The Murtha Airport is another Monument to the Folly of Keynesian Stimulus Spending

Posted by PITHOCRATES - April 7th, 2012

Week in Review

Keynesian economists, and the current administration, strongly believe in the power of government stimulus spending.  Keynesian theory is all about the importance of consumer spending.  And everything about Keynesian stimulus should put more money into consumers’ pockets so they can spend money in the private sector economy.   For even the Keynesian will acknowledge that consumer spending in the private sector economy is the only thing that matters for real economic growth.  And anything that helps in this endeavor can and should be done.  Even if it means having the government pay people to dig a ditch.  Then fill it back in.  And then dig it out again.  And so on.  Because those people the government pays to do something completely worthless will take their paychecks and spend them in the private sector.  Thus stimulating the private sector economy.

Of course you can only pay so many people to dig a ditch.  But an airport, now that’s some real government spending (see Murtha Airport, brought to you by American taxpayers by Jonathan Karl, Richard Coolidge & Sherisse Pham posted 4/3/2012 on Yahoo! News).

Three years ago, we first visited the tiny airport, and found a monument to pork barrel spending: An airport with a $7 million air traffic control tower, $14 million hanger, and $18 million runway big enough to land any airplane in North America. For most of the day, the only thing this airport doesn’t have is airplanes.

We flew there on one of three flights that arrive there daily, all of them from Washington D.C. About half the cost of every ticket, $100, is paid by American taxpayers, a subsidy Congress voted to renew just this past February.

The place had a shiny new luggage carousel, a state of the art tower, and some very bored air traffic controllers — but very few passengers. The place is a tribute to the power of its namesake; everything from the reinforced runway to the radar facility to the new terminal, are all thanks to Democratic Congressman John Murtha, who died more than a year.

You see, that’s the problem of paying people to do something worthless.  Building this airport cost a lot of taxpayer money.  Those who built the airport did well.  While they were building the airport.  But now that the work is done that airport is one expensive filled in ditch.  For it’s as useful as a filled in ditch.  But even more costly.  For a filled in ditch at least doesn’t need employees to stand around waiting for something to do.  It doesn’t consume electricity and natural gas utilities.  And it doesn’t have to be maintained.  Unlike a runway.  Even if it’s not being used.

The government went into debt paying for this.  It’s part of the reason the debt ceiling has to be increased so often.  Because of all the John Murtha pork barrel spending out there.  Worse, the airport cannot generate enough revenue to support itself.  And requires government subsidies to keep it open so people can stand around waiting for something to do.  This and all other pork barrel spending adds up to be a terrible drag on the economy as it sucks money out of the private sector (where they don’t build airports where there are no airplanes to use them).  Where the only spending that counts for real economic growth is reduced by the amount of the stimulus taxed out of it.  And servicing the debt created by this stimulus spending further reduces economic activity in the private sector.  As the interest on the debt grows to a larger and larger line item in the U.S. budget.  Forcing the government to borrow money to pay the interest on the money they borrowed previously.

The worst thing about this is that those on the Left, the Keynesians, don’t see a problem in this.  For they have no fundamental understanding of economics and believe their Keynesian follies actually help the economy.  Despite having a failing track record for close to a century.  They believe.  They have faith.  And don’t need to see results.  For their faith is enough.  Yet they won’t stand for the irresponsible ‘spending’ of a tax cut that actually stimulates economic activity in the private sector.  That place where the only spending that counts for real economic growth takes place.  And has a very successful track record of success.  As Harding/Coolidge proved.  As JFK proved.  As Reagan proved.  And as George W. Bush proved.


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The Austrian School of Economics

Posted by PITHOCRATES - February 27th, 2012

Economics 101

Because of the Unpredictable Human Element in all Economic Exchanges the Austrian School is more Laissez-Faire

Name some of the great inventions economists gave us.  The computer?  The Internet?  The cell phone?  The car?  The jumbo jet?  Television?  Air conditioning?  The automatic dishwasher?  No.  Amazingly, economists did not invent any of these brilliant inventions.  And economists didn’t predict any of these inventions.  Not a one.  Despite how brilliant they are.  Well, brilliant by their standard.  In their particular field.  For economists really aren’t that smart.  Their ‘expertise’ is in the realm of the social sciences.  The faux sciences where people try to quantify the unquantifiable.  Using mathematical equations to explain and predict human behavior.  Which is what economists do.  Especially Keynesian economists.  Who think they are smarter than people.  And markets.

But there is a school of economic thought that doesn’t believe we can quantify human activity.  The Austrian school.  Where Austrian economics began.  In Vienna.  Where the great Austrian economists gathered.  Carl Menger.  Ludwig von Mises.  And Friedrich Hayek.  To name a few.  Who understood that economics is the sum total of millions of people making individual human decisions.  Human being key.  And why we can’t reduce economics down to a set of mathematical equations.  Because you can’t quantify human behavior.  Contrary to what the Keynesians believe.  Which is why these two schools are at odds with each other.  With people even donning the personas of Keynes and Hayek to engage in economic debate.

Keynesian economics is more mainstream than the Austrian school.  Because it calls for the government to interfere with market forces.  To manipulate them.  To make markets produce different results from those they would have if left alone.  Something governments love to do.  Especially if it calls for taxing and spending.  Which Keynesian economics highly encourage.  To fix market ‘failures’.  And recessions.  By contrast, because of the unpredictable human element in all economic exchanges, the Austrian school is more laissez-faire.  They believe more in the separation of the government from things economic.  Economic exchanges are best left to the invisible hand.  What Adam Smith called the sum total of the millions of human decisions made by millions of people.  Who are maximizing their own economic well being.  And when we do we maximize the economic well being of the economy as a whole.  For the Austrian economist does not believe he or she is smarter than people.  Or markets.  Which is why an economist never gave us any brilliant invention.  Nor did their equations predict any inventor inventing a great invention.  And why economists have day jobs.  For if they were as brilliant and prophetic as they claim to be they could see into the future and know which stocks to buy to get rich so they could give up their day jobs.  When they’re able to do that we should start listening to them.  But not before.

Low Interest Rates cause Malinvestment and Speculation which puts Banks in Danger of Financial Collapse

Keynesian economics really took off with central banking.  And fractional reserve banking.  Monetary tools to control the money supply.  That in the Keynesian world was supposed to end business cycles and recessions as we knew them.  The Austrian school argues that using these monetary tools only distorts the business cycle.  And makes recessions worse.  Here’s how it works.  The central bank lowers interest rates by increasing the money supply (via open market transactions, lowering reserve requirements in fractional reserve banking or by printing money).  Lower interest rates encourage people to borrow money to buy houses, cars, kitchen appliances, home theater systems, etc.  This new economic activity encourages businesses to hire new workers to meet the new demand.  Ergo, recession over.  Simple math, right?  Only there’s a bit of a problem.  Some of our worst recessions have come during the era of Keynesian economics.  Including the worst recession of all time.  The Great Depression.  Which proves the Austrian point that the use of Keynesian policies to end recessions only makes recessions worse.  (Economists debate the causes of the Great Depression to this day.  Understanding the causes is not the point here.  The point is that it happened.  When recessions were supposed to be a thing of the past when using Keynesian policies.)

The problem is that these are not real economic expansions.  They’re artificial ones.  Created by cheap credit.  Which the central bank creates by forcing interest rates below actual market interest rates.  Which causes a whole host of problems.  In particular corrupting the banking system.  Banks offer interest rates to encourage people to save their money for future use (like retirement) instead of spending it in the here and now.  This is where savings (or investment capital) come from.  Banks pay depositors interest on their deposits.  And then loan out this money to others who need investment capital to start businesses.  To expand businesses.  To buy businesses.  Whatever.  They borrow money to invest so they can expand economic activity.  And make more profits.

But investment capital from savings is different from investment capital from an expansion of the money supply.  Because businesses will act as if the trend has shifted from consumption (spending now) to investment (spending later).  So they borrow to expand operations.  All because of the false signal of the artificially low interest rates.  They borrow money.  Over-invest.  And make bad investments.  Even speculate.  What Austrians call malinvestments.  But there was no shift from consumption to investment.  Savings haven’t increased.  In fact, with all those new loans on the books the banks see a shift in the other direction.  Because they have loaned out more money while the savings rate of their depositors did not change.  Which produced on their books a reduction in the net savings rate.  Leaving them more dangerously leveraged than before the credit expansion.  Also, those lower interest rates also decrease the interest rate on savings accounts.  Discouraging people from saving their money.  Which further reduces the savings rate of depositors.  Finally, those lower interest rates reduce the income stream on their loans.  Leaving them even more dangerously leveraged.  Putting them at risk of financial collapse should many of their loans go bad.

Keynesian Economics is more about Power whereas the Austrian School is more about Economics

These artificially low interest rates fuel malinvestment and speculation.  Cheap credit has everyone, flush with borrowed funds, bidding up prices (real estate, construction, machinery, raw material, etc.).  This alters the natural order of things.  The automatic pricing mechanism of the free market.  And reallocates resources to these higher prices.  Away from where the market would have otherwise directed them.  Creating great shortages and high prices in some areas.  And great surpluses of stuff no one wants to buy at any price in other areas.  Sort of like those Soviet stores full of stuff no one wanted to buy while people stood in lines for hours to buy toilet paper and soap.  (But not quite that bad.)  Then comes the day when all those investments don’t produce any returns.  Which leaves these businesses, investors and speculators with a lot of debt with no income stream to pay for it.  They drove up prices.  Created great asset bubbles.  Overbuilt their capacity.  Bought assets at such high prices that they’ll never realize a gain from them.  They know what’s coming next.  And in some darkened office someone pours a glass of scotch and murmurs, “My God, what have we done?”

The central bank may try to delay this day of reckoning.  By keeping interest rates low.  But that only allows asset bubbles to get bigger.  Making the inevitable correction more painful.  But eventually the central bank has to step in and raise interest rates.  Because all of that ‘bidding up of prices’ finally makes its way down to the consumer level.  And sparks off some nasty inflation.  So rates go up.  Credit becomes more expensive.  Often leaving businesses and speculators to try and refinance bad debt at higher rates.  Debt that has no income stream to pay for it.  Either forcing business to cut costs elsewhere.  Or file bankruptcy.  Which ripples through the banking system.  Causing a lot of those highly leveraged banks to fail with them.  Thus making the resulting recession far more painful and more long-lasting than necessary.  Thanks to Keynesian economics.  At least, according to the Austrian school.  And much of the last century of history.

The Austrian school believes the market should determine interest rates.  Not central bankers.  They’re not big fans of fractional reserve banking, either.  Which only empowers central bankers to cause all of their mischief.  Which is why Keynesians don’t like Austrians.  Because Keynesians, and politicians, like that power.  For they believe that they are smarter than the people making economic exchanges.  Smarter than the market.  And they just love having control over all of that money.  Which comes in pretty handy when playing politics.  Which is ultimately the goal of Keynesian economics.  Whereas the Austrian school is more about economics.


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FT103: “If General Grant used Keynesian tactics he wouldn’t have given up the attack on Cold Harbor until all of his soldiers were dead.” Old Pithy

Posted by PITHOCRATES - February 3rd, 2012

Fundamental Truth

On the Eve of Cold Harbor Grizzled Union Veterans pinned Scraps of Paper with their Names and Home Cities Inside their Jackets

General Grant has a few reputations.  That he was a drunk.  He wasn’t.  He just couldn’t hold his liquor.  And he hated inactivity.  And being away from his family.  Two things that led him to drink.  They also called him a butcher.  That he cared little for his men.  Which wasn’t true.  The bloodiest single day of battle in the Civil War was the Battle of Antietam.  Grant wasn’t there.  The bloodiest battle was the three days at Gettysburg.  Grant wasn’t there.  One of the greatest Union defeats was at Fredericksburg.  Grant wasn’t there.  So it wasn’t Grant.  It was the tactics used in the Civil War.  Napoleonic tactics.  Massing great ranks of soldiers opposite great ranks of soldiers.  Fire a few shots.  Close in on each other.  Then finish the job with the bayonet.  And plenty of finishing was needed as those Napoleonic weapons weren’t rifled.  Or all that accurate.

The weapons were rifled, though, in the American Civil War.  And far more accurate.  So they killed a lot of soldiers as they massed and fired.  And killed even more as they closed in to finish the job.  They soon learned that massing troops in the open on the field of battle was not a good idea.  Instead they looked for good ground to defend.  At Antietam there was a sunken road in the center of the Confederate line.  One of the first trenches used in warfare.  Lee failed at Gettysburg because General Ewell failed to take the high ground on the eve of the first day of battle.  Over night the Union entrenched strong defensive positions.  That held for days 2 and 3.  At Fredericksburg there was another sunken road.  This one was behind a stone wall.  It was also on the high ground.  And that’s where the Confederates were when the Union attacked.  And lost the battle.

General Lee was a combat engineer in the Mexican War.  Some called him the King of Spades.  So fortifying defensive positions was something he was good at.  And became better at.  Building breastworks.  Which even the odds in battle when a numerically superior force attacks a smaller entrenched force.  Like at Cold Harbor.  Where the breastworks zigzagged for 5 miles.  Allowing the defenders to shoot into the front of the attacking force.  As well as into the side of the attacking force.  Which is why on the eve of battle the grizzled veterans in the Union Army pinned scraps of paper with their names and home cities inside their jackets.  An early dog tag.  So when they attacked those heavily fortified defensive positions in the morning their surviving comrades could identify their bodies and send them home to family for burial.  Which, sadly, proved very useful after the battle.

The Problem with Keynesian Economics is that it interferes with Market Prices causing Inflation and Bubbles

The attack was over in less than an hour.  Seven thousand Union soldiers fell killed or wounded.  Grant regretted his order to attack until his dying day.  And he wouldn’t give such an order again.  Because he learned the folly of attacking entrenched positions.  And began adjusting his tactics to match the technology of the battlefield.

Sometimes it’s easier to identify failed policies in war.  It may have taken some time.  But it eventually became clear.  For when the casualty rates soared people were less willing to send their sons off to war.  Making the cost of those failed policies very real.  And personal.  Not abstract numbers.  Like in economics.  Where few understand what Keynesian economics is.  Or how to identify if these policies work.  Or if they fail.  For if you listen to Keynesian economists they never fail.  And when they do it’s not because they’re wrong.  It’s because those using them weren’t bold enough.  Such as using a Keynesian economic stimulus to pull an economy out of a recession.  It didn’t work in the Seventies.  And it didn’t work in the most recent recession.  The Great Recession.  And how do Keynesians explain this failure?  The economic stimulus wasn’t big enough.

The problem with Keynesian economics is that it interferes with the market forces.  By denying reality.  The business cycle.  The cycle between good economic times and bad economic times.  From periods of expanding economic activity to periods of contracting economic activity.  It’s this second half of the business cycle that Keynesians were especially trying to deny.  Recessions.  Those things that correct prices at the end of a growth cycle.  Before inflation can set in and wreak its havoc.  And when Keynesians interfere with this market mechanism the market doesn’t correct prices before inflation sets in.  So prices keep rising.  And they create asset bubbles.  Like housing bubbles.  Like the one that led up to the Subprime Mortgage Crisis.  And because Keynesians interfered all they did was delay the inevitable.  Allowing prices to rise higher than they normally would have.  Which meant they had further to fall.  Creating a longer and more painful recession than there would have been had they not interfered.

Unlike a Keynesian, General Grant Recognized a Failed Policy and Stopped Using It

Keynesians try to reduce economics down to a set of mathematical equations.  That they accept on faith.  Blinded by their ideology.  And refuse to recognize their failure.  Which is why they continue to interfere with market forces.  And continue to make recessions longer and more painful than they need be.  While strewing a swath of economic destruction in their path.  Like all of those home owners who lost so much value in their houses that their mortgages are now greater than the market price of their house.  Many lost their retirement nest egg in the process.  Some even had to alter their retirement plans because of their losses.  Or go back to work in their retirement.

These aren’t bodies littering a battlefield.  But the Keynesian carnage has destroyed lives just the same.  Impoverishing future generations to pay for their inept policies.  For people not even born today will have a tax bill so great that it will diminish their living standard far below what we enjoy today.  As bad as that is what’s worse is that they don’t change their policies after these failures.  Believing that the only reason they’ve failed is because they didn’t try them on a grand enough scale.  Or the government quit them before they had a chance to work. 

Thankfully General Grant didn’t use such Keynesian thinking at Cold Harbor.  Had he used such reasoning he would have ordered a second assault.  And a third. And kept ordering them as long as he had living men to send in against that entrenched defense.  But he didn’t.  Why?  Because he was smarter than a Keynesian.  He recognized a failed policy.  And stopped using it.


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The Big Economies are Increasing their Debt and Heating up the Competition for Buyers

Posted by PITHOCRATES - January 7th, 2012

Week in Review

Keynesian economists don’t see a problem for governments to run deficits.  They’ll look at the current bond rates, do some calculations and note that the additional interest expense for the government is negligible in the grand scheme of things.  But interest costs are not the only problem governments will have.  They also have to first find someone to buy their debt (see Biggest Economies Face $7.6 Trillion Bond Tab by Keith Jenkins and Anchalee Worrachate posted 1/3/2012 on Bloomberg).

Governments of the world’s leading economies have more than $7.6 trillion of debt maturing this year, with most facing a rise in borrowing costs.

Led by Japan’s $3 trillion and the U.S.’s $2.8 trillion, the amount coming due for the Group of Seven nations and Brazil, Russia, India and China is up from $7.4 trillion at this time last year, according to data compiled by Bloomberg…

Investors may demand higher compensation to lend to countries that struggle to finance increasing debt burdens as the global economy slows, surveys show…

The amount needing to be refinanced rises to more than $8 trillion when interest payments are included. Coming after a year in which Standard & Poor’s cut the U.S.’s rating to AA+ from AAA and put 15 European nations on notice for possible downgrades, the competition to find buyers is heating up.

So even in the Keynesian world there is a limit on deficit financing.  When there is more debt than buyers some debt will go un-purchased.  And to make sure that isn’t your debt you’ll have to entice those few buyers to buy your debt.  By the only way you can.  With higher interest rates.  Which makes your original problem worse.  By increasing your overall debt.


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Someone does NOT have to Pay for Wasteful Government Spending

Posted by PITHOCRATES - November 27th, 2011

Week in Review

The Keynesian economists are out again saying that we need to tax the rich more.  Because lower tax rates for the rich don’t have a net economic benefit.  Just as lower tax rates for the poor and middle class don’t have a net economic benefit.  Because if a higher tax rate makes them work one hour less, they get one less hour of pay.  And have one less hour of pay to spend in the market place.  Ergo, it is a wash.  For rich and poor alike.  But the rich can afford it more easily so we should tax them instead of the poor and middle class.

This is macroeconomics groupthink.  By a bunch of elitist who think they know better than everyone else in the world.  They do understand some economic basics (see Somebody has to pay for government posted 11/23/2011 on The Economist).

If you tax rich people less, you tax regular and poor people more. And when you tax them, they, like rich people, have a certain propensity to work less (“deadweight loss”). Also like rich people, the money they pay in taxes is money they cannot spend, which leads to lower economic activity and lower GDP in the short run.

But make all the wrong conclusions.

Higher taxes mean people have less money to spend.  They got that right.  But all their theory is based on one great fallacy.  And that fallacy is this:  All government spending is necessary.  And therefore must be paid for with taxes.

Contrary to Keynesian belief, all government spending is not necessary.  In fact, most of their spending is not necessary.  And should be cut.  The intent of the Founding Fathers is clear.  The federal government was not to be a nanny state.  Being a nanny state is nowhere enumerated in the Constitution.  This growth of the federal government has only created a privilege class.  And they have risen to rule us by getting as many of us as possible dependent on their ‘generosity’.  Which, ironically, was the point of the Revolution.  To end rule by a privileged class.

So when you look at federal spending in this light the argument of who should pay the taxes is a moot point.  Spending should be cut.  Meaning taxes should be cut.  Not increased.  On anyone.

Arguing not to increase taxes on anyone is a good argument to make.  Because it transfers the argument past the veneer of fairness to what it actually is.  An out of control federal government spending money wastefully and recklessly to buy votes.


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The Chinese Scale Back their Ambitious High-Speed Rail Plans because their Keynesian Polices Unleashed Inflation

Posted by PITHOCRATES - October 30th, 2011

Week in Review

Railroads are expensive to build.  And to operate.  Especially high-speed railroads.  Why?  Because unlike airplanes that fly in the air between cities trains have to travel on track between cities.  And that’s a whole lot of railroad infrastructure.  That’s why railroads don’t suffer as much during times of escalating fuel costs as trucking and aviation.  Because fuel isn’t their greatest cost.  As it is for trucks and planes.  It’s that massive infrastructure that they have to build.  And maintain.

To build a railroad you need lots of money.  And lots of labor.  Preferably cheap labor.  And that usually means government money.  And immigrant labor.  That’s how they built the first transcontinental railroad in America.  Along with a lot of inefficiencies.  And corruption.  Typical when you put government and big piles of money together.

That first transcontinental railroad needed a lot of ‘fixing up’ before it was safe for use.  They had to move some track from ice to terra firma.  Rebuild some bridges that weren’t disposable after a few uses.  That kind of thing.  Because that’s the kind of craftsmanship you get when government is in charge of the money.  What we call crony capitalism.  Government rewarding their friends.  Picking winners and losers.  And helping those who will help them.  That is, return the favor of government contracts with campaign contributions.

Governments all around the world are in favor of building more high-speed rail.  Because it will ‘put people to work’.  And ‘save the planet’.  By moving people out of gasoline-powered cars into electricity-powered trains.  Electricity that is generated from even more polluting coal-fired power plants.

The Americans have been trying.  Obama’s stimulus included billions for high-speed rail.  That did nothing.  Meanwhile the Chinese have been doing it.  By making money for the banks to lend.  And using cheap ‘second-class’ migrant labor from China’s countryside to build their high-speed rail.  And how has that been working?  Not so good (see Can’t pay, won’t pay posted 10/29/2011 on The Economist).

EFFORTS to curb inflation in China are having some painful side-effects. A squeeze on bank lending has prompted some businesses short of cash to stop paying wages to blue-collar workers. Even the much-vaunted state sector is feeling the pinch. Work has all but ground to a halt on thousands of kilometres of railway track, and many of the network’s 6m construction workers have been complaining about not being paid for weeks or sometimes months…

The government touted building railways as a great way to keep the economy buoyant during global financial trouble, and boost employment. But the $600 billion stimulus launched in 2008 is all but spent. Indeed, the central government has urged state banks to cut back on lending in order to curb inflation, which in the year to July reached a three-year high of 6.5%, before dropping to 6.1% in September.

Yet another example of why Keynesian economic stimulus stimulates only economic bubbles and inflation.  Which are always corrected by recessions.  And the greater the stimulus/bubble the greater the recession.  Of course Keynesian government economists everywhere will all come to the same conclusion.  That China isn’t spending enough.  And that governments everywhere should follow the Chinese example.  But without the one flaw of turning off the easy credit spigot.  Because Keynesians always say that any inflation created by government stimulus is minor and negligible in comparison to all the good that it does.

Similar problems have also been reported in road building and property construction, prompting a growing number of demonstrations and violent incidents, including clashes with employers and suicides. Such difficulties are likely to get worse towards the end of the year, when companies traditionally try to settle accounts with employees. Wage inflation is adding to employers’ woes. Minimum wages have risen by an average of nearly 22% in the two-thirds of China’s provinces which have adjusted them this year. Nice if you can get it, but not much use if you are not being paid at all.

But the Keynesians couldn’t be more wrong.  Once inflation starts it ripples through the economy.  Costs go up.  Wages go up.  Increasing consumer prices everywhere.  There’ll be some economic prosperity for a little while.  But soon inflation will eat away at the standard of living.  People will be making more money everywhere.  But that money will buy less and less.  It will buy less of a house.  Fewer toys.  And even less food.  This is the endgame of Keynesian stimulus.  And we’re seeing it played out on a grand scale in China.  Like we saw in Japan during their Lost Decade.  Where the Japanese suffered a deflationary spiral that just never ended.  To correct all that damage caused by their Keynesian bubble.

This could prove to have a devastating effect on the American economy.  For the Americans will have no one left to finance their debt.  And yet President Obama, the Democrats and all those mainstream Keynesian economists are all clamoring for one thing.  Can you guess what that is?  That’s right.  More Keynesian stimulus.

Some people just never learn.


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LESSONS LEARNED #87: “In a democracy you hold the keys to the treasury. So be careful of what you ask for.” -Old Pithy

Posted by PITHOCRATES - October 13th, 2011

Keynesian Spending gave us Double Digit Interests Rates, Double Digit Inflation Rates and Stagflation

LBJ was going to end poverty.  He declared war on it.  His soldiers?  Dollars.  Lots of them.  His battle plan?  The Great Society.  Tactics?  Just throw lots of money at a problem.  Hope that some of it actually hit its target.  And further hope that some of the money that did hit its target actually did something beneficial.  Just hope for the best.

And thus grew the welfare state.  The recipients liked it.  Because they were the recipients.  Government liked it.  Because the recipients liked it.  Who voted for them out of gratitude.  And dependency.  And the Keynesian economists liked it.  Because government spending was stimulus.  And they love stimulus.  These Keynesian economists.  So everybody kept asking for more.  As no one saw the harm in printing money to make people feel good.

The Keynesian said this was proof that a manageable amount of continuous inflation (printing money) would do away with the business cycle.  The boom and bust that had recurring good times.  And recurring recessions.  They said let’s just have a continuous boom.  When real demand fell just create artificial demand by having the government step in.  Let the government stimulate demand by printing money to spend.  And they did.  GDP went up.  Thus proving their theory.  Or so they thought.  Until they realized printing all that money had so weakened the dollar that interests rates soared.  To double digits.  As did prices.  Giving us double digit inflation rates.  And stagflation.  That’s why the economy sucked in the Seventies.  And why Jimmy Carter was a one term president.

Bad Monetary Policy gave us Cheap Money, the Housing Bubble and the Subprime Mortgage Crisis

After the dot-com bubble burst the economy went into recession.  So the government went to their patented recession cure-all.  Monetary policy.  Playing with interest rates.  I.e., printing money.  Because housing sales have always been the key to a growing economy.  Because building a house generates a lot of economic activity.  And furnishing a house generates even more economic activity.  So the best way to kick-start the economy was to get more people into houses.  The more the better.  Whether they could afford to or not.  Because no matter what happens, people always pay their mortgage.

So the government kept interest rates low.  Artificially low.  To encourage people to borrow money.  To buy housees.  And they did.  But not enough of them did.  Poor people weren’t buying.  Mortgage bankers were turning them down.  Because they couldn’t qualify for a mortgage.  So the government pressured them to approve people even if they didn’t qualify.  Fannie Mae and Freddie Mac guaranteed these risky mortgages.  Then bought them.  It worked.  Thanks to ARMs and no-doc mortgages, anyone could walk in off the street and get a cheap mortgage with little down.  The people liked it.  And asked for more.  Thus began the housing boom.

People were buying and selling houses like there was no tomorrow.  Investors were flipping homes.  People were moving up into McMansions.  Bidding the price of houses into the stratosphere.  Paying whatever the price was.  Because the money was so cheap to borrow.  Artificially low.  Which really inflated the price of these houses.  To unsustainable levels.  Until the bubble burst.  And these prices began to correct to reflect reality.  The Fed, waking up the next morning in a stupor, saw what they had done.  And desperately tried to fix things.  To limit the damage.  They raised interest rates.  ARMs reset.  And the great Subprime Mortgage Crisis began.  And thanks to Fannie and Freddie buying those risky mortgages, the contagion spread around the world.  To everyone who bought what they thought were safe investments backed by safe mortgages.  Because people always paid their mortgages.   But were, in fact, backed by the riskiest of all investments.  Defaulting subprime mortgages.

The Social Democracies’ Spending gave European Countries Staggering Debt and a Sovereign Debt Crisis

Karl Marx was a German.  But his theories quickly swept across the Rhine.  Soon there were communists everywhere in the West.    After World II, when communism became the new enemy, Western Europe favored something called social democracies.  Communism-light.  The social welfare state.  Cradle to the grave nanny state.  With generous state benefits.  National health care.  Pensions.  You name it.  And the state gave it.

People liked it.  Asked for more.  And their governments were glad to oblige.  They spent more and more money.  Rather, they spent more and more of the taxpayers’ money.  These social democracies had some of the highest tax rates.  Which was fine with the poor receiving these generous state benefits.  But it explains why anti-capitalists like John Lennon and Bono moved out of the UK.  To escape the high taxes on the wealth they created with free market capitalism.  So there was a capital flight out of these social democracies.  While at the same time their public sectors grew.  More and more people worked for the government.  Received government pay and benefits.  And generous pensions.  The people liked this.  And asked for more.  Except Lennon and Bono, of course.  And the other superrich who fled these social democracies.

As tax rates climb and capital flees, though, economic activity stagnates.  Which forces these countries to borrow.  And borrow some of them did.  Some of the smaller countries in the Eurozone (Greece) are so in debt that they can’t even roll over their existing debt.  They are in such a mess that no one wants to take a chance loaning them money.  Because no one thinks Greece will ever be able to repay whatever they borrow.  Of course, with the common currency (Euro), Greece’s problems are everyone’s problems.  So the richer countries in the Eurozone (Germany) are pouring money into the ECB to try and rescue Greece.  And save the Euro.  What we call the European sovereign debt crisis.  While the world waits with bated breath.  Because if they fail it could very well plunge the world into another severe recession.  Or worse.  Because the world needs the Eurozone.  To buy their exports.  So they can prop up their own sick economies.

Class Warfare pits the Rich against the Poor and Middle Class, the Taxpayers against the Public Sector

Many, if not all, of the great crises countries have…are…going through is because of bad monetary policy.  Using the power of the purse to make happy voters.  Whatever the cost.  For they were always sure they could avoid paying this cost.  That they could always keep pushing this cost off onto a future generation.  But the spending grew too great.  The debt grew too high.  And, before they knew it, that future generation was here.  And it’s us.

The people grew fat and lazy on these generous benefits.  And they never worried about the cost.  Because the cost was always someone else’s problem.  Until now.  Not only are they losing some of these generous benefits.  But they now have to pay for some of them.  The cost being so great that everyone has to pay their ‘fair’ share.  Which was fair when ‘everyone’ didn’t include them.  But it now includes them.  And they don’t like it one bit.  So they’ve taken to the streets throughout Europe.  Rioting here.  Protesting there.  And demanding that the rich (anyone who is not them) pay more in taxes so they can continue to live the good life.  All funded courtesy of the taxpayers.  Who aren’t.  Living the good life.

So class warfare escalates.  Pitting the rich against the poor and middle class.  And the taxpayers against the public sector.  Placing these countries on the brink of anarchy.  All because the people learned that they could vote themselves money.  And did.  They got everything they asked for.  Including something they didn’t bargain for.  The destruction of their countries.


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Keynesian Economics and Job Creation just don’t go Together

Posted by PITHOCRATES - October 12th, 2011

It’s Competition between Intel and AMD pushing Chip Technology to New Heights, not Government Investment

With Solyndra going belly up after that half billion dollar government investment people have been asking questions.  One of which is how government should invest into the private economy.  Well, here’s one example (see AMD’s Bulldozer Fails To Meet Expectations by Devin Coldewey posted 10/12/2011 on TechCrunch).

The Intel-AMD war has been going on a long time, and I hope it will be going on longer. The last few years have been hard on the underdog, however, with huge growth by Intel in both the low-power and high-performance sectors. The Core 2 Duos excelled, as did the Core i* series, and its most recent consumer series, the Sandy Bridge update to the i*s, is a monster. AMD has consistently lagged behind, though from the other side of the table you might say they’ve been nipping at Intel’s heels quite effectively for years…

Unfortunately, despite the new architecture and insane transistor count (the 8-core 8150 has around 2 billion), performance and efficiency per core just plain isn’t that good. There are a few tests on which Bulldozer takes on Sandy Bridge well, such as those truly optimized for high core counts, but on single-core tasks it gets destroyed.

In other words, government shouldn’t invest in the private economy.  Because, when they don’t, the private economy does very well.

Does any of that techno-speak make sense to you?  If you’re not in the hi-tech industry, or a kid, the answer is probably ‘no’.  But the beautiful thing is that we can enjoy the end product of putting 2 billion transistors on a chip.  That we can understand.  And that it is competition between Intel and AMD pushing chip technology to incredible new heights.  Not government investments.

Obama wants to Raise Taxes on Small Business Owners, the Number One Job Creators in the Country

The most successful companies out there making the things we all want and must have need help from government.  The kind of help only government can give.  That thing only government can do.  Cut tax rates (see Business groups push for business-friendly tax reform by Bernie Becker posted 10/12/2011 on The Hill).

The National Federation of Independent Business, the Independent Community Bankers of America and more than 40 other groups are calling on key policymakers to tackle both the individual and the corporate tax codes together and to end double taxation on corporations.

“By embracing these broad concepts, Congress can move the taxation of business income in a direction that helps ensure that all employers, regardless of how they are organized, continue to invest and create jobs here in America,” the groups wrote to the top Democrat and Republican on both the Senate Finance and House Ways and Means panels.

The Left keep saying businesses don’t object to high taxes and costly regulations.  The Keynesian economists like to cite poll after poll that business owners’ only concern is the lack of demand.  And then interpreting that as meaning that they want government to invest and stimulate the private economy.  But these businesses are saying otherwise.  They’re saying it is the high taxes.

The Obama administration also has, so far at least, spent more time pushing for corporate tax reform, while Republicans like Rep. Dave Camp (R-Mich.), the chairman of the House Ways and Means Committee, want a more comprehensive approach.

Camp has taken that stance in large part because many small businesses, called pass-through entities, pay their taxes through the individual code and would be left behind in any corporate-only reform.

And it’s worse than that.  Obama wants to raise taxes on these ‘pass-through’ entities.  To make them pay their ‘fair share’.  Those so called rich people earning $250,000 or more.  These small business owners whose business incomes ‘pass through’ to their private tax returns.  These same people that have risked everything they own to create a business.  And create jobs.  Who are, in fact, the number one job creators in the country.  But many fail.  And lose everything.  These are the rich people that Obama wants to raise the tax rates on.

Public School Education is Bad because Dumbing Down of our Kids is Necessary to Fool our Young Voters

Which calls into question the bedrock of all their policy.  Tax and spend Keynesian economics (see SCHOLAR COMMENTARY by Matthew Mitchell posted 10/10/2011 on Mercatus Center).

Sargent and Sims’s work is particularly relevant today as it explains the way that peoples’ expectations of the future can impact their current behavior. This is reflected in every economics story today that uses the phrase “policy uncertainty.”

Their work came along at a time when Keynesian economic models were facing challenges: There were theoretical challenges by economists like Milton Friedman and Robert Lucas, both of whom have previously won Nobel Prizes, but there were also empirical challenges. Keynesian economics didn’t seem to make much sense of the 1970s when the economy experienced high unemployment and high inflation, whereas it had worked pretty well in explaining macroeconomic trends in the 1960s.

The problem with the faux science Keynesian economics (a social science not a real science) is that it tries to quantify human behavior.  Which is something many people believe we can’t do.  Those in the Austrian school of economics.  Ronald ReaganMargaret Thatcher.  And most economists not wedded to their governments.

The 1970s were the heyday of Keynesian economics.  Even Republican Richard Nixon adopted Keynesian policy and declared he was a Keynesian, too.  Then Jimmy Carter continued many of these same policies.  And how did that work?  You can ask Jimmy Carter.  Who lost to Ronald Reagan in a landslide.  By asking a simple question during a presidential debate.  Are you better off than you were four years ago?

Part of these failures had to do with the fact that these earlier Keynesian models relied on people’s naiveté. They worked so long as people could be fooled by government. For example, government-induced inflation might boost the economy if enough producers are fooled into thinking that higher prices are the result of increased demand for their products. Sargent’s work explains how people’s beliefs about the future impact their behavior. He found that if you make modest assumptions about peoples’ ability to understand how policy will affect their future, Keynesian policy prescriptions like short-term fiscal or monetary stimulus don’t work very well.

And there’s your answer to why the quality of our public school education is lagging other countries.  It’s not the money.  It’s the curriculum.  And the dumbing down of our kids.  So government can fool them.  To make them believe bad economic policies are good.  So these young voters keep voting for them.  Which is important to them.  Because once people wise up, they lose their votes.

As Long as there is a Democrat Politician Somewhere there will be a Vote to Buy

The best government policy for investing in the private sector is no policy.  Successful companies don’t need help.  They just need to be left alone.  So they can do what they do best.  Create great things.  And jobs.

Higher taxes do not create jobs.  They destroys jobs.  At least according to those who create jobs.

And the tax and spend Keynesian myth of active government participation has been debunked once again.  By real economists.  This time by the Nobel in Economics winners.  Sargent and Sims.  Thus proving once again that you can’t quantify human behavior.  And that people consider more than the interest rate before spending their money.

So you’d think this would put an end to any further stimulus spending.  But no.  Because stimulus spending isn’t about stimulus.  It’s about getting votes.  And as long as there is a Democrat politician somewhere there will be a vote to buy.


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When Democrat Policies Fail and they Fall in the Polls they Scramble to Endorse Reaganomics

Posted by PITHOCRATES - October 5th, 2011

Democrats have Blamed every ill known to Mankind on Reaganomics

The Left hates Ronald Reagan.  Proclaimed the era of Reagan was over.  No more were these Reagan Republicans going to screw over the poor so the rich can live a better life.  Yes, they hated this man with a passion.  And everything he stood for.  This supply-sider of the Austrian School.  He and is unfunny Laffer Curve.  This cold-hearted tax cutter.  But now they love him.  Why?  Because he supported taxing the rich.

I’ll pause a moment for those of you who have fallen out of your chairs.  Ready?  Good.

You know Congressional Democrats are grasping at straws to promote their policies when they claim their archenemy would have supported them, too.  You know why they’re trying, though, don’t you?  If you listened to the protesters on Wall Street you should know.  With their control of public school teachers and college professors (both dependent on taxpayer money for generous pay and benefit packages), they can revise history.  And keep kids ignorant.  Hopefully keeping them oblivious of things they don’t want them to know.  Such as the true legacy of Ronald Reagan (see MILLER: Ripping off the Gipper by Emily Miller posted 10/4/2011 on The Washington Times).

Liberals are trying to twist Ronald Reagan’s words to muster support for raising taxes. House Minority Leader Nancy Pelosi’s press office sent a memo on Monday to congressional Republicans claiming they’d found evidence proving that President Reagan was the real inspiration for President Obama’s tax-the-rich “Buffett Rule.” The California Democrat posed the question: “What would Reagan do?”

The correct answer is: He would cut taxes. Mrs. Pelosi’s memo sends people over to the liberal Think Progress website, where a video montage interweaves clips of Mr. Obama and Reagan saying apparently similar things about tax rates. “We’re going to close the unproductive tax loopholes that allow some of the truly wealthy to avoid paying their fair share,” said the Gipper.

You’re supposed to think that’s just what Mr. Obama is doing, but the liberals edited out the context of the 40th president’s remarks. In a June 1985 speech at an Atlanta high school, he called for a total overhaul of the tax system. He wanted loopholes closed to lower the tax rates for everyone, for a net reduction in the tax burden. Congressional Republicans point out that’s precisely the opposite of what the Democrats are now trying to do.

You see, the Democrats can’t rely on telling the truth to pass their policies.  Because their policies only benefit those in government.  And those who live like parasites on the wealth creators.  Such as those protestors on Wall Street.  Who want the wealth of the wealth creators.  But want no part of capitalism which created that wealth.  And are too ignorant to understand that you can’t have one without the other.

Thank you public school teachers and college professors.

So they must lie.  Revise history.  To try and fool people into believing that their policies are just like Ronald Reagan’s.  And apparently hoping people don’t remember that Democrats have blamed every ill known to mankind on these very same policies.  ReaganomicsTrickledown economics.  The scourge of mankind.  But the majority of Americans apparently love the big lug so they’ll swallow back their bile and say, hey, we love him, too.  And hope that the grimace on their face doesn’t look as bad or as painful as it feels.

Fannie Mae and Freddie Mac created America’s Financial Mess, not Wall Street

So where did these Wall Street protests come from?  Where did the primary impetus come from?  Apparently Canada.  Thanks, Canada.  As if the corrupting influence of Terrance and Phillip wasn’t enough already.  So I guess we have to Blame Canada (Warning:  Blame Canada contains adult content) for this, too (see Occupy Toronto leaderless, unfocused but hopeful by Dana Flavelle posted 10/4/2011 on the Toronto Star).

The Wall Street protests were inspired by Canadian anti-consumer magazine Adbusters.

Editor in chief and co-founder Kalle Lasn said he’s been calling for this kind of protest movement for 20 years.

It’s finally happening because people are angry with the financial fraudsters on Wall Street who created America’s economic mess and largely went unpunished, he said in a telephone interview from Vancouver.

But that isn’t who created America’s financial mess.  It was government.  Specifically the government sponsored enterprises (GSE) Fannie Mae and Freddie Mac.  If it wasn’t for them buying and/or guaranteeing risky subprime mortgages there would have been no subprime mortgage crisis.

That was government policy.  Putting as many people into houses as possible.  Even if they couldn’t afford them.  That wasn’t Wall Street.  Wall Street was merely an accessory after the fact.  Aiding and abetting Fannie Mae and Freddie Mac.  By selling those toxic subprime mortgages in collateralized debt obligations (CDOs).  Promoting them as high yield yet low risk.  Because they were backed by mortgages, historically the safest loans in all of America.  So investors bought these.  Not knowing how risky they were.  But you know who knew how risky they were?  The GSEs Fanny and Freddie.  Because they bought them.  And remember what the ‘G’ stands for in GSE.  Government.

If you removed government from this equation mortgage bankers would not have approved these risky subprime mortgages.  Because that risk would have been on their books.  But when government said ‘don’t worry  we’ll take that risk off of your books’ what did they have to lose in approving risky subprime mortgages?  Less harassment from the government for not approving mortgages for the poor and minorities who didn’t qualify?  Yeah, like they were going to miss that harassment.

If these protestors want to protest those responsible they should protest government.  Not Wall Street.

Damn Canadians.  If it’s not making our kids fart and curse they’re getting them to protest the wrong people.  (Editor’s note:  We like Canada and Canadians.  And mean them no disrespect.  We’re just having a little fun with the movie South Park: Bigger, Longer & Uncut.  In which incidents lead to war between Canada and the U.S.  A premise so ridiculous that it’s funny.  For Canada and the U.S. have been the best of friends.  And will always be the best of friends.)

The more Public Sector Union Employees paying Dues the more Money is collected for Democrat Coffers

Perhaps that’s the problem.  Too much government.  The federal government has grown into a behemoth.  On top of thousands and thousands of local governments throughout the country (see Infographic: Local government by the numbers by Mary Mahling and Carla Uriona posted 10/4/2011 on Stateline).

There are 89,476 local governments in the United States. They include counties, cities, villages, towns and townships, as well as special districts that handle utilities, fire, police and library services.

That’s a lot of government.  And there’s only one way to pay for a lot of government.  With a lot of taxes.

So we have government upon government upon government.  Surely with all that government we must be getting some value for all of these taxes.

More than two centuries of American democracy have resulted in a profusion of governments at the local level, not only cities and counties but villages and townships, park districts and sanitary districts and a host of others. To those trying desperately to bring a state’s budget into balance, many of these are useless anachronisms incapable of providing any service that could not be provided higher up the governmental chain. But to the tens of thousands of people who hold office in these local entities — and to millions of citizens who live within them — multiple local governments are a crucial piece of evidence that American democracy reaches down to the grassroots level.

Apparently not.  And don’t call me Shirley.

They just provide a lot of jobs for the unemployable.  By taxing the wealth creators.  And redistributing it to people whose job is a duplicate of one at another level of government.

They do serve a purpose, though.  Being totally funded by taxpayers, they have a vested interest to keep raising taxes on the taxpayers.  Which is, of course, helpful to Democrats.  So the more local governments the better.  The more public sector union employees paying dues the more money finds its way into Democrat coffers.

Any Attempt to Quantify Human Behavior will Ultimately Fail

And then you have academe.  And Keynesian economists.  Furthering the growth of government with their government-spending Keynesian economics (see Tis The Gift To Be Simple by Paul Krugman posted 10/5/2011 on The New York Times).

To be sure, IS-LM is an attempt to squeeze a dynamic economy into a static model, which is why people like me usually cross-check our conclusions with something intertemporal. But it’s actually a pretty darn sophisticated approach — as demonstrated by the fact that economists who dismiss or attack IS-LM as too simplistic or something almost always end up making assertions that are much more simplistic than IS-LM, if not falling into outright logical fallacies. In fact, I can’t think of a single exception to this rule: every attack on IS-LM I’ve ever seen (as opposed to suggestions that we should also look at more complex models) was followed by some kind of empirical or logical howler.

I have a criticism.  Any attempt to quantify human behavior will ultimately fail.  Because you can’t quantify human behavior.

Economics belong to the branch of science we call social sciences.  That is, it’s not real science.  Because the wildcard is that human behavior can always produce some unintended consequence to government action.  Such as Prohibition giving us organized crime.  Whereas the equations of science typically don’t.  We can use science to build bridges, buildings and airplanes.  And they work pretty much as planned.  Without any unintended consequences.

You can’t represent human behavior by mathematical formulas.  We know some behavioral responses.  Such as sex in advertising gets men’s attention.  But that’s a base primeval instinct.  There’s not a whole lot of thinking going on.  Not so in a complex economy.  Where there is a lot of thinking going on.  Keynesians like to think the economy is as simple as impulse buying at the point of sale checkout aisle.  Put more candy on display and you sell more candy.  Not so with buying a house.

Everyone will like to own a beautiful home.  But people won’t buy a house on impulse.  Not when there’s record unemployment.  And talk of a double-dip recession.  Because if you learned anything from the subprime mortgage crisis it’s this.  Too much debt is bad.  And there is no such thing as a guaranteed job.  Playing with interest rates won’t change that.  Only time will.  When enough time has passed to let people feel secure in their jobs again.  Then and only then will they consider taking on debt again.  No matter what the IS-LM model predicts.  Because you can’t quantify human behavior.

The Wall Street Protestors with Student Loan Debt Probably don’t have Science or Engineering Degrees

All government policy is social science.  It’s not an exact science.  That’s why strange things happen.  Unintended things.  Whenever government tries to influence behavior.  And when government tries they have a track record of failure.  Which is why they don’t run for reelection on the success of their policies.  They run on the success of someone else’s (Ronald Reagan’s) policies.  And say that their policies are the same.  And they are except with a few minor changes.  And by ‘few’ I mean they couldn’t be any more different.  So they lie.  Or they just demonize their opponents.

But our kids are blissfully ignorant.  Thanks to public school teachers.  And college professors.  Who care more about improving their taxpayer funded pay and benefits than education.  That’s why government grows.  And why we have degrees like women’s studies.  And poetry.  Degrees that offer no hope for employment in a capitalistic economy.  For what business that relies on pleasing their customers (like Apple does consistently) need people with these skills?

No.  They need people with science and engineering degrees.  You know, the hard ones.  So the kids who took the easy route in college must depend on teaching others their worthless knowledge.  Or get a government job.  Which has a lot to do with the anger of these protestors who have huge student loan debt.  And no job.  Because if they hate capitalism you can guess what their degrees are in.

(Editor’s note:  This was written before news of Steve Jobs’ passing broke.  Our condolences go out to his family.  We decided to leave the Apple reference in as a tribute to Steve Jobs.  He was one of America’s greatest entrepreneurs.  The world is a better place because of him.  For the gifts he gave us.  And the inspiration he gave to the next generation of great entrepreneurs.)


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Obama’s Economic Policies have Failed because they’re Keynesian Economic Policies

Posted by PITHOCRATES - September 2nd, 2011

Government Spending and Easy Monetary Policy haven’t created any Jobs 

The new jobs report is in.  It’s not good.  Surprise, surprise (see ‘No confidence’ sparks rush to safety by Blake Ellis posted 9/2/2011 on CNNMoney).

The Labor Department reported that the economy added no jobs in August, while the unemployment rate remained at 9.1%. That was the worst reading since September 2010, when the economy lost 27,000 jobs.

Economists had been expecting a weak report given the recent debt ceiling gridlock, plunging consumer confidence and the downgrade of the United States’ credit rating in August. But what they got was even worse than expected.

These Keynesian economists have been predicting every kind of wonderful they could with every new Keynesian policy.  But government spending and easy monetary policy haven’t created any jobs.  If they did we’d have them.  Jobs.  But we don’t have them.  After close to 3 years of trying.  I mean, the economy is so bad that oil prices are falling.

Since a healthy economy typically spurs demand for oil, fears that another recession is around the corner are causing traders to worry about waning demand, said Flynn.

“Crude oil is looking at demand destruction right now,” he said. “With a lack of people going back to work and economic data as a whole as it is, it’s just not a supportive environment for higher prices.”

So the Obama administration has spent the U.S. to record deficits.  And record debt.  But because so many people are unemployed demand for oil is destructing.  What a terrible tradeoff for cheaper oil.

Oil is the lifeblood of a healthy economy.  So you know an economy is not healthy when people aren’t buying oil.  In a country where chronically insufficient domestic supplies once raised the price of gasoline to over $4/gallon.  Now any spikes in gas prices seem to have more to do with a depreciating dollar (thanks to all that easy monetary policy) than demand.

Keynesians see no Downside to Excessive Government Spending or Inflation

Still there are some who say the problem is not excessive spending.  But spending that was not excessive enough (see Fatal Distraction by Paul Krugman posted 9/2/2011 on The New York Times).

Zero job growth, with unemployment still at nosebleed levels. Meanwhile, the interest rate on 10-year US bonds is down to 2.04%, and it’s negative on inflation-protected securities.

Aren’t you glad we pivoted from jobs to deficits a year and a half ago?

Krugman is a Keynesian.  So by ‘jobs’ he means government spending.  And by ‘deficits’ he means responsible government.  He sees no downside to excessive government spending.  Or inflation.  As if the 1970s never happened.

A lot of People hate the Rich and Successful, especially Ivy League Elitists

But the 1970s did happen.  And we had double-digit inflation at the end of that decade.  Didn’t help.  It didn’t make a dent in the unemployment numbers.  Yet there are those who want to take that very dangerous road again (see View: Inflation Is Easy to Free, Hard to Control by the Editors posted 9/1/2011 on Bloomberg).

…But now, a growing number of voices, mainly on the left wing of the Democratic Party but also in the Federal Reserve, are calling for what is in effect default in slow motion. It goes by the name of inflation.

Inflation decreases the value of debts, like the $14 trillion owed by the federal government to lenders such as the government of China (and a lot of ordinary American savers, too), and it increases the value of assets, like houses. Thus it helps all debtors, from the federal government to individual homeowners who can’t pay their mortgages. Inflation has been running at an average of 2.4 percent over the past decade. After a couple of years of, say, 6 percent inflation, that $14 trillion would be worth closer to $12 trillion in current dollars. A $400,000 mortgage would be worth about $350,000.

Some may say, shrinks debt?  Increases asset value?  Well where’s the problem with that? 

We call it class warfare.  Of the worse kind.  Creditors versus debtors.  The poor versus the rich.  The poor hate the rich because they have to borrow from them to buy a house.  And they would love to not pay them back.  But if you start doing this eventually the rich won’t loan their money anymore.  So there will eventually be no more home ownership.  Except for the rich. 

It’s a story as old as time.  And the U.S.  The states were passing debtor laws.  Favoring debtors.  Harming creditors.  And destroying legal contracts in the process.   Which a nation built on the rule of law could not have.  For if there are no contracts there is only force.  Where the most powerful get what they want.  And those not powerful enough to fight them off simply lose what they have. 

This is one of the reasons why the Founding Fathers called for the Philadelphia Convention in 1787.  To save what they just fought 8 years to get.  A nation where no man is above the law.  And contracts are legal binding.  Still, there are a lot of people who hate the rich and successful.  Who think contracts are merely suggestions.  Especially Ivy League elitists who have no ability but arrogance and condescension.  Who could never become rich and successful on their own.  Preferring privilege over hard work.  And have no problem trampling over people’s contract rights.  Or Constitutional rights, for that matter.  But that’s another story.  For another time.

As it happens, a couple of years of 6 percent inflation is exactly what the leading economist advocating this approach — Kenneth Rogoff at Harvard — recommends. He is joined by Paul Krugman and by a growing number of economic journalists and commentators. Some of these people have been saying that inflation is no threat worth worrying about, because it has not appeared despite circumstances that ordinarily would have produced it. Now they say inflation is no threat because a little of it would actually be a good thing.

At Bloomberg View, we think that doing anything to encourage increased inflation is a very bad idea. People who advocate it are either too young or too old to remember our last adventure with inflation, in 1979 and 1980…

You can’t easily pencil in two years of 6 percent inflation and then go on your merry way. Inflation is self-feeding and takes on a life of its own. And it works only by surprise. If lenders all know that the government is going to induce or at least tolerate something like 6 percent inflation, they will demand something like 8 percent interest from borrowers. There goes the grease on the wheels. And it’s not just lenders: Labor negotiators will have their backs stiffened if they know that any dollar figure they negotiate will buy less and less. Manufacturers who know their inputs are going to be getting more expensive, in dollar terms, will raise their prices in anticipation, thus making inflation a self-fulfilling prophecy. Long-term planning becomes difficult to impossible.

This is what happened in the Seventies.  It’s why there were double-digit interest rates.  Inflation was depreciating the dollar so fast that it took near usury rates before anyone would loan money.  It was great for people with money to loan.  But horrible for people who had to borrow.

There is no Record of increasing Taxation and Regulation increasing Economic Activity

This is not just a condemnation of the Obama economic policies.  This is a condemnation of Keynesian economics as a whole.  They only lead to a bloated federal government.  That grows at the expense of the job-producing private sector (see Needed: A Reagan Moment To Stop Our Decline by Lawrence Kudlow posted 9/2/2011 on Investors).

During the Bush years, the federal government increased from 18% of GDP to 21%. The debt went up $2.5 trillion, from roughly 32% of GDP to 40%. And now, during the Obama period, spending has moved even higher to at least 24% of the economy, while total federal debt has ballooned near 100% of GDP.

It’s almost a mirror image: The expansion of the public sector and the decline of the private sector. This is completely inimical to the American peacetime experience…

And all while jobs, the economy and stocks slumped over the past 10 years, the dollar dropped 37% and gold increased by nearly 500%, from $250 to nearly $1,900 an ounce.

We don’t have the kind of inflation today that we experienced in the 1970s. But it is certainly worth noting that a collapsing currency and a skyrocketing gold price are key barometers of a loss of confidence in the American economic story.

But the Keynesians aren’t worried.  Mr. Paul Krugman belittles those ‘responsible’ people who worry about phantom demons like inflation.  When it comes to spending, their constant refrain is to flame on.  And only worry when inflation is burning white hot.  Then they can simply tap their monetary breaks and make everything good again.  Or so they think.

But there is a bigger problem.  This ‘limited’ government of the Founding Fathers is growing into a leviathan. 

My key thought is that the U.S. in the last decade has adopted a wrongheaded policy of government expansion — primarily spending and regulating — financed by ultra-easy monetary policy and rock-bottom interest rates.

Tax rates haven’t moved much. But the whole tax system is badly in need of pro-growth flat-tax reform and simplification. However, the expansion of spending and regulating is robbing the private sector of its entrepreneurial vitality. Here’s the new fear: More big-government spending stimulus from Obama’s jobs plan. More EPA. More NLRB. More Dodd-Frank. More ObamaCare.

And as the policy mantle for growth has swung to Federal Reserve stimulus, we are learning once again what Milton Friedman taught us 40 years ago: The central bank can produce new money, but there is no permanent production of jobs and growth from that pump-priming.

Big government financed by easy money is a lethal economic combination. It must be reversed. We should be reducing the regulatory and spending state while keeping money predictably stable (and even re-linked to gold).

The supply-side nostrum that worked so well for 20 years, beginning with Ronald Reagan, was low tax rates, light regulation, limited government, and a hard dollar. Gold collapsed between 1980 and 2000 as stocks, jobs, and the economy roared. The last ten years? We’ve gotten the policy mix completely backwards. The results show it.

And that’s something that the Keynesians can’t point to.  When they had full legislative power (as they had since the Democrats won the House and Senate back in 2006), they can’t point to a historical record of success.  Like the tax-cutting supply-siders can. 

JFK cut taxes and saw economic growth.  Reagan cut taxes and saw economic growth.  George W. Bush cut taxes and saw economic growth.  But there is no record of increasing taxation and regulation increasing economic activity.  You know why?  Because it doesn’t.  If it did the economy would be booming now because the government has never spent or regulated more.

Let’s hope the Keynesians Concede Failure while there is still an Economy to Save

How many bad economic reports will it take before the Keynesians will finally concede failure?  When will the Ivy League elitists stop hating people who are more talented and successful than they are?  And when will the people that put them into power see that it’s only the power they’re interested in?  Not the economy.  Or our well being?

I hope these people come to their senses soon.  While there is still an economy to save.


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