FedUpUSA

Archive for July 9th, 2010

At least he had one in the first place…. but it’s definitely gone now:

While the unemployed may spend more as a result of higher unemployment benefits, those people from whom the resources are taken will spend less. In an economy, the income effects from a transfer payment always sum to zero. Quite simply, there is no stimulus from higher unemployment benefits.

Oh wait.  That’s correct.  So where’s the “loss of mind”?  Right here:

My suggestion would have been to take all $3.6 trillion and declare a federal tax holiday for 18 months. No income tax, no corporate profits tax, no capital gains tax, no estate tax, no payroll tax (FICA) either employee or employer, no Medicare or Medicaid taxes, no federal excise taxes, no tariffs, no federal taxes at all, which would have reduced federal revenues by $2.4 trillion annually. Can you imagine where employment would be today? How does a 2.5% unemployment rate sound?

Oh Christ.

We’ve not blown enough bubbles, right?

We haven’t seen enough results from them?

What causes bubbles?  That’s simple, in the end analysis:

False signals of demand in the economy, which then cause actors in that economy to increase the supply of goods and services beyond that which the economy can support on a sustainable basis.

Excessive credit issuance sends a false demand signal in the economy.  Giving McDonalds’ burger-flippers loans to “buy” $500,000 houses when they can’t afford a $150,000 one on a sustainable basis is one such false signal.  This encourages the building of lots of $500,000 houses, it drives the price of the materials (including land) sky high and it drives up the demand for labor beyond sustainable levels.

Stock prices shoot the moon too, especially any firm related to housing.  Home builders, Lowes, Home Depot, lumber companies, all go to the moon.

But this only works so long as you can continue to send that false demand signal.  In the case of credit you must continually increase it on an exponential basis by granting it on looser and looser terms in ever-increasing amounts in order to keep the bubble growing.

The same applies here.  You’d have to indefinitely extend this practice forever.  But Government has real expenses and must somehow pay them.  Right now our interest rates are very low, but they wouldn’t be for long if the government was to “forget about” all taxes for 18 months.  Our creditors would (correctly) presume that we would likely never pay them, and as a result they would refuse to roll over our debt. 

Hello Greece!

Everyone, including Laffer, is looking for a free lunch.  They all want some desperate way to keep the party going.  But the keg has run dry, and the brewery was looted and burned last night by the revelers.  There is no more beer.

Ultimately, the drunk must either detox or die.  Those are the only two choices.

If the drunk does not stop drinking before the damage reaches a critical level, he will die. 

But for each bottle before that point is reached, the detox – the DTs and similar maladies that come from withdrawal from his addiction – becomes worse.  Yes, “just one more hit” produces a brief respite, but not only does it make the withdrawal more difficult and painful, it runs an ever-higher risk that this bottle may truly be the last bottle.

Laffer needs to wake the hell up and stop with the Ponzi crap.  We ran that game in 2003 and got this mess.

The next bottle we guzzle may be the last drink we take.

The Market-Ticker

There’s dumb and then there’s knowingly-misleading.  This last piece is the latter:

The Obama administration is in a difficult spot. It’s now obvious that the stimulus was much too small; yet there’s virtually no chance of getting additional measures out of Congress. The administration has chosen to deal with this by trying to have it both ways — condemning Republicans, rightly, for obstructionism, while at the same time claiming, falsely, that we’re still on the right track.

The Obama administration is in a tough spot of its own making.

The “stimulus” was never going to work: it couldn’t, mathematically.

Why not?  Because of this ugly little reality:

I don’t know how much larger one could have made the so-called “stimulus.”  But just as in 2003 it failed to produce lasting prosperity or turn around the economy because the Ponzi Economic “pull forward” on demand (via increased credit) had hit the wall.

That’s the ultimate failure of all of these so-called “economists.”  They simply disregard debt – on purpose.

This is idiotic, and worse, it’s intentionally misleading.  Anyone with half a brain knows that debt has to be repaid, and that if you have an economic system with $100 in currency and yet permit someone to loan what part of it they have at interest it is inevitable that the interest will ultimately consume all of the $100! 

The answer to that is usually “emit more currency!”  Yet this leads to a second conundrum – one can only emit more credit or currency (both spend the same) at a rate that matches growth in output, lest you get inflation.  Inflation means that you really didn’t accomplish anything, as while there are more units of currency (and/or credit) available in the economy each one purchases fewer goods or services.

The only way to prevent this from happening is to accept periodic recessions in which both borrowers and lenders who take and make the weakest loans fail and go bankrupt.

That causes the credit and debt (remember, credit and debt are the counter-balancing entries on both sides of the balance sheet) to be removed – and balance restored.

Recessions are particularly hard on creditors that loaned capital unsecured, as they take actual uncompensated losses.  Those who loaned capital in a secured fashion get the collateral, which may adjust in price downward to it’s actual value, but it doesn’t go to zero.  The unsecured lender, on the other hand, is faced with a complete loss.

The feedback mechanism (losses suck!) cause lenders to increase the price of capital – that is, the interest they demand.  This in turn causes people to be more adverse to taking out credit for anything other than productive purposes – that is, to speculate or consume.

Through this natural set of feedback mechanisms (known as economic pain by those who experience it) the market works to restore balance – and protect the monetary system as a whole.

Government interference with this process always introduces undesirable distortions.  By picking winners and losers government causes misallocation of capital – that is, it subsidizes losing behavior.  By preventing fools from suffering their economic fate, government suppresses rates of interest charged for capital, which inevitably leads to negative real rates and thus speculative asset bubbles (after all, if you’re going to get paid to borrow, you will borrow as much as you possibly can!)

But far worse is the refusal to recognize that absolutely nothing the government does produces anything.  That is, government can redistribute a unit of currency (or credit) from Joe to Jane, but government in doing so does not and will not cause more units of currency in terms of output to be produced on a sustainable basis. 

Each dollar Jane gets from government (and spends, saves or invests) Joe no longer has, as it was taxed away from him, or it was borrowed in furtherance of a Ponzi Scheme as the below charts will show.  In neither case did government increase the wealth of the nation – it shifted it from one hand to another.

That is, at best government can send a false demand signal into the market.  If this becomes engrained in the economy it then creates a structural deficit which is nearly-impossible to remove, because if the government stops doing so then the recession or depression it was trying to “cover up” immediately re-asserts itself. 

This is what happened in 2003.  Now we’re doing it again, writ large at 300% of the former size.  We’ve gone from embedding a recession into structural deficits to embedding a depression into them. 

That path inexorably will lead to a bond market revolt.  Perhaps not today, or tomorrow, but with absolute certainty it will occur.  Organic GDP is contracting, not expanding, and eventually those who loan capital to the US Government (that’s us in the end – by buying goods and services which then are recycled into Treasuries!) will deduce that we’re getting a poor return on our investment.

The expansion of a credit bubble depends on ever-increasing borrowing across the entire economy, with ever-larger parts of it going to speculation and consumption.  This creates an effective naked short on the currency.  The first bits of this feel like “prosperity for free” (rather than for hard work.)

All Ponzi Schemes have at their core the fundamental mathematical precept of exponents.  That is, the growth of the scheme requires ever-greater numbers of “things” (people, credit dollars, etc) to participate, because the exponential function of growth lags the exponential function of cost. 

While the gap is both small and appears “painless” at first, it is that very seductive beginning that makes such schemes so dangerous, as the below chart shows:

Compare against:

The problem with trying to continue the series is that, as you can see in the actual chart, the level of debt has topped out – despite the government’s hellbent-attempt to goad continued expansion by running huge deficits.  Now let’s extend that theoretical debt chart another 20 years.

Oh, incidentally, the actual debt-to-gdp spread is about 3% and has been since the 1950s without much variation, so put the expected ”real” results smack-dab between those two curves.  Worse, GDP expansion has contracted from nearly 7% annualized to just over 5% since 2000 onward as the ever-greater amount of debt service has weighed on the economy.

While one never knows in advance exactly how far such an exponential spread will go before it collapses, this is exactly what all Ponzi Schemes look like when graphed mathematically, and is why they always collapse.

When the scheme is early in its run everyone thinks that it will be no big deal, because at the time it isn’t.  But when it gets later on everyone is terrified at the prospect of accepting the losses that must be taken, because they’ve gotten so large.

The error in this thinking is that those losses will continue to grow exponentially so long as the spread is maintained, and while narrowing the spread will help, it won’t stop the accumulation of damage.  Only accepting the hit stops the accumulation.

In this case we’re now to the point where restoring fiscal balance across the credit system requires a roughly 60% contraction in both outstanding credit and the size of the Federal Government (in terms of dollars.)  That in turn will contract GDP by 40%.

I understand this sort of prescription is considered politically unacceptable.

But math doesn’t care about politics.  It simply accumulates more damage, day by day, until we accept the math – and the truth.  The gap has reached a size that is mathematically impossible to grow out of through expansion of GDP.

Once we accept the math – and the damage - we must demand that credit and monetary aggregates be strictly tied to GDP in the future to prevent this from happening again.  The Federal Reserve Act contains the necessary stricture, but no punishment for violations – and violate they have over the last sixty years.  We must add the missing “or else” and expose all credit, monetary and price aggregates in the economy so as to monitor The Fed’s performance – and if necessary, jail them if they continue to offend.

We either accept the math and the damage that must be taken through our economy or we will suffer a political and economic collapse.

Those are the only options folks – we argue only “when”, not “what.”

It’s the math.

The Market-Ticker

Las Vegas, NV

President Obama is in Las Vegas, where he’s holding an invitation-only fundraiser for Senate Majority Leader Harry Reid, among other closed-door events.

The president is welcome; he should be courteously received.

That said, it’s too bad the president isn’t planning to mingle with average Nevadans and visit our shopping centers incognito, to get a look at what his economic policies have really wrought — what a city with 14.1 percent (official, understated) unemployment looks like, under an administration whose main economic goals seem to be the punishment and prevention of capital formation and business growth.

The president might have gotten an earful, here at ground zero of the Great Recession.

While “Obamacare” doesn’t go into full effect for four more years, taxes to support it kick in this fall, starting with a 10 percent tanning salon tax (why?) and a “1099″ tax that’s projected to suck an additional $17 billion out of private businesses in the next decade by making them file “1099″ snitch forms for virtually everyone to whom they pay a few hundred dollars.

Is that likely to help Nevada’s economy rebound, President Obama? Won’t it drive even more business “under the table,” where workers have less protection, illegal aliens thrive and many continue to draw welfare while paying no taxes at all?

Speaking of illegals, your administration just sued our neighbor to the southeast, Arizona, for enacting a state law that instructs local police to help enforce federal immigration law — despite the fact the Supreme Court ruled in 1976 that federal immigration law doesn’t intend “to preclude even harmonious state regulation.”

What’s the political message of this cynical lawsuit? That some 12 million illegals should feel safe continuing to occupy jobs that U.S. citizens have flocked to fill whenever they’ve had a chance, presumably. Just wait for the Democrats to grant you amnesty, invite in your extended family and send you all Democratic voter registration cards — as soon as the heat of November’s mid-term elections has passed — is that it?

Is that supposed to help Nevada’s unemployed and the local businesses they can no longer patronize?

What about “cap and trade” and your carbon tax, still promoted by you and your legislative ramrod, Sen. Reid, even after much of the basis for worrying about climate change has been shown to be a hoax?

Your administration admits this legislation will artificially drive up power bills and other energy costs. Mr. President, is that supposed to help cash-strapped Nevada firms create new jobs? If it causes air fares and gasoline prices to soar, will that help bring the tourists back to Las Vegas?

And a “VAT” or add-on national sales tax — is that next?

If the 2008 economic correction had been allowed to proceed without interference, mal-invested firms would have been forced to liquidate in bankruptcy. The buildings where new entrepreneurs might like to open would have passed into new hands, and could now be leased at far lower rates. Instead, many structures in Las Vegas now stand empty, owned by banks or by the FDIC or by “walking dead” owners who dare not rent out the premises at lower rates lest their overdue notes be called. It’s a weird economic limbo, and it’s not helping.

Why so many costly bailouts, Mr. President? Why so much bypassing of America’s fine bankruptcy courts? Was it because your union supporters objected to what might happen to their contracts, which helped sink firms like General Motors? Is that why you intervened to arrange for the government and the unions to take over that firm? How many other industries will now be taken over? We already know about health care. The banks, too?

And speaking of unions, is “card check” still in play? The prospect that workplaces could be unionized without a worker secret-ballot majority — that’s supposed to encourage local business investment and growth?

Meantime, the inflation caused by all this spending keeps prices and wages artificially high. Is that supposed to help?

Nevadans have a long tradition as hard-working frontier entrepreneurs. Nevadans would rather have a real, private-sector job than a handout. How many of your high-level appointees have any experience creating such jobs, Mr. President? Do you see that as a problem?

Las Vegas Review-Journal