Yes, Senior Citizens, wake up: Paul Krugman, along with the other sycophants echoing his views, are trying to kill you.
Is that too strong a charge?
Listen to Paul opine:
What should it be doing? Conventional monetary policy, in which the Fed drives down short-term interest rates by buying short-term U.S. government debt, has reached its limit: those short-term rates are already near zero, and can’t go significantly lower. (Investors won’t buy bonds that yield negative interest, since they can always hoard cash instead.) But the message of Mr. Bernanke’s 2002 speech was that there are other things the Fed can do. It can buy longer-term government debt. It can buy private-sector debt. It can try to move expectations by announcing that it will keep short-term rates low for a long time. It can raise its long-run inflation target, to help convince the private sector that borrowing is a good idea and hoarding cash a mistake.
The Fed has done pretty much all but the last. It bought government debt. It bought private (Fannie and Freddie are not government “agencies” as the law defines them) debt. It announced that it would leave short rates at 0-0.25% for “an extended period.”
But now Krugman crosses a particular line in asking that The Fed explicitly raise an inflation target – that is, intentionally seek to destroy the savings and investments of all Americans.
What Krugman refuses to understand (because he is a hard-core lefty collectivist) is that capital formation comes from savings. That is, new businesses form from surplus capital excess of requirements.
Such a policy as Krugman advocates shuts down the engine of economic prosperity and throws sand in the crankcase, doing critical damage to small business. Indeed, there are two things that reliably trash small business:
Destroy savings and thus the foundation upon which capital formation rests.
Threaten to, or actually do, put in place an uncertain but increasing tax policy, especially taxes that bear on employment, so that the small businessman has no means to figure out what an employee will cost him “all in” through the next five years.
The Obama Administration has done a lot of the latter, what with “health care reform” and all. I can’t tell you within any reasonable degree of certainty what it would cost me to open a small manufacturing concern when it comes to environment regulation (e.g. “cap and trade” threats) but more importantly, what it would cost me to hire employees. Health “reform” has turned employee benefits costs into a black hole, and for small businesses this is a critical problem – and one that has no solution.
Today The Fed is holding an alleged “small business lending conference” where the argument is basically “do something – do anything damnit!”
Well, do exactly what? When one has $53 trillion out in debt that requires service, why should we encourage yet more borrowing?
Low interest rate “promises” are idiotic. True capital formation doesn’t come from borrowing – it comes from saving. But low rates disincent saving – indeed, the entire point of this exercise is to try to drive capital from “safe” places into the stock market and other speculative bets. In doing so the very foundation of small business – capital formation – is destroyed.
Everyone wants to talk about how The Fed should “act” or banks should “lend.” But bank lending has been cut off both by the market and “low” interest rates, which has incentivized banks to simply make a risk-free return by borrowing at 0% and lending to the government at 3 or 4%! Since government debt has no reserve said Treasuries can then be “Repod” and the cycle repeated, levering up that return over ten “round trips” or so to 25 or 30% (net of expenses) – dramatically more than can be garnered by lending to any business.
The paradox is that if you want to incent small business formation and entrepreneurship you want interest rates to rise and you want that to happen in an environment of stable or even slowly falling prices and costs.
Because small business, formed with saved capital and not borrowing, thrives in such an environment. Operating off retained earnings both raw material and labor costs fall more rapidly than do prices, and yet retained earnings while being saved for future expansion earn not only a decent rate of return via interest but hold or gain their purchasing power!
The small-business explosion of the 80s and 90s was formed by such an environment. Many people simply ignore the facts – in the 80s interest rates were quite high and thus capital formation took place like crazy. What’s missing from the understanding is that once the shock of the end of the oil embargo wore off productivity increases and technology drove down costs, acting exactly as if deflation had taken hold in the cost of both raw materials and most importantly labor.
MCSNet, my company, formed in the early 1990s in just such an environment – capital formation came via surplus from prior production, not from borrowing. The rapid improvement in technology made the per-unit-of-output labor cost drop dramatically over the next few years – an effective deflation.
This was a company that turned less than $100,000 in surplus saved capital (in total) into an operating concern that over the next five years sold into the tens of millions gross and, like most businesses, returned most of those sales back into the economy in the form of wages and purchases of plant and raw items that were then turned into products and services for sale.
Note that most “Internet” companies in the 1990s never made money on a fully-amortized basis. Why? Amortization of borrowing costs. Why do you think “EBIDTA” was so common as a means of reporting “results”? It’s easy to report a “profit” when one doesn’t have to include the cost of borrowed funds (or taxes, for that matter!)
Yet those costs are real.
MCSNet couldn’t avoid taxes, of course. The only (legal) way to avoid taxes is to be dead. Nor could we avoid depreciation; the reality of operating an Internet Business (especially in the 90s) was that every 18 months literally everything you owned for capital equipment had to be turned over due to the rapid advancement of technology, and yet the IRS doesn’t see so-called “capital equipment” this way.
But interest and amortization can both be reduced to zero by not using financial leverage!
So when you get to the end of the day, our “E” (really) was only reduced by “D” and “T” – there was no “A” or “I”.
This is how we turned a 60% operating margin four years running and a better-than-40% NET operating margin from the first day of formal operation until the firm was sold.
We want and need businesses like MCSNet. To get them firms have to eschew and get rid of “I” and “A”. It’s that simple, yet none of the so-called “pundits” and “economists” want to talk about this, because doing so means we stop acting like Wimpy and instead eat only the hamburgers we can pay for, forming businesses from surplus capital instead of Ponzi Debt schemes.
In order to return the economy to health we must decrease outstanding debt as a percentage of GDP. All paths that lead to less debt as a percentage of GDP are good on-balance, all paths that lead to more debt as a percentage of GDP are bad.
This does not mean that we should not prefer those less-painful alternatives to decreasing debt as a percentage of GDP. Pain is only enjoyed by sadists and masochists, and it appears that Krugman is in the former camp.
I am in neither.
Those so-called “pundits” and “economists” who urge greater and greater borrowing can do so only in an environment where savers are destroyed. That includes you Senior Citizens, it includes you Baby Boomers, it includes all who have as one of their precepts of life that thrift is a virtue, not a vice.
These very jackals declared war on you during the 2000s – remember the 2003 Bush exhortation to “go out and shop”? Remember 0% car loans, 125% car loan rollovers, liar loans to buy houses?
All of this was hyperinflationary as every dollar emitted as unbacked credit – that is, credit where there is either no asset of equal value behind the loan or where the asset value is insufficient to cover the money lent, is a naked short against the currency in question.
All naked shorting causes the price of what you short (the value of the currency, in this case) to be depressed. In this case what we did was decimate the value retained by savers, which are over-represented in the ranks of older Americans. We have destroyed the viability of Social Security and Medicare through intentional lies in the so-called “Consumer Price Index” through “hedonic adjustment” and “owner’s equivalent rent”, instead of simply measuring and reporting prices.
That illusion and depression of value can only happen through ever-increasing naked short interest! Thus, the puerile and insane acts of the last two years by The Fed, including “quantitative easing” and similar shenanigans, all in an attempt to prevent the massive naked short of the previous five years from unwinding and destroying those who had emitted that unbacked credit (primarily the large banks!)
But just as with naked shorting in the general market the game can only continue so long as you can find someone to buy your shorted shares. Mathematically all such games must end; you either run out of market participants to take the other side of your bet or worse, speculators become attracted to your activity and decide to attempt to force you to repudiate your policy, seeing the opportunity to bankrupt you (and make a windfall profit for themselves.)
Krugman, and those who advocate this sort of wealth-destroying warfare on those who value thrift and savings need to shut their pie holes.
It is precisely their “prescription” that has led us to the economic destruction we now find ourselves in.
America can’t afford any more of it.