on a buying spree with the intention of raising the price of the stock. If they successfully cornered the market on United Copper Company stock then the investors shorting the stock would have no choice but to buy from them to repay their borrowed shares. Causing the short sellers to incur a great loss. While reaping a huge profit for themselves.
Well, that was the plan. But it didn’t quite go as planned. For they did not control as much of the stock as they thought they did. So when the short-sellers had to buy new shares to replace their borrowed shares they could buy them elsewhere. And did. When other investors saw they weren’t going to get rich on the cornering scheme the price of the stock plummeted. For the stock was only worth that inflated price if the short-sellers had to buy it at the price the Heinze brothers dictated. When the cornering scheme failed the stock they paid so much to corner was worth nowhere near what they paid for it. And they took a huge financial loss. But it got worse.
The Panic of 1907 led to the Federal Reserve Act of 1913
After getting rich in the copper business in Montana they moved east to New York City. And entered the world of high finance. And owned part of 6 national banks, 10 state banks, 5 trusts (kind of like a bank) and 4 insurance companies. When the cornering scheme failed the Heinze brothers lost a lot of money. Which spooked people with money in their banks and trusts. As these helped finance their scheme. So the people rushed to their banks and pulled their money out. Causing a panic. First their banks. Then their trusts. Including the Knickerbocker Trust Company. Which collapsed. As the contagion spread to other banks the banking system was in risk of collapsing. Causing a stock market crash. Resulting in the Panic of 1907.
Thankfully, a rich guy, J.P. Morgan, stepped in and saved the banking system. By using his own money. And getting other rich guys to use theirs. To restore liquidity in the banking system. To avoid another liquidity crisis like this Congress passed the Federal Reserve Act (1913). Giving America a central bank. And the progressives the tool to take over the American economy. Monetary policy. By tinkering with interest rates. And breaking away from the classical economic policies of the past that made America the number one economic power in the world. Built on a foundation of thrift, savings, investment, free trade, the gold standard, etc. Where people saved for the future. The greater their savings the more investment capital there was. And the lower interest rates were.
The Federal Reserve (the Fed) changed all of that. By printing money to keep interest rates artificially low. Giving us boom and bust cycles as people over invest and over build because of cheap credit. Leading to bubbles (the boom) in asset prices that painful recessions (the bust) correct. Instead of the genuine growth that we got when our savings determined interest rates. Where there is no over-investing or over-building. Because the limited investment capital did not permit it. Guaranteeing the efficient flows of capital to generate real economic activity.
Warren Harding’s Tax Cuts ignited Economic Activity and gave us the Modern World
Thanks to the Fed there was a great monetary expansion to fund World War I. The Fed cut the reserve requirements in half for banks. Meaning they could loan more of their deposits. And they did. Thanks to fractional reserve banking these banks then furthered the monetary expansion. And the Fed kept the discount rate low to let banks borrow even more money to lend. The credit expansion was vast. Creating a huge bubble in asset prices. Creating a lot of bad investments. Or malinvestments. Economist Ludwig von Mises had a nice analogy to explain this. Imagine a builder constructing a house only he doesn’t realize he doesn’t have enough materials to finish the job. The longer it takes for the builder to realize this the more time and resources he will waste. For it will be less costly to abandon the project before he starts than waiting until he’s built as much as he can only to discover he will be unable to sell the house. And without selling the house the builder will be unable to recover any of his expenses. Giving him a loss on his investment.
The bigger those bubbles get the farther those artificially high prices have to fall. And they will fall sooner or later. And fall they did in 1920. Giving us the Depression of 1920. And it was bad. Unemployment rose to 12%. And GDP fell by 17%. Interestingly, though, this depression was not a great depression. Why? Because the progressives were out of power. Instead of the usual Keynesian solution to a recession Warren Harding (and then Calvin Coolidge after Harding died in office) did the opposite. There was no stimulus deficit-spending. There was no playing with interest rates. Instead, Harding cut government spending. Nearly in half. And he cut tax rates. These actions led to a reduction of the national debt (that’s DEBT—not deficit) by one third. And ignited economic activity. Ushering in the modern world (automobiles, electric power, radio, telephone, aviation, motion pictures, etc.). Building the modern world generated real economic activity. Not a credit-driven bubble. Giving us one of the greatest economic expansions of all time. The Roaring Twenties. Ending the Depression of 1920 in only 18 months. Without any Fed action or Keynesian stimulus spending.
By contrast FDR used almost every Keynesian tool available to him to end the Great Depression. But his massive New Deal spending simply failed to end it. After a decade or so of trying. Proving that government spending cannot spend an economy out of recession. But cuts in government spending and cuts in tax rates can. Which is why the Great Recession lingers on still. Some 6 years after the collapse of one of the greatest housing bubbles ever. Created by one of the greatest credit expansions ever. For President Obama is a Keynesian. And Keynesian policies only lead to boom-bust cycles. Not real economic growth. The kind we got from classical economic policies. Built on a foundation of thrift, savings, investment, free trade, the gold standard, etc. The economic policies that made America the number economic power in the world.
Tags: banking system, banks, boom, bubbles, bust, capital, credit expansion, Depression of 1920, Fed, Federal Reserve Act, free trade, government spending, Great Depression, Harding, Heinze, interest rates, investment, Keynesian, Knickerbocker Trust Company, liquidity, monetary expansion, monetary policy, Panic of 1907, real economic activity, recession, savings, short-sellers, short-selling, stock, stock price, tax rates, the gold standard, thrift, trusts, United Copper Company, Warren Harding
Some of the Richest People in the United States live in the Suburbs of Washington, D.C.
Liberals say they care about the people. While they say conservatives only care about their money. Conservatives want to cut taxes and government spending so they can keep more of their money to spend on their families. Liberals want to increase taxes and government spending. To take more money from taxpayers to spend on other people. People who are more deserving of that money than the people who earned it.
Liberals say they want to tax and spend because they care about people. And not money. Like conservatives. Yet the more money a liberal government collects in taxes the more powerful that government grows. And the richer those in government get. Just look at the wealth surrounding Washington, D.C., which includes six of the ten wealthiest counties in the U.S. It used to be the military industrial complex. Now it’s the government industrial complex. For liberals do not like the military. And gut defense spending to fund their welfare state. Spending our money to reward their friends. And buying votes by making people dependent on government.
Some of the richest people in the United States live in the suburbs of Washington, D.C. Who got rich on taxpayer money. Where those connected to the liberal aristocracy enjoy obscene levels of wealth. While the median family income falls. Leaving families in the rest of the country to get by on less. While those connected to government enjoy those obscene levels of wealth. Yet liberals care about the people. And not these obscene levels of wealth.
Liberals have grown Very Wealthy by Caring for the People ‘instead’ of Money
So it’s no secret the more money the government collects the better liberals in government live. The bigger government grows the more government jobs that are available. Allowing liberals to spread the wealth. Other people’s wealth, that is. So it’s good for those inside the government aristocracy. Which is why liberals ‘care’ about the people. So they can run a massive welfare state. With them at the top. Like Old World royalty. Passing alms out to the people. Where the people grovel. And are obedient. Grateful for what royalty gives them. Thanking them politely. And never forgetting their place. The dirt beneath their feet (to borrow a line from the musical Les Misérables).
It is hard, then, to believe liberals when they say they care about the people. As caring for the people has made them very wealthy. Wealth they acquired by taking it away from other people. Via taxes. It is harder still to believe them when you look at their actions. Whenever there is a high-profile gun crime, for example, they immediately use it to advance gun control legislation. As if America is suffering from a plague of gun deaths. And that only when the government takes away guns from law-abiding gun owners will the dying stop. Of course, others throughout history have wanted to take away the people’s guns. Including the British in 1775. When the shot heard ’round the world was fired. Kicking off the Revolutionary War.
So Americans are very suspect whenever anyone comes after their guns. Because that means only one thing. Those trying to take away those guns want to make these gun owners weaker. The question is, why? Why do governments want to make their people weaker? Probably for the same reason ruling elites everywhere do. When you’re greatly outnumbered you don’t want the people you’re oppressing to be able to fight back.
For Every Person who ‘picked’ an Obamacare Policy 38 People lost the Insurance they Liked and Wanted to Keep
Listening to liberals you would think that the only way people are dying in America is from gun violence. Is this true? If not exactly how are people dying? Well, according to the Centers for Disease and Prevention (see Table 2. Deaths, death rates, and age-adjusted death rates for 113 selected causes, Injury by firearms, Drug-induced Injury at work, and Enterocolitis due to Clostridium difficile: United States, final 2010 and preliminary 2011) the total deaths in 2011 was 2,512,873. Some of the leading causes of death were cardiovascular diseases at 778,503 (31.0%). Cancers (Malignant neoplasms) at 575,313 (22.9%). Chronic lower respiratory diseases at 143,382 (5.7%). Just with these three groups of diseases we’re at 59.6% of all 2011 deaths. And that’s before we get to non-disease related deaths. Such as Drug-induced deaths at 40,239 (1.6%). Motor vehicle accidents at 34,677 (1.4%). Falls at 26,631 (1.1%). And one of the least causes of deaths. Assault (homicide) by discharge of firearms at 11,101 (0.4%).
Gun deaths account for less than one half of one percent of all deaths in 2011. Yet they want to take guns away from law-abiding gun owners to stop an epidemic of gun deaths totaling 0.4% of all deaths in 2011. That’s what liberals are focused on. That. And the decriminalization of drugs. Because drugs are a victimless crime. Something only responsible adults choose to do. Despite drug-induced deaths being more than three and half times greater than gun deaths. But liberals are hard on guns. And soft on drugs. Even though more people die from drugs than from guns. Yet liberals care about people.
The Affordable Care Act (Obamacare) was to provide affordable health insurance to about 50 million of uninsured people. With the rollout of Obamacare only 106,185 ‘picked’ an insurance policy in October (some may have bought a plan or simply placed one in their shopping cart). While 4.02 million people in 28 states have lost their health insurance (see White House to Allow Insurers to Continue Canceled Health Plans by Carol E. Lee and Louise Radnofsky posted 11/14/2013 on The Wall Street Journal). So for every person who ‘picked’ an insurance policy 38 people lost the insurance they liked and wanted to keep. Considering 59.6% of all deaths in 2011 were from heart disease, cancer and chronic lower respiratory diseases taking away health insurance from 4.02 million people could very well cause more people to die from these diseases. For they are very common diseases. And these policy cancellations are only from the individual market. When the cancellations for the employer-provided plans start hitting next year we may be seeing hundreds of millions who will lose their health insurance. Which is by design. To force the people who already have insurance into costlier plans to pay for those who don’t. And, of course, to make government bigger. As well as making liberals in the government aristocracy wealthier.
Whenever there is a high-profile gun death the left renews their push for new gun control legislation. Even if it saves only one child. They say this despite guns being responsible for less than one half of one percent of all deaths. Yet when they take away health insurance from 4.02 million people who may die from heart disease, cancer and chronic lower respiratory diseases, these deaths are negligible. Acceptable. A small percentage of the population whose deaths won’t mean a thing in the grand scheme of things. All that is important to them is protecting and growing the government aristocracy. So they can continue to live in the wealthiest counties in the U.S. While enjoying their regal lives paid for with other people’s money. Yet it’s the liberals that care about people.
Tags: aristocracy, cancer, chronic lower respiratory diseases, conservatives, drugs, government aristocracy, government spending, gun control, gun control legislation, gun crime, gun deaths, guns, heart disease, law-abiding gun owners, liberals, liberals care about the people, Obamacare, obscene levels of wealth, royalty, taxes, taxpayers, wealth, welfare state
Week in Review
Since the Keynesians took over monetary policy we’ve had the Great Depression, the inflation racked Seventies, the dot-com bubble/recession of the late 1990s/early 2000s and the subprime mortgage crisis. It’s also given Japan their Lost Decade, a deflationary spiral that started in the late Eighties that they are still fighting today. As well as the sovereign debt crisis still ongoing in Europe. So Keynesian economics has a record of failure. Yet governments everywhere embrace it. Why? Because they love having the power to create money. Especially when it’s ostensibly for helping the economy. Which it never does. As efforts to do so resulted in the carnage noted above. But it always gives a good excuse for another surge in government spending. And Keynesians love government spending.
Why does Keynesian economics fail? Alan Greenspan, former chairman of the Federal Reserve whose policies helped create some of this carnage (dot-com bubble and subprime mortgage crisis), explains (see Greenspan ponders the roots of a financial crisis he failed to foresee by Martin Crutsinger, The Associated Press, posted 10/21/2013 on The Star).
Now, Alan Greenspan has struck back at any notion that he — or anyone — could have known how or when to defuse the threats that triggered the crisis. He argues in a new book, The Map and the Territory, that traditional economic forecasting is no match for the irrational risk-taking that can inflate catastrophic price bubbles in assets like homes or tech stocks.
This is why the Soviet Union lost the Cold War. Because their managed economy failed. As all managed economies fail. Because it is impossible to know the decisions of hundreds of million people in the market. These people making decisions for themselves result in economic activity. But when governments try to decide for them you get Great Depressions, debilitating inflation, bubbles and nasty recessions. As well as the collapse of the Soviet Union.
People only took irrational risks when the Federal Reserve (the Fed)/government interfered with market forces. The dot-com bubble grew because the Fed kept interest rates artificially low. So was it irrational for people to take advantage of those artificially low interest rates and make risky investments they otherwise wouldn’t have made? Yes. But if the Fed didn’t keep them artificially low in the first place there would have been no dot-com bubble in the second place.
Was it irrational for people to buy houses they couldn’t afford when the Clinton administration forced lenders to qualify the unqualified for mortgages they couldn’t afford? Was it irrational behavior for people to buy houses they couldn’t afford because of artificially low interest rates, ‘cheap’ adjustable rate mortgages, zero-down mortgages, interest only mortgages and no-documentation mortgages? Yes. But if the Fed/government did not interfere with market forces in the first place to increase home ownership (especially among those who couldn’t qualify for a conventional mortgage) there would have been no subprime housing bubble in the second place.
The problem with Keynesians is they call anyone who doesn’t behave as they hope to make people behave with their policies irrational. That is, people are irrational if they don’t think like a Keynesian and therefore cause Keynesian policies to fail. But before there could be irrational exuberance there has to be a climate that encourages irrational exuberance first. For if we went back to the banking system where our savings rate determined our interest rates as well as the investment capital available there would be no bubbles. And no irrational exuberance. What kind of a banking system would that be? The kind that vaulted the United States from their Founding to the number one economic power in the world in about one hundred years. And they did that without making money. Unlike today.
Q: The size of the Federal Reserve’s balance sheet stands at a record $3.7 trillion, reflecting all the Treasurys and mortgage-backed securities the Fed has bought to push long-term interest rates down. You have expressed concerns about this size, which is more than four times where the balance sheet stood before the start of the financial crisis. What are your worries?
A: My basic concern is that we have to rein this thing in well before the demand for funds picks up and makes it very difficult to rein in. (Inflation) is not immediate. It is down the road. But historically, there are no cases where central banks blow up their balance sheets or where countries print money which doesn’t hit (with higher inflation).
The balance sheet is four times what it was before the Great Recession? That’s an enormous amount of new money created to stimulate the economy. And yet we’re still wallowing in the worst economic recovery since that following the Great Depression. I don’t know how much more you can prove the failure of Keynesian economics than this. About five years of priming the economic pump with stimulus stimulated little. Other than rich Wall Street investors who are using this easy money to make more money. While the median household income falls.
Keynesian economics attacks the middle class. While enriching the ruling class. And their crony friends on Wall Street. These policies further the divide between the rich and everyone else. Yet they continually say these same policies are the only way to reduce the divide between the rich and everyone else. The historical record doesn’t prove this. And those familiar with the historical record know this. Which is why the left controls public education. So people don’t learn the historical record. Because once they do it becomes harder to win elections when you’re constantly lying to the American people.
Tags: Alan Greenspan, artificially low interest rates, balance sheet, bubbles, dot com bubble, Federal Reserve, government spending, Great Depression, Greenspan, housing bubble, inflation, interfere with market forces, irrational, irrational behavior, irrational exuberance, irrational risk, irrational risk-taking, Keynesian, Keynesian economics, making money, managed economy, monetary policy, mortgages, recession, Soviet Union, subprime mortgage crisis
(Originally published February 20th, 2012)
John Maynard Keynes said if the People aren’t Buying then the Government Should Be
Keynesian economics is pretty complex. So is the CliffsNotes version. So this will be the in-a-nutshell version. Keynesian economics basically says, in a nut shell, that markets are stupid. Because markets are full of stupid people. If we leave people to buy and sell as they please we will continue to suffer recession after recession. Because market failures give us the business cycle. Which are nice on the boom side. But suck on the bust side. The recession side. So smart people got together and said, “Hey, we’re smart people. We can save these stupid people from themselves. Just put a few of us smart people into government and give us control over the economy. Do that and recessions will be a thing of the past.”
Well, that’s the kind of thing governments love to hear. “Control over the economy?” they said. “We would love to take control of the economy. And we would love to control the stupid people, too. Just tell us how to do it and our smart people will work with your smart people and we will make the world a better place.” And John Maynard Keynes told them exactly what to do. And by exactly I mean exactly. He transformed economics into mathematical equations. And they all pretty much centered on doing one thing. Moving the demand curve. (A downward sloping graph showing the relationship between prices and demand for stuff; higher the price the lower the demand and vice versa).
In macroeconomics (i.e., the ‘big picture’ of the national economy), Keynes said all our troubles come from people not buying enough stuff. That they aren’t consuming enough. And when consumption falls we get recessions. Because aggregate demand falls. Aggregate demand being all the people put together in the economy out there demanding stuff to buy. And this is where government steps in. By picking up the slack in personal consumption. Keynes said if the people aren’t buying then the government should be. We call this spending ‘stimulus’. Governments pass stimulus bills to shift the demand curve to the right. A shift to the right means more demand and more economic activity. Instead of less. Do this and we avoid a recession. Which the market would have entered if left to market forces. But not anymore. Not with smart people interfering with market forces. And eliminating the recession side of the business cycle.
Keynesians prefer Deficit Spending and Playing with the Money Supply to Stimulate the Economy
Oh, it all sounds good. Almost too good to be true. And, as it turns out, it is too good to be true. Because economics isn’t mathematical. It’s not a set of equations. It’s people entering into trades with each other. And this is where Keynesian economics goes wrong. People don’t enter into economic exchanges with each other to exchange money. They only use money to make their economic exchanges easier. Money is just a temporary storage of value. Of their human capital. Their personal talent that provides them business profits. Investment profits. Or a paycheck. Money makes it easier to go shopping with the proceeds of your human capital. So we don’t have to barter. Exchange the things we make for the things we want. Imagine a shoemaker trying to barter for a TV set. By trading shoes for a TV. Which won’t go well if the TV maker doesn’t want any shoes. So you can see the limitation in the barter system. But when the shoemaker uses money to buy a TV it doesn’t change the fundamental fact that he is still trading his shoemaking ability for that TV. He’s just using money as a temporary storage of his shoemaking ability.
We are traders. And we trade things. Or services. We trade value created by our human capital. From skill we learned in school. Or through experience. Like working in a skilled trade under the guidance of a skilled journeyperson or master tradesperson. This is economic activity. Real economic activity. People getting together to trade their human capital. Or in Keynesian terms, on both sides of the equation for these economic exchanges is human capital. Which is why demand-side economic stimulus doesn’t work. Because it mistakes money for human capital. One has value. The other doesn’t. And when you replace one side of the equation with something that doesn’t have value (i.e., money) you cannot exchange it for something that has value (human capital) without a loss somewhere else in the economy. In other words to engage in economic exchanges you have to bring something to the table to trade. Skill or ability. Not just money. If you bring someone else’s skill or ability (i.e., their earned money) to the table you’re not creating economic activity. You’re just transferring economic activity to different people. There is no net gain. And no economic stimulus.
When government spends money to stimulate economic activity there are no new economic exchanges. Because government spending is financed by tax revenue. Wealth they pull out of the private sector so the public sector can spend it. They take money from some who can’t spend it and give it to others who can now spend it. The reduction in economic activity of the first group offsets the increase in economic activity in the second group. So there is no net gain. Keynesians understand this math. Which is why they prefer deficit spending (new spending paid by borrowing rather than taxes). And playing with the money supply.
The End Result of Government Stimulus is Higher Prices for the Same Level of Economic Activity
The reason we have recessions is because of sticky wages. When the business cycle goes into recession all prices fall. Except for one. Wages. Those sticky wages. Because it is not easy giving people pay cuts. Good employees may just leave and work for someone else for better pay. So when a business can’t sell enough to maintain profitability they cut production. And lay off workers. Because they can’t reduce wages for everyone. So a few people lose all of their wages. Instead of all of the people losing all of their wages by a business doing nothing to maintain profitability. And going out of business.
To prevent this unemployment Keynesian economics says to move the aggregate demand curve to the right. In part by increasing government spending. But paying for this spending with higher taxes on existing spenders is a problem. It cancels out any new economic activity created by new spenders. So this is where deficit spending and playing with the money supply come in. The idea is if the government borrows money they can create economic activity. Without causing an equal reduction in economic activity due to higher taxes. And by playing with the money supply (i.e., interest rates) they can encourage people to borrow money to spend even if they had no prior intentions of doing so. Hoping that low interest rates will encourage them to buy a house or a car. (And incur dangerous levels of debt in the process). But the fatal flaw in this is that it stimulates the money supply. Not human capital.
This only pumps more money into the economy. Inflates the money supply. And depreciates the dollar. Which increases prices. Because a depreciated dollar can’t buy as much as it used to. So whatever boost in economic activity we gain will soon be followed by an increase in prices. Thus reducing economic activity. Because of that demand curve. That says higher prices decreases aggregate demand. And decreases economic activity. The end result is higher prices for the same level of economic activity. Leaving us worse off in the long run. If you ever heard a parent say when they were a kid you could buy a soda for a nickel this is the reason why. Soda used to cost only a nickel. Until all this Keynesian induced inflation shrunk the dollar and raised prices through the years. Which is why that same soda now costs a dollar.
Tags: ability, aggregate demand, aggregate demand curve, business cycle, consumption, deficit, deficit spending, demand, demand curve, economic activity, economic exchanges, economic stimulus, Economics, economy, government spending, higher prices, human capital, inflation, interest rates, John Maynard Keynes, Keynes, Keynesian, Keynesian economics, market forces, markets, money, money supply, prices, recession, skill, smart people, sticky wages, stimulus, stupid people, taxes, trade, traders, value
The Democrats’ idea of Bipartisanship is Republican Capitulation
It’s that time of the year again. Summer is winding down. The weather is starting to cool. The harvest is coming in. The stores are already stocking their shelves with Halloween decorations. Yes, it’s the end of the government’s fiscal year. The time the government will run out of money unless Congress passes a new budget. Or what passes for budgets these days. Continuing resolutions.
This that magical time of year when Republicans and Democrats come together to negotiate the government’s budget for the upcoming fiscal year. The give and take process where they sit down and work with each other. Civilly. Saying things like, “Yes, that is too costly. We need to spend less there.” And, “You’re right, that is important to the people and we should spend more there.” And the occasional, “I agree. That program is no longer needed and we can remove it from the budget entirely.”
I am, of course, lying. These are things that are rarely, if ever, said to each other. For when it comes to these budget battles it is always the same. The Republicans try to be responsible and cut spending. The Democrats then call them greedy corporate toady Nazis. The Republicans will then suffer a general emasculation and give the Democrats their spending hikes. And perhaps a tax hike or two. While asking them to please like them and invite them to the cool parties. And the Democrats will then commend the Republicans’ bipartisanship. What others would call capitulation. Happy that things are once again right in the world. With the Republicans once again the Democrats’ bitch.
Entitlement Spending creates a Permanent Underclass that keeps the Privileged Class in Power
John Emerich Edward Dalberg-Acton, known more simply as Lord Acton, said, “Power tends to corrupt, and absolute power corrupts absolutely. Great men are almost always bad men.” And boy was he on to something there. For something happens when some good conservatives go to Washington. They enter a world like no other. Nothing they could ever have dreamed of. A world that once belonged only to the nobility and the aristocracy. Those things Americans fought for their independence from. And here they are. After winning an election to rein in the kind of government spending that makes this living possible. And they say, “What, end all of this? Are you mad?”
So many cross over to the dark side. Sell their souls. Forsake their constituents. Do great dishonor to our Founding Fathers. All because they like the money and the power. Especially the power. Some resist. Those from the Tea Party seem more immune than most when it comes to the corrupting influences of Washington. But these people who stand on principle? Those who serve their constituents honorably? The left will fling every invective upon them. A figuratively flinging of excrement. To try to beat them down and break them. To get them, too, to forsake their constituents. And to join them as they drop trou and defecate on the Constitution. Figuratively, too, of course. At least I hope so.
So this is what makes the budget process so adversarial. You have those who are trying to do the right thing for the people. And those on the other side who want to corrupt these people. To get them to quit fighting against them and to join them. So they can maintain their privileged class. This is what all that entitlement spending is all about. It’s nothing but alms. To keep the people content enough so they don’t rise up. But not too content that they don’t fear that those greedy corporate toady Nazis may take away their meager alms. And once they get someone to think like that they have a voter for life.
There comes a Point when Raises in Tax Rates actually Reduce Tax Revenue
The key, then, is keeping people poor. For the whole privileged class thing those in Washington have doesn’t work unless they have poor people who need them. Which is why they spend so much time reminding the poor how much they need them. The Democrats in Congress. Who are always there fighting for them. Keeping their alms flowing. But also keeping them poor. Which a welfare state does well. Because if you have enough to subsist lethargy will do the rest and destroy the spirit. Getting the poor to accept their place as a permanent underclass. That needs a permanent privileged class taking care of them.
There is only one problem. This destroys lives. People in this permanent underclass may have gone on and done great things. They may have been doctors. They may have been engineers. They may have been entrepreneurs. But they will never be those things because the left sacrificed them to maintain their privileged class. Forever consigning them to the underclass. So the privileged class has someone to take care of. No matter how costly it gets to maintain this entitlement culture. No matter how great the deficits get. Or how great the national debt grows.
So there is another problem. As you convert taxpayers into tax-consumers you have to keep raising taxes on those remaining in the tax base. But as you raise tax rates you put the brakes on economic expansion. And with reduced economic activity there is reduced tax revenue. There comes a point when raises in tax rates actually reduce tax revenue. And we’ve passed that point. Which is why we have record deficits. A record national debt. And the worst economic recovery since that following the Great Depression. Because we are spending, taxing and regulating too much. Which is why uncorrupted conservatives want to cut taxes, defund Obamacare, roll back other costly regulations and reduce spending. Things the left bitterly opposes. For doing so means we don’t need them as much as they need us to need them.
So as the budget battle commences you will hear the usual refrain from the left. We can’t afford tax cuts. As they equate tax cuts with government spending. But we can always afford new government spending. So the left will call for bipartisanship. That is, capitulation. And eventually make the Republicans their bitch. Again. And increase the national debt. Again. Putting the nation on the path to bankruptcy. What the left considers a small price to pay to maintain their privileged class. As long as that bankruptcy comes after they’re dead and buried. After they enjoyed their time in the privileged class. Which is why the left is also less likely to believe in God and life after death. For it is easier to be bad when there is nothing to fear after a bad life.
Tags: alms, Bankruptcy, bipartisanship, budget, budget battle, capitulation, Congress, conservatives, cut spending, deficits, Democrats, government spending, Lord Acton, national debt, new spending, permanent underclass, poor, power corrupts, privileged class, Republicans, spending, tax cut, tax cuts, tax hike, tax rates, tax revenue, taxes, underclass, Washington
(originally published August 6, 2012)
Keynesians believe if you Build Demand Economic Activity will Follow
People hate catching a common cold. And have long wanted a cure for the common cold. For a long time. For hundreds of years. But no one had ever filled this incredible demand. All this time doctors and scientists still haven’t been able to figure that one out. Despite knowing with that incredible demand, and our patent rights, whoever does figure that one out will become richer than Bill Gates. Which is quite the incentive for figuring out the ingredients to make one little pill. So why hasn’t anyone found the cure for the common cold?
There are many reasons. But let’s just ignore them. Like a Keynesian economist ignores a lot of things in their economic formulas. In fact, let’s try and enter the head of some Keynesian economists. And have them answer the question why there isn’t a cure for the common cold. Based on their economic analysis you might hear them say that we have a cure for the common cold. Because a high demand makes anything happen. Or you might hear them say we don’t have a cure because enough people haven’t caught a cold yet. And that we need to get more people to catch colds so we increase the demand for a cure.
Keynesians believe if you build demand economic activity will follow. Like in that movie where they build a baseball diamond in a cornfield and those dead baseball players come back to play on it. So Keynesians believe in government spending. And love stimulus spending. As well as taxing people to give their money to other people to spend. Because having money to spend stimulates demand. Consumers will consume things. And increase consumption. So suppliers will bring more things to market. And create more jobs to meet that consumption demand. Unless people save that money. Which is something Keynesians hate. Because saving reduces consumption. Which is about the worst thing you could do in the universe of Keynesian economics. Save money. For in that universe spending trumps saving. In fact, spending trumps everything. No matter how you create that spending. Keynesians actually believe taxing people so they can pay other people to dig a ditch and then fill that ditch back in stimulates economic activity. Because these ditch diggers/fillers will take their paycheck and spend it.
Today People wait Anxiously for the next Apple Release to Learn what the Next Thing is that they Must Have
Of course there is a problem with this economic theory. When you take money away from others they haven’t created new economic activity. They just transferred that spending to someone else. The people who earned that money spend less while the people who didn’t earn it spend more. It’s a wash. Some spending goes down. While some spending goes up. Actually there is a net loss in economic activity. Because that money has to pass through government hands. Where some of it sticks. Because bureaucrats have to eat, too. So the people receiving this money don’t receive as much as what was taxed away. So Keynesian stimulus doesn’t really stimulate. It actually reduces economic activity from what it might have been. Because of the government’s cut.
And it gets worse. Because this consumption demand doesn’t really create jobs. We get nothing new out of it. What do people demand? Things they see. Things they know about. For it is hard to demand something that doesn’t exist. You see a commercial for another incredible Apple product and you want it. Thanks to some great advertising that explained why you must have it. In other words, when you give money to people all they will do is buy things they’ve always wanted. Things that already exist. Old stuff. It’s sort of the chicken and the egg thing. Which came first? Wanting something? Or the thing that people want?
Raising taxes on Apple to create a more egalitarian society by redistributing their wealth will let people buy more of the old stuff. But it won’t help Apple create more new things to bring to market. Things we don’t even know about yet. If we tax them so much that it leaves little left for them to invest in research and development how are they going to develop new things? Things we don’t even know about yet? Things that we will learn that we must have? Once upon a time no one was asking for portable cassette players. Then Sony came out with the Walkman. And everyone had to have one. Once upon a time there were no MP3 players. No smartphones. No tablet computers. Now people must have these things. After their manufacturers told us why we must have them. Today people wait anxiously for the next Apple release to learn what the next thing is that they must have.
Say’s Law states that Supply Creates Demand
Supply leads demand. We can’t ask for the unknown. We can only ask for what the market has shown us. Which is why Keynesian economics doesn’t work. Because focusing on demand doesn’t work. Giving people money to spend doesn’t stimulate creativity in the market place. Because that money was taxed out of the market place. Reducing profits. Leaving less for businesses to invest into research and development. And reducing their incentive to take big risks to bring the next big thing to market. Like a phone you can talk to and ask questions. Again something no one was demanding. But now it’s something everyone wants.
Jean-Baptiste Say (1767–1832) was a French economist. Another brilliant French mind that contributed to the Enlightenment. And helped advance Western Civilization. He observed how supply led demand. Understood production was key in the economy. He knew to create economic activity you had to focus on the producers. Not the consumers. Because if we encourage brilliant minds to bring brilliant things to market the demand will follow. As history has shown. And continues to show. Every time a high-tech company brings something new to market that they have to explain to us before we realize we must have it. Or said in another way, supply creates demand. A little law of economics that we call Say’s law.
If Keynesian economics worked no one would have to have a job. The government could print money for everyone. And the people could take their government dollars and consume whatever was in the market place. Which, of course, would be pretty sparse if no one worked. If there were no Steve Jobs out there thinking of brilliant things to bring to market. Because supply creates demand. Demand doesn’t create supply. For fists full of money won’t stimulate any economic activity if there is nothing to buy. So using Keynesian stimulus as a cure for a recession is about as effective as someone’s homemade cure for the common cold. You take the homemade concoction and in a week or two it cures you. Of course, the cold just ran its course. Which is how recessions end. After they run their course. Which can be a short course if there isn’t too much Keynesian intervention.
Tags: Apple, common cold, Consumers, consumption, create jobs, cure for the common cold, demand, economic activity, government spending, incentive, Jean-Baptiste Say, jobs, Keynesian economist, Keynesians, market, money, production, recession, research and development, saving, Say's Law, spending, stimulate demand, stimulus spending, suppliers, supply, Supply creates demand, taxes, taxing
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