Thursday, April 30, 2009

Rule of Law? Forgettahboughdit

Greg Mankiw tells it like it appears to be going here.

Where is the Supreme Court when we need it? We're supposed to have three branches of government. Two of the three have evidently decided law doesn't matter any more. We need the third to do its job.

Maybe we could make an appeal to the 50 state governors. Texas seems to be ruminating about states rights. Did we elect a king? He seems to think so. Sadly enough, lots of the herd seem to be okay with that.

Bush and his crowd of financial geniuses started the ball rolling with Paulson's ham-fisted TARP. We have laws about what's to happen with banks that are insolvent, but they weren't followed by Bush or Obama. Why not?

Now we have the auto industry. We have laws about companies that are insolvent, too. But they are also not being followed. Why not? Instead, President BHO has decided that it's his domain to do whatever he wants to do. Does anyone else out there have a problem with that besides me?

Where Will We Go With Health Care?

Soon, very soon now, the 545 will have to make some decisions about our health care system. We Baby Boomers are beginning to get older now. Soon, very soon, some of use will double and triple our demand for health care.

Not to worry. Our loving, ever caring government will take care of us, right? Government will take care of everything, won't it? Just ask Chrysler and AIG. We'll have a health care czar, no doubt (probably an official board to go along with the czar, too, just to make it look more seemly).

The czar and her official board will tell all the rest of how much the hundreds of thousands of medical procedures and medical products the system will allow us to use. We won't have to worry about the cost, though, since the government will pay. The czar and the board will also tell us how much providers of health care services and producers of health care products will be paid.

But how will the czar know the right answers? Check this article out to learn just how impossible that task will be and why it has absolutely no hope of working out even remotely well.

Hey, this could work, you say? How do I know that it won't? Two answers; economic thinking and empirical evidence from places on earth where it's already been tried. Remember the Soviet Union? But that won't stop the "change we can believe in," will it. Incredible as it seems, we just don't seem to learn much from our previous economic experiments.

The 545 are bobbing and weaving right now about the future of medicare. So far, they've dodged the bullet. But the bullet is actually a guided missile. Soon, very soon, the missile will find its mark and the 545 will be forced by reality to fess up and admit that health care is really like all other goods and services---not free.

Producing health care requires real resources---natural, human, and technological resources. Owners of those resources will want to be paid for their use, just as you demand to be paid for the labor services you sell to your employer. When the health care czar starts telling us how much will be paid for those resources, things will get interesting.

We have been down this road before. All we really need to do is pay attention to what happened. But we the people evidently don't want to look. I repeat, remember the former Soviet Union?

Wednesday, April 29, 2009

Nothing New Under the Sun Redux

Doug French writes here about how old "change we can believe in" really is.

Obama is really just borrowing a few pages from history, as French's piece demonstrates amply. Of course, people who know very little history will have to learn the hard way that we've been down this road before. Sadly, we seem to have a voting majority of folks who fit neatly into that dubious category.

Friedrich Hayek wrote The Road to Serfdom in 1944. Ayn Rand wrote Atlas Shrugged in 1957. Both wrote about the inevitable, regrettable results of abandoning human liberty and voluntary exchange (my synonym for "capitalism," but without the baggage; "capitalism" is not actually a 4-letter word), although from substantially different perspectives. Both wrote in response to events of their times following FDR's vast expansion of government and its ham-fisted intrusion into our lives.

Here we are again, even though the lessons of history tell us where we are going and how it will turn out. This time it's different, right? Here's a question; why would it be different this time?

How is it possible that a majority of people in the United States either never knew or have already forgotten that government compulsion leads to human misery? How is it possible that a majority of people don't understand that the source of human prosperity is not a government that taxes and prints money to finance its theft of real wealth from those who created the wealth. How is it possible that a majority of people are genuflecting at the feet of a savior made man, even in the face of so much evidence of the inevitable outcome?

History tells us BHO is mistaken and that he too will simply take us down a road we've already traveled---a road we should know better than take again.

Monday, April 27, 2009

Negative Interest Rates: Yep, Pretty Goofy

Robert Murphy explains here why even a careful thinker like Greg Mankiw shouldn't be left alone to think too long all by himself. John Maynard Keynes warned about that.

The Fed has been giving us negative real interest rates whenever it wants to for a long time. When the rate of inflation is higher than the market rate of interest, the real rate of interest is negative. That's easy to see with a little example.

Suppose you lend me $100 for a year and we both agree that I will pay you 5% interest. At the end of the year, I give you back your original $100 plus $5 interest. Did you really earn 5% interest? Not if the rate of inflation was 10% during the year.

With an average inflation rate of 10%, the purchasing power of $105 is less than the purchasing power of your original $100 a year ago. So, you actually paid me to borrow your money. Thanks.

Have we ever had a 10% rate of inflation in the United States. You bet. From 1974 through 2004, the average annual rate of inflation came in at about 10.5% per year. Did lenders actually earn a negative rate of interest during that time. You bet. Market rates of interest were definitely below 10.5% for a good part of that period. Why would lenders do that? Because they didn't know the Fed was going to jack up inflation; they were fooled.

If you'd like someone to thank, you know who to look to. That's right; our old buddy the Fed. When will Mankiw, Bernanke, Geithner, and all the rest of the really, really smart economists figure out that interest rates are prices and that meddling with prices has consequences?

Some of us dumber economists already know that.

Friday, April 24, 2009

Fire the Fed and Wall Street!

Here, Larry Kotlikoff and Ed Leamer describe a different system for financial markets that would eliminate or sharply mitigate recessions and the roller coaster rides in the stock market we've all been on.

Gregory Mankiw says here , in so many words, that he's not going to comment. Step up to the plate and take a swing, Greg. Tell us what's right or wrong, true or false, good or bad about Kotlikoff and Leamer's proposal. Don't be such a fading violet.

Here's my opinion. Kotlikoff and Leamer's proposal makes an enormous amount of economic sense. Who do you suppose will oppose it? That's right; the Fed and the politicians. See if you can figure out why they will oppose it. Who else will oppose it? That's right; stock brokers, investment bankers, commercial bankers, insurance companies, and all the other current financial market intermediaries that continue to fleece we the people daily.

The SEC and FINRA will also oppose the idea. Regulators insist on keeping their ham fists in everything. They would be out of a job. Do you realize that Bernie Madoff couldn't have done what he did if one simple law had been in place? That law would have made it illegal to custody the money of one's own investment advisor cients. Why don't we have that law? That's right; because the regulators don't want such an easy fix and because politicians don't either.

Financial markets do need restructuring. But not because bankers and brokers are greedy and everyone else is Mother Teresa. Financial markets simply need to be structured to take advantage of what we know about risk, human behavior, and economics.

Remember, we can't borrow what hasn't been produced and saved, regardless of how many times the Fed and it's apologist economists say we can. Kotlikoff's and Leamer's proposal would limit borrowing to what households actually save. What an idea. Once again, you see why politicians won't like the idea. How could the U.S. Treasury borrow without limit without the help of the Fed? It couldn't. Hmmm.

Kotlikoff and Leamer have proposed a way that makes sense and would yield massive benefits. How about telling your local congress person and BHO that you will not vote for them again unless they get behind the proposal.

Who's Lying?

According to Ken Lewis, CEO of Bank of America, Paulson and Bernanke told Lewis not to discuss BOA's take over of Merrill Lynch. In the WSJ today, we read
News Alert
from The Wall Street Journal

The Federal Reserve didn't advise Bank of America or CEO Ken Lewis "on any questions of disclosure," a spokeswoman for Fed Chairman Ben Bernanke said.

Lewis has told New York's attorney general that then-Treasury Secretary Henry Paulson and Bernanke pressured him in December not to discuss issues with its pending purchase of Merrill Lynch.

"It has long been the Federal Reserve's view that questions of this nature are best addressed by individual institutions and their legal counsel, as they are in a position to understand clearly their obligations and responsibilities," the spokeswoman, Michelle A. Smith, said.
So, either Lewis is lying, Bernanke is lying, or both are lying. Is there some other way to interpret this contradiction in statements?

What does Lewis have to gain from his statements? What does Bernanke have to gain from his denial? The market will sort Lewis out, regardless of whether he's lying or not. But Bernanke is only 4 years into a 14-year appointment as a member of the Board of Governors of the Fed. He is also running for reappointment to a second 5-year term as Chair of the BOG of the Fed. Hmmmm.

Thursday, April 23, 2009

A New Federalism?

Here, Randy Barnett proposes a constitutional convention that would adopt amendments that return the power of government to the states. Of course, the original Constitution stipulated clearly that the people and state legislatures were to be the source of governmental power. The federal government was strictly limited and subsidiary to the states. But we all know that any regard for what the Constitution says vanished in Washington decades ago.

The American people recently elected a president who clearly believes the Constitution cannot be and should not be taken literally. Instead, BHO believes, as he himself has stated often enough, that the Constitution must be bent, shaped, disregarded and interpreted to accord with modern times.

BHO's belief pretty much makes government a government of people instead of laws, don't you think.? Events of the past 100 days make it entirely clear that BHO intends for the federal government to absolutely control power. Are we the people happy with that? Evidently a majority are; a majority of people elected BHO.

Who remembers who was Secretary of the Treasury before Henry Paulson and Timothy Geithner? Why don't you remember? Because the Secretary of the Treasury has never been so important before the shenanigans started by Paulson (read Bush) and continued by Geithner (read BHO).

By the way, can anyone seriously argue that what the U.S. Treasury and the Fed have been up to for the past several months is not completely outside Constitutional limits? Oh, excuse me; I forgot; the Constitution does not matter. Never mind that every president has sworn to defend it and enforce it. Where is the Supreme Court when we need it most?

If and when Texas secedes from the union---as I have been told it reserved the right to do in its own constitution---many of us will likely move to Texas. That may be the last hope we classical liberals and lovers of liberty have. It's a bit warm there in the summer (which is about 9 months of the year), but that's a small price to pay to enjoy liberty, don't you think?

By the way, if the U.S. Treasury ends up holding voting common stock in the nation's largest banks, you can be certain the value of any common stock you may hold in those banks will plummet rapidly. Witness Fanny and Freddie. Hang on to your hats, and please, let's hush all that bleating.

Tuesday, April 21, 2009

BHO To Peform Financial Magic!

Greg Mankiw, bless his heart, shows us here what we can expect from BHO regarding his promise to cut the deficit in half by the end of his first term.

If BHO keeps this sort of thing up, his first term may be his only term (one can remain optimistic, no?). Are we the people really that dumb?

BHO's words, always eloquent, just don't square with the analysis of the Congressional Budget Office, as shown here

Source CBO

Thursday, April 16, 2009

What Went Wrong With Our Financial Markets?

A good friend who lives in Austin, TX sent me this. Aside from changing the names to protect the guilty, this account of what went wrong in our financial markets is right on.
At last, here's what we've all been waiting for: an understandable explanation of derivative markets.

Heidi is the proprietor of a bar in Detroit. In order to increase sales, she decides to allow her loyal customers - most of whom are unemployed alcoholics - to drink now but pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).

Word gets around about Heidi's drink-now-pay-later marketing strategy and, as a result, increasing numbers of customers flood into Heidi's bar, and soon she has the largest sale volume for any bar in Detroit. By providing her customers' freedom from immediate payment demands, Heidi gets no resistance when she substantially increases her prices for wine and beer, the most consumed beverages. Her sales volume increases massively.

A young and dynamic vice-president at the local bank recognizes these customer debts as valuable future assets and increases Heidi's borrowing limit. He sees no reason for undue concern since he has the debts of the alcoholics as collateral.
At the bank's corporate headquarters, expert traders transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities are then traded on security markets worldwide.

Naive investors don't really understand the securities being sold to them as these AAA secured bonds are really the debts of unemployed alcoholics. Nevertheless, their prices continually climb, and the securities become the top-selling items for some of the nation's leading brokerage houses who collect enormous fees on their sales, pay extravagant bonuses to their sales force, and who in turn purchase exotic sports cars and multimillion dollar condominiums.

One day, although the bond prices are still climbing, a risk manager at the bank (subsequently fired due his negativity), decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi's bar.

So Heidi demands payment from her alcoholic patrons, but being unemployed, they cannot pay back their drinking debts. Therefore, Heidi cannot fulfill her loan obligations and claims bankruptcy.

DRINKBOND and ALKIBOND drop in price by 90 %. PUKEBOND performs better, stabilizing in price after dropping by 80 %. The decreased bond asset value destroys the bank's liquidity and prevents it from issuing new loans.

The suppliers of Heidi's bar, having granted her generous payment extensions and having invested in the securities, are faced with writing off her debt and losing over 80% on her bonds. Her wine supplier claims bankruptcy, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 50 workers.

Then the bank and brokerage houses are saved by the Government, following dramatic round-the-clock negotiations by leaders from both political parties.

Ultimately, the funds required for this bailout are obtained by a tax levied on the employed, middle-class non-drinkers.
Personally, I think we should not return to Congress or the Senate anyone who voted for TARP, Son of TARP, TALF, or PUKE. I'll go you one better. I think we should have term limits for both Congress and the Senate. Let's be fair. How about a maximum of one 4-year term for Congress and a maximum of one 6-year term for the Senate. That would return government to "we the people." What are we waiting for?

If you say "it can't be done," then YOU are part of the reason why it can't be done. If you say "it shouldn't be done," then please explain your thinking in a comment.

Private Sector Roads?

Yes, indeed. Read about it here. Voluntary exchange is a powerful, moral alternative to ham-fisted, bureaucratic government. We are led to believe, by those who have a vested interest that we believe it, that taxing us to build "infrastructure" is an appropriate role for government. But is it?

Professor Walter Block's new book offers a different, enlightened, and logical perspective. He also notes here that
If the highways were now commercial ventures, as once in our history they were, and upward of 40,000 people were killed on them annually, you can bet your bottom dollar that Ted Kennedy and his ilk would be holding Senate hearings on the matter. Blamed would be "capitalism," "markets," "greed," i.e., the usual suspects. But it is the public authorities who are responsible for this slaughter of the innocents.
Interesting observation, no?

Wednesday, April 15, 2009

Fed 101

Jon Hilsenrath writes here in the WSJ about Fed Chair Ben Bernanke's PR blitz of late. Is Mr. Bernanke simply running for reappointment from BHO, or is the Fed making an honest attempt to move away from secrecy? Mr. Hilsenrath writes,
Mr. Bernanke's turn as the nation's Professor-in-Chief is a stark contrast to the public roles of his predecessors. Mr. Greenspan and Mr. Volcker liked to keep financial markets and lawmakers guessing about their next moves, in part because they felt it gave them more flexibility. Disclosing little, they were scrutinized much.

Mr. Volcker's cigar-chomping performances on Capitol Hill were seen as a metaphor for the smokescreens he threw up to questions about interest rates. Mr. Greenspan, who took over from Mr. Volcker in 1987, did one on-the-record TV interview shortly before that year's stock-market crash and never did another as chairman. He almost never took questions after speeches. He delighted in his ability to obfuscate.

"I spend a substantial amount of my time endeavoring to fend off questions and worry terribly that I might end up being too clear," he joked to a room full of economists more than a decade ago.
Here are a few questions we the people deserve straightforward answers to. I doubt if the college students at Morehouse College knew enough about money and banking to ask them during Mr. Bernanke's recent PR speech there.

Why aren't the Fed's operations completely transparent and open by law? Why do we allow seven members of a Board of Governors to manipulate the nation's money supply in secrecy? Why is the Fed allowed to fix short-term interest rates and heavily influence long-term interest rates at will? Why have we allowed the Fed to give us an annual average rate of inflation from 1970 through 2004 of 10.5%?

We already know all the answers given by the Fed and most academic economists to these questions. But those answers are self serving, disingenuous, and evasive. The Fed and its apologist economists say transparency would "disrupt" financial markets; secrecy is necessary. The Fed and its apologist economists says inflation is necessary because the threat of deflation is just too scary. The Fed and its apologist economists say that fixing short term interest rates is necessary to "stabilize" financial markets.

Secrecy serves those who know the secret at the expense of those who do not. Financial markets are disrupted by surprises, not by information. Fluctuating purchasing power of our dollars---whether up or down---disrupts and impedes economic activity when we don't know it's coming. Financial markets have not been stabilized by the Fed's actions; financial markets have been destabilized. Interest rates are rental prices of using someone else's money. We don't think someone should be allowed to fix the price of bread; why do we think someone should fix the price of borrowing?

The European Central Bank (ECB) has a single, straightforward, transparent objective that is mandated by law; keep the average price level stable. Because the ECB is a creature of the nation states of the European Union, all of whom have different national interests, the ECB is not allowed to manipulate the money supply at will. Members of the EU expect the ECB to do just one thing; avoid inflation or deflation.

Is it too presumptuous to ask the Fed to do the same?

Monday, April 13, 2009

Fair Taxation?

Ari Fleischer writes here about the extremely lopsided burden of the federal income tax. BHO says the rich should pay their fair share. I agree. In my opinion, that would mean people who make more than $250,000 per year should get a tax cut. Check out the numbers in Fleischer's article then ask yourself what you think would be fair.

Mr. Fleischer calls for a simplified income tax code. It's been tried; it evidently can't be done. I'll go him one better. Get rid of the federal income tax and all payroll withholding taxes altogether. Let's raise the revenue with a national sales tax that we the people agree to let the Congress spend.

While I don't particularly like the name, the Fair Tax proposes a well researched alternative to the federal income tax that offers nothing but benefits for we the people.

Your Congress person may not like the Fair Tax (House Bill HR 25, Senate Bill S 296) because the Fair Tax would remove an enormous source of power for legislators to reward their friends and punish their enemies.

Members of Congress also don't like the idea of term limits, even though no single change would do more to return government to the people where it belongs.

A national retail sales tax is economically sound. Read this letter sent to the President, all members of Congress, and all members of the last presidential tax commission a couple of years ago to find out why.

If you would like to become "we the people" again,  tell your Congress person to support the Fair Tax or else find another job.

Thursday, April 9, 2009

Who's Neck Is the Fed and the Treasury Saving?

Here's a question that seems worth asking. Just who is it that now owns all the so-called "toxic assets." The toxic assets are bonds sold to finance pools of subprime mortgages, bonds sold to finance pools of leveraged buy outs of publicly traded companies, bonds sold to finance pools of commercial real estate ventures. These bonds are "toxic" because no one wants to buy them from whoever it is that now owns them.

Waaaaaah, Waaaaaaah. Move on, cry babies. Take your losses and leave the rest of us out of it. Just because you aren't as wealthy as you thought you were really isn't a public problem---until the politicians decided to make it one.

Do you own any toxic assets? Neither do I. Who does? Whoever it is, it is their necks the Fed and the Treasury is working overtime to keep whole. Why? Don't you think that's a reasonable question? In fact, the losses due to these toxic assets have already occurred. The Fed and the Treasury cannot remove the losses. But they can redistribute the losses to you and me.

If you or I buy a financial security and its market value goes down, you or I will be the loser. That's happened more than once to me personally. How about you? Why is it that the owners of these wretched bonds called "toxic assets" are now not supposed to lose their money?

I really don't want to hear about "too big to fail" or "it would cause instability in financial markets." Those are bogus answers designed to get you and me to divert our attention elsewhere. No business is too big to fail. We already have instability in financial markets.

AIG needed to go bankrupt; it still does. Just who's neck is being saved? GM needs to go bankrupt. Chrysler needs to go bankrupt. Any financial institution that has owners' equity (called bank capital by bankers) below the legally required level needs to go bankrupt.

We have bankruptcy law and the FDIC (responsible for monitoring failing banks and getting them out of the system through asset repurchase) for a reason. Why aren't we using them? We all need to ask our local politicians these simple questions.

The sooner these bad performers are gone, with the present owners lose their investments, the sooner the economy will be on its way to recovery. Don't you wish your neck was valued as highly as whoevers' necks it is that the Fed and the Treasury are protecting with your tax dollars?

Just a question.

Tuesday, April 7, 2009

1819: America's First Housing Bubble

C.J. Maloney writes here about history repeating itself in two fascinating yet disturbing ways. First, the banking system caused a housing bubble in 1819 based on bogus, credit-financed money. Second, with BHO's policies already underway (really just a continuation and expansion of Bush's policies), we are repeating the mistaken response to the Great Depression provided by FDR and the politicians of that era.

Maloney explains how the panic of 1819 quickly righted itself because the people of that era understood that government had caused the problem, and that yet more government intervention into voluntary exchange was definitely not the solution.

Today, we've lost sight of the abundant lessons history provides, and lots of folks are clamoring to be saved by government from the problems that government caused in the first place.

More credit is not the answer. More federal spending financed by the Fed buying up non-performing assets with newly created money, while other investors buy Treasury bonds instead, is not the answer. Insisting that investors and banks who made bad loans lose their wealth is the answer.

The economy, left to voluntary exchange, is amazingly robust. Individuals know what to do and how to do it when they are left to pursue their own best interests. Expecting politicians and financial market regulators---who together caused the problem---to solve the problem is simply a stupefying idea.

Monday, April 6, 2009

Why the Collapse of the Housing Bubble Devestated Financial Markets

Nobel Laureate Vernon Smith and research associate Steven Gjerstad write here about why the decline in worth of houses of about $3 trillion since 2006 has caused such devastation in financial markets, while a decline in worth of stocks of about $10 trillion in 1999-2002 did not. They write
Earlier, during the downturn in the equities market between December 1999 and September 2002, approximately $10 trillion of equity was erased. But a measure of financial system performance, the Keefe, Bruyette, and Woods BKX index of financial firms, fell less than 6% during that period. In the current downturn, the value of residential real estate has fallen by approximately $3 trillion, but the BKX index has now fallen 75% from its peak of January 2007. The financial sector has been devastated in this crisis, whereas it was almost completely unaffected by the downturn in the equities market early in this decade.

How can one crash that wipes out $10 trillion in assets cause no damage to the financial system and another that causes $3 trillion in losses devastate the financial system?

In the equities-market downturn early in this decade, declining assets were held by institutional and individual investors that either owned the assets outright, or held only a small fraction on margin, so losses were absorbed by their owners. In the current crisis, declining housing assets were often, in effect, purchased between 90% and 100% on margin. In some of the cities hit hardest, borrowers who purchased in the low-price tier at the peak of the bubble have seen their home value decline 50% or more. Over the past 18 months as housing prices have fallen, millions of homes became worth less than the loans on them, huge losses have been transmitted to lending institutions, investment banks, investors in mortgage-backed securities, sellers of credit default swaps, and the insurer of last resort, the U.S. Treasury.
As Smith and Gjerstad note, the big difference is where the money came from to purchase the assets. In the 1999-2002 collapse of stock market wealth, investors had purchased the stocks with money they had saved. In the 2006-2008 collapse of housing values, people had purchased the houses with money that no one had saved, least of all the people buying the houses.

That's right. No one had saved the money that was lent to subprime borrowers, Alt-A borrowers, and "liar loan" borrowers. The money they borrowed came from the Fed, created from nothing.

Had the money used to finance the wretched mortgage loans been saved, financial markets would not have been devastated. While Smith and Gjerstad's analysis is useful and insightful, they don't emphasize the real root of the problem---bogus money creation by the nation's banking cartel, the Federal Reserve System.

Some of us grow weary of economists, the media, and politicians blaming just about everyone for the financial meltdown---except the single-most guilty party---the Fed. And what is the Fed's solution? That's right; create more bogus money.

And  we the people were heard mumbling softly in the background.

Saturday, April 4, 2009

Why Is Bank Lending So Critical?

Martin Feldstein writes here in the WSJ that
Increased bank lending is the key to a sustained recovery. Households and businesses that cannot obtain credit are now unable to spend and to invest, dragging down total demand and GDP. The banks are unwilling to lend because they lack confidence in the value of the loans and other assets they already carry on their books, and therefore lack confidence in whether they have enough capital to avoid insolvency. Removing these high-risk assets is a prerequisite to get the lending mechanism in gear again.
Why all this emphasis on bank credit? That's not what I learned in graduate school. That's not what I teach in financial management.

Most people don't know that corporate America finances the majority of its investments in plant and equipment with retained earnings, not borrowed money. Since when does a business need to borrow to be successful?

Why is it that businesses can't increase equity financing to displace debt financing? Even the auspicious likes of a Martin Feldstein, whom we should all respect, needs to answer that question instead of insisting that our economy depends on credit.

Friday, April 3, 2009

No Tax Increase, Says BHO? Fogettaboughtit

Michael Boskin writing here in the WSJ tells us
Finally, what of the claim not to raise taxes on anyone earning less than $250,000 a year? Even ignoring his large energy taxes, Mr. Obama must reconcile his arithmetic. Every dollar of debt he runs up means that future taxes must be $1 higher in present-value terms. Mr. Obama is going to leave a discounted present-value legacy of $6.5 trillion of additional future taxes, unless he dramatically cuts spending. (With interest the future tax hikes would be much larger later on.) Call it a stealth tax increase or ticking tax time-bomb.

What does $6.5 trillion of additional debt imply for the typical family? If spread evenly over all those paying income taxes (which under Mr. Obama's plan would shrink to a little over 50% of the population), every income-tax paying family would get a tax bill for $163,000. (In 10 years, interest would bring the total to well over a quarter million dollars, if paid all at once. If paid annually over the succeeding 10 years, the tax hike every year would average almost $34,000.) That's in addition to his explicit tax hikes. While the future tax time-bomb is pushed beyond Mr. Obama's budget horizon, and future presidents and Congresses will decide how it will be paid, it is likely to be paid by future income tax hikes as these are general fund deficits.

We can get a rough idea of who is likely to pay them by distributing this $6.5 trillion of future taxes according to the most recent distribution of income-tax burdens. We know the top 1% or 5% of income-taxpayers pay vastly disproportionate shares of taxes, and much larger shares than their shares of income. But it also turns out that Mr. Obama's massive additional debt implies a tax hike, if paid today, of well over $100,000 for people with incomes of $150,000, far below Mr. Obama's tax-hike cut-off of $250,000. (With interest, the tax hike would rise to more than $162,000 in 10 years, and over $20,000 a year if paid annually the following 10 years). In other words, a middle-aged two-career couple in New York or California could get a future tax bill as big as their mortgage.
Draw your own conclusions.

Thursday, April 2, 2009

Will Your Income Keep Up?

Thorsten Polleit explains here why the incredible growth in the monetary base caused by the Fed during 2008 is extremely dangerous. Once again, politicians and their bureaucratic minions ignore the lessons of history.

Are you worried about hyperinflation? If your personal income rises as fast as prices throughout the economy, you won't need to worry. But will your money income keep up?

Is it possible for inflation in the United States to follow the same path forged by Germany following World War I or Zimbabwe today? What will stop the seeds of hyperinflation sown by the Fed from blossoming? We appear to have a perfect storm of Fed policy coupled with a sharp move toward socialism at the federal level well underway. Aren't you worried at least a little bit? I'm worried a lot.

If the Fed continues to pump base money into the banks, and the banks continue to purchase Treasury notes and bonds with the money, and the federal government continues to spend the borrowed money on transfer payments, what will keep the United States from experiencing hyperinflation?

And if the federal government continues to push its tentacles of regulation, command, and control into private enterprise, what will cause production of real goods and services to rise? We had that social experiment already, too. It's called the rise and fall of the Soviet Union. The Soviet what? Some of us still remember.

If you instinctively understand that printing money does not increase production of real goods and services, then trust your instincts. New base money that's borrowed by the federal government is just running the money printing press.

I hope we the people can eat greenbacks, because running the money printing press will eventually push the prices of real food higher. I hope we the people can run our cars on greenbacks, because running the money printing press will eventually push the price of oil and gasoline higher. I hope we the people can use greenbacks for band aids and cardiovascular splints, because running the money printing press will eventually push the price of health care higher. Get the picture?

We've run this particular social experiment several times before. Why are we running the experiment yet again? I think we know why. Because politicians find it easy to promise a free lunch and then blame the bad outcome on their predecessors. It won't be long before we're hearing daily about the bad hand BHO was dealt and how the previous eight years are to blame.

We're already hearing that what we really need is more government intervention in private enterprise from bureaucrats who have never had a productive job in their lives.

We are already hearing that what we really need to straighten out financial markets is more regulation (we're not supposed to notice that what we've had since 1913 is massive regulation of financial markets).

We are already hearing that what the auto industry needs is command and control from Washington. Bureaucrats can straighten it all out. Never mind that the people who are supposed to accomplish this feat have no knowledge or experience in business or the auto industry.

Wednesday, April 1, 2009

We Can't Borrow What Hasn't Been Produced

Frank Shostak explains here a fundamental economic truth that BHO and his economic advisers refuse to acknowledge.

By the way, Geithner, Bernanke, Summers, and Romer are all smart people. They understand that we can't borrow what hasn't been produced and saved. So why are they saying otherwise? I am led to the conclusion that these smart folks are dissembling because BHO wants them to, and he's their boss.

Removing non-performing loans from banks' balance sheets will not return the economy to growth. But it will redistribute the losses that have already occurred due to the rotten loans the banks and other financial institutions made using money created by the Fed. It will also speed America farther down the road of command and control from the 545.

Sadly enough, according to BHO's actions, manifested through Geithner and Bernanke, the wealthy should be and will be spared the consequences of their wretched decision making. And we who had nothing to do with the whole affair will be made to bear the costs. Never mind what BHO says; examine what he does.

Do you think BHO understands that we cannot borrow what has not yet been produced and saved? If he doesn't, he's not bright enough to lead us; if he does and says otherwise, ... well, you can finish the sentence.

Change we can believe in, right? No ... more like business as usual. Concentrated benefits and widely dispersed costs. That's the way of the 545 who would control your life.