It's Bad!

Someone who appreciated my book and quoted it on his blog, D.X. Turner from Texas, has alerted me to this informative juxtaposition. The first graphic is a quote from Vermont Independent (socialist) Senator, Bernie Sanders.

Turner adds: " The truth is that entitlement spending, what Bernie conveniently labels as "the backs of the elderly, the sick, the children and the poor" is the primary driver behind the deficit." He then supplies this telling chart.

That little ball way over on the left hand side is virtually all federal spending that you can think of. You know, the departments of this, that, and the other thing. If President Rick Perry forgets to eliminate one, it won't make much difference.

The obvious conclusion is that our problem centers around two words: benefits and entitlements. Unless we unite around a plan to bring these under control, we are soon to be Greece, Italy, and the rest of them.

D.X. Turner blogs at Arguing with a Fencepost.

Gold, the Silent Success Story

As I write this, gold is breaking $1560 an ounce, a new record. The price rose $25 an ounce today. That is stunning. People were talking about $1500 gold by Christmas. It hit that figure before Good Friday. It is now more than half way from there to $1600 within the following week.

This should be front page news, not only because it is a rip-roaring good investment, but also because gold prices move inversely with the value of the dollar. A rapidly rising gold price means a plummeting dollar. Surely that's news.

So I wrote my column this week on gold and the U.S. economy ("Whither Gold Prices?"). Not that I am an economist or a gold market analyst, but I talk to people who understand these things, I digest the principles, add the politics, and put it all together. Badaboom, badabing...I'm a prognosticator.

When the Republicans retook the House, commissioned by the voters to reign in government spending, had Obama tacked to the center as Bill Clinton did after his 1994 midterm defeat, we would perhaps have a sign that precious metal prices were soon on their way down. But the president has signaled no such change in course. In fact, in his budget-cutting plans, he has signaled his continued determination to raise taxes on the job-producing class.


...there is every reason to believe that there is a lot of upside to precious metal prices. That’s the good news if you still want to get into the market. The bad news is unemployment, inflation, and a huge, tragic waste of human potential as we flounder in this ideological soup of Obama’s wealth redistributionist fantasy.

Track precious metal prices at www.kitco.com.

Consider the front page of today's Wall Street Journal: "Officials Unfazed by Dollar Slide."

The U.S. dollar fell Thursday to its lowest point since the summer of 2008, but officials aren't showing signs that they are alarmed by the currency's descent or acting to stem it. In recent days, the nation's top two economic policy makers—Federal Reserve Chairman Ben Bernanke and Treasury Secretary Tim Geithner—have publicly expressed their desire for a strong dollar. But there is little indication of a change in policy from either the Fed or Treasury—or in underlying economic conditions—that would alter the currency's downward course.

 This well known analyst gives advise on bubble and silver prices:

Legendary global investor and chairman of Singapore-based Rogers Holdings, Jim Rogers warned that if silver continues to go up like it has been over the past 2 or 3 weeks and reaches triple digits in 2011, he will probably start to think about selling because then 'you've got a bubble'.

Speaking to Financial Survival Radio, Rogers said: " My hope is, silver and gold and all commodities will continue to go up in an orderly way for another ten years or so, and eventually the prices will be very, very high".

"I hope something stops it going up in the foreseeable future and we have a correction," he added.
Explaining his wish, Rogers warned that "a parabolic move and all parabolic moves end badly".

"Eventually, everybody’s going to be owning gold, and then we’ll all have to sell our gold.  But that’s a long way from now, he predicted.

The legendary investor doesn't consider the recent increases in precious metals as parabolic. "If silver continues to go up like it has been over the past 2 or 3 weeks, yes, then it would get to triple digits this year.  And then we’ll have to worry.  It’s not parabolic yet".  

Here is an overview of, as the article puts it, "How gold went from $251 to $1,500."

P.S. Gold hit $1570 an ounce today. Silver still came shy of $50.

Tom Friedman to the Rescue

Thomas Friedman today in the New York Times tells us that there are two Tea Party movements in American : one is ultimately insignificant but drawing a lot of press attention; the other is ignored and leaderless, but will transform the country if anyone picks up on it. Former is what we call the Tea Party movement and the latter is the true Tea Party. ("The Tea Kettle Movement," September 28, 2010.)

Hey, Tom! The first step is obvious to everyone in the TPM. Stop spending! The best way to do that at this point is: vote the Democrats out of office. Stop the Obama addiction to zeros. Yes, the Republicans under George W. Bush's leadership had public money flowing like water from a ghetto hydrant. But Barack Obama broke the dam, and the Tea Party movement took off. It is what my fellow blogger, Harold Kildow, has pointed out, it's "the trouble with trillions."

In my Worldmag.com column today, "The Tea Party: More Than Steam," I look at the Tea Party agenda, such as it is, and how is does indeed promise to accomplish what Friedman says it can't: restore America to its vigor and preeminence.

Friedman says the real groundswell of popular unrest is unsettled by a different set of issues that go more the heart of our problems.

The issues that upset the Tea Kettle movement — debt and bloated government — are actually symptoms of our real problem, not causes. They are symptoms of a country in a state of incremental decline and losing its competitive edge, because our politics has become just another form of sports entertainment, our Congress a forum for legalized bribery and our main lawmaking institutions divided by toxic partisanship to the point of paralysis.

This true Tea Party Movement which, unlike the commonly identified but false one, has a substantive agenda that focuses on "America’s core competency and strategic advantage," which is "our ability to attract, develop and unleash creative talent. That means men and women who invent, build and sell more goods and services that make people’s lives more productive, healthy, comfortable, secure and entertained than any other country."

It's obvious that the people who make up this popular movement have spent a long time thinking through the details of what they want from government in response to our crisis.

Leadership today is about how the U.S. government attracts and educates more of that talent and then enacts the laws, regulations and budgets that empower that talent to take its products and services to scale, sell them around the world — and create good jobs here in the process. Without that, we can’t afford the health care or defense we need. This is the plan the real Tea Party wants from its president (emphasis added).

The Friedman gives us more details:

To implement it would require us to actually raise some taxes — on, say, gasoline — and cut others — like payroll taxes and corporate taxes. It would require us to overhaul our immigration laws so we can better control our borders, let in more knowledge workers and retain those skilled foreigners going to college here. And it would require us to reduce some services — like Social Security — while expanding others, like education and research for a 21st-century economy. 

Wow. This is a popular movement that only an ivory tower liberal can imagine. There are some good ideas mixed in here, but it strains credibility to suggest that there's an angry giant of American popular opinion ready to explode out there with all these ideas on his mind. Essentially, Tom Friedman has said that it's not the Tea Party movement that's going to transform American politics and save the country. Instead it's...Tom Friedman!

We'll be waiting for that, Tom.

It's Coming! Doom! Doom!

Back in June, I put some indicators together in my non-economist mind and wrote that 2011 will be our Second Plunge Recession. At Worldmag.com, I entitled a fuller version of this "We're Doomed." (You should be able to get the gist of a column or chapter by its title.)

Some people who left comments at World were skeptical. Various award winning economists say we're pulling out of this mess. They cite data. Who is this Innes guy? But remember, economics is not a science, though it has a strong quantitative component. Human elements like political passions and wishful thinking enter even into the minds of laureates.

They fester in my mind too, but I'm sorry to say that developments are confirming Innes's prognostications. Look at these headlines:

"Dow Slumps Again" (Jonathan Cheng, WSJ, August 24, 2010).

U.S. stocks slid again Wednesday as blue chips bobbed above and below 10000 as economic data continued to disappoint. ... Investors were responding to a second consecutive day of weak news from the housing sector, as new-home buying fell to a record low in July amid rising inventories, another signal that the market could continue struggling without support from the government's first-time home buyer's tax credit.

"Plunge in Home Sales Stokes Economy Fears" (Sudeep Reddy and Nick Timiraos, WSJ, August 25, 2010).

U.S. home sales plummeted in July to a level not seen in more than a decade, spurring fears of renewed weakness in housing prices and the broader economy. ... The expiration of a home-buyer tax credit in the spring was expected to damp buying, though less severely. Economists said the sales drop—together with a corresponding rise in the inventory of unsold homes—meant another decline in housing prices was on the horizon. House prices had stabilized last year after declining since 2006.

This article quoted Paul Dales of Capital Economics as stopping short of saying this means a double dip recession for sure. "At this point in the recovery, every little bit counts. A double dip in the housing market and house prices would not be enough to generate another recession. It would certainly help to hold back the recovery."

So what would send us over the edge if this doesn't? (That's an if.) Repealing the Bush tax cuts seems like a big enough blow to finish us off. So if you love your family, your job, your neighbors, lobby your Democratic Congressman to back off on that plan. In fact, if you support the President's broader agenda and would like to see him win a second term, you should also lobby to leave the tax cuts in place.

******************

In my column, I say that Social Security is a big Ponzi scheme. Rassmussen Reports surveyed the American public on that question, and the results are here.

Laffer Confirmed. It's a Lean Tomorrow.

Aha! (I love the sound of that.) This report confirms what Arthur Laffer says concerning misplaced incentives and the big economic come down we should expect next year.

Read "Pending Home Sales 'Fell Off a Cliff'" on CNNMoney.com.

The experts expected home sales to drop once the homebuyer tax credit lapsed at the end of April, but the depth of the decrease was shocking.

According to the National Association of Realtors (NAR), pending home sales fell a whopping 30% in May. Their index, which measures signed sales contracts but not closed sales, plunged to 77.6 from 110.9 in April. It's even off 15.9% from a year ago when the nation was barely emerging from the recession.

"The pending home sales report is a disaster," said Mike Larson, a real estate analyst for Weiss Research. "Sales fell off a cliff after the tax credit expired. It's the biggest monthly decline ever and the index is at its lowest level since NAR began tracking it in 2001."

Read my report on Arthur Laffer and others in the post below, or in "We're Doomed" at WORLDmag.com.

Killing Prosperity and Security As Policy

The Democrats are working at full throttle to get this country under the firm and detailed direction of left wing bureaucrats before their two year window of opportunity closes in January of 2011 when the new Congress is sworn in. Friday's Wall Street Journal opinion page lays out what that means to us, our children, and our grandchildren. Peter Wallison explains how they are choking the source of our prosperity. Mortimer Zuckerman shows how they squandering our existing prosperity. Douglas Feith and Abram Shulsky explain how they are casting away the nuclear umbrella that has been securing our prosperity and all our liberties.

Wallison points out in "Republicans and America's New Deal" that even though Franklin Roosevelt's New Deal actually lengthened and deepened the Depression, President Obama and the old liberals in Congress has pressed forward with similar policies.

The signature initiatives of the Obama administration were very much in the mold of the old New Deal—the heedless spending, a stimulus plan focused on government employment, a health-care program that brought one-sixth of the economy under government control, and now the financial regulatory bill that would control another sixth. ...

Because of ObamaCare, the failed stimulus package, and the massive deficits that will afflict the country for years to come, the Democrats are likely to pay dearly in November. But not before those who are still in the thrall of the New Deal will have taken the U.S. financial system back almost 75 years. ...


The only good thing to come from this spectacle is that it shows the business community and American voters that the Democratic Party—despite the moderate face of the Obama presidential campaign—has not outgrown their New Deal mentality. Democrats are still the party of government and the special interests that cling to it.

In "The Bankrupting of America," Mortimer Zuckerman turns the spotlight on how the huge public service unions and the party of government serve one another at the expense not only of taxpayer, but of the country's long-term economic viability. Think of GM and California, but with no possibility of a bailout.

Public unions organize voting campaigns for politicians who, on election, repay their benefactors by approving salaries and benefits for the public sector, irrespective of whether they are sustainable. ...

What we suffer is a ruinously expensive collaboration between elected officials and unionized state and local workers, purchased with taxpayer money. ... No wonder the Service Employees International Union has become the nation's fastest-growing union: It represents government and health-care workers. Half of its 700,000 California members are government employees. More and more, it wins not on the picket line but at the negotiating table, where it backs up traditional strong-arming with political power. It spends vast amounts of money on initiatives that keep the government growing and the gravy flowing. ...

City government was developed to serve its citizens. Today the citizenry is working in large part to serve the government. It is always hard to shrink government spending. It is particularly difficult when public-sector unions have such a unique lever of pressure. We have to escape this cycle or it will crush us.

Finally,  Barack Obama is trying to bring us a nuclear free world, and isn't that special. His government's statement on how to reach this blessed goal is expressed in a document called the Nuclear Posture Review (NPR). The Defense Department states that, "The Nuclear Posture Review is a legislatively-mandated review that establishes U.S. nuclear policy, strategy, capabilities and force posture for the next five to ten years." In "The Dangerous Illusion of 'Nuclear Zero'," Douglas Feith and Abram Shulsky, both of the Hudson Institute, argue that the one awkward little catch to fulfilling this dream is that, as the document itself tells us, it requires world peace as a precondition. But on we go, just the same.

One of the conditions that would permit the United States and others to give up their nuclear weapons "without risking greater international instability and insecurity" is "the resolution of regional disputes that can motivate rival states to acquire and maintain nuclear weapons." Another condition is not only "verification methods and technologies capable of detecting violations of disarmament obligations," but also "enforcement measures strong and credible enough to deter such violations."

The first condition would require ending the Arab-Israeli conflict, settling the Korean War, resolving Kashmir and the other India-Pakistan disputes, and defusing Iran's tensions with its neighbors and with the U.S. It also means solving any other significant conflicts that might arise.

Verification would be tough, but even if technology could solve the problem, the question remains: What kind of "enforcement measures" do those who drafted the NPR imagine? ... "Strong enough" enforcement would have to include military measures. Is the idea here a U.N. military force that could fight large wars, as some diplomats proposed when the U.N. Charter was negotiated in the late 1940s? Or would military enforcement be the duty of the strongest state, presumably the U.S.? Only an arrangement verging on world government—an entity that could deploy overwhelming military power against a violator without interference by other powers—could possibly fill the bill. ...

In the event of a serious crisis, countries would race to reconstitute their nuclear arsenals. The winner would enjoy a fleeting nuclear monopoly, and then come under severe pressure to use its nuclear weapons decisively. The resulting instability could make the competitive mobilizations of the European armies in 1914 look like a walk in the park.

No matter how hard the polls turn against them, these New Left Democrats who emerged from the radicalism of the 1960s (with whom Barack Obama is noticeably comfortable) will drive home their political and economic agenda because they are sure that they know better than everyone else, and also because they are moved by a moral passion that is as deaf any appeal to the historical record, the economically obvious, and even their own political self-interest as the most fanatical jihadist.

The Greek Tragedy and Our Fate

Greece, the ancient birthplace of democracy, is coughing up blood on account of the democratic disease of bribing the people with their own money, or, in its current form, not even their grandchildren's money but money that no one can ever afford to pay. Theodore Dalrymple says the story is a common one among Western nations ("Know Thyself: rather than pointing fingers, Greek citizens should look in the mirror," City Journal, May 7, 2010).

My WORLDmag column yesterday, draws a parallel between the bankruptcy that cities like San Francisco are facing ("Freakish Frisco: where one-third of city workers make $100,000 and Willy Brown is a budget hawk" by Pete Peterson, City Journal, May 4, 2010) and the Greek tragedy that is playing itself out across the sea.

Read "Our Own Greek Tragedy."

Also, consider these debt-to-GDP ratios for 2009 from the CIA World Factbook:
Australia 18.6%
Belgium 99%
Canada 72%
Chile 9%
France 79.7%
Greece 113.4%
Hong Kong 18%
Italy 115%
Japan 192%
Netherlands 62%
Spain 50%


The United States is listed as having a ratio of 40% in 2008 and of 53% the next year. Pretty stable. The CBO director's blog reported last year: "The current recession and policy responses have little effect on long-term projections of noninterest spending and revenues. But CBO estimates that in fiscal years 2009 and 2010, the federal government will record its largest budget deficits as a share of GDP since shortly after World War II. As a result of those deficits, federal debt held by the public will soar from 41 percent of GDP at the end of fiscal year 2008 to 60 percent at the end of fiscal year 2010. This higher debt results in permanently higher spending to pay interest on that debt." In March, the CBO estimated the ratio would reach 90% by 2020.

But those are only partial figures. The CIA World Factbook appends the following illuminating information to the figures they report:

note: data cover only what the United States Treasury denotes as "Debt Held by the Public," which includes all debt instruments issued by the Treasury that are owned by non-US Government entities. The data include Treasury debt held by foreign entities. The data exclude debt issued by individual US states, as well as intra-governmental debt. Intra-governmental debt consists of Treasury borrowings from surpluses in the trusts for Federal Social Security, Federal Employees, Hospital Insurance (Medicare and Medicaid), Disability and Unemployment, and several other smaller trusts. If data for Intra-government debt were added, "Gross Debt" would increase by about 30% of GDP. 

That puts the 2009 debt figure at roughly the 87% of GDP it is reported as being today. Do the rest of the math.

Gold Market Ponzimonium

I am not one for conspiracy theories (John Birch Society, the Illuminati, CFR, etc.), but there is evidence that the price of gold is being artificially suppressed by circles of powerful people who have a substantial stake in covering up just how weak the American dollar has become, i.e., a lot weaker than current trading of both the dollar and an ounce of gold would indicate.

The most public notice of the economy shattering possibility that the lid could come off the price of gold as the deficit spending boomerang comes back to clobber us was in The Huffington Post last week: "It's Ponzimonium in the Gold Market" by Nathan Lewis.

This video may be helpful in explaining the significance of the gold price relative to the purchasing power of the dollar and the strength of the economy, i.e., relative to YOU.



I have found this explanation of what exactly money is very informative. It explains things like fiat money and fractional banking, and other things people really need to understand to live in the adult world.



Also, don't let an 11,000 point Dow and rosy forecasts by sunshine peddlers in Washington delude you. Brace yourselves for the collapse of the commercial real estate market, a huge aftershock of foreclosures in the residential market, aggressive inflation, bond market barrenness, and then rising interest rates to entice people to buy our government bonds of dubious reliability so we can finance Obama's glory spending and his stimulus trillions for satisfying Democratic political constituencies, i.e., unions and left wing Utopian interest groups.

I'm not an economist, and it would not be unlike me to see a darker horizon than there actually is, but it also seems to me that it's wise to keep these plausible-to-virtually certain developments in mind.

Thanksgiving and This Dark Valley

Christians are not Zoroastrians. Neither are we gnostics. We not only thank God from whom all blessings flow, but we also pass through the valley of the shadow of death in the confidence not only that he is with us, but also that he is Lord over that valley, and even that the valley itself is his loving rod of discipline (Psalm 23:4).

For that reason, Scripture tell us to give thanks in all situations, both the happy and the unhappy, the bright and the dark. "Light dawns in the darkness for the upright (Psalm 112:4).

Rejoice in the Lord always. Again I will say, rejoice! Let your gentleness be known to all men. The Lord is at hand. Be anxious for nothing, but in everything, by prayer and supplication, with thanksgiving, let your requests be made known to God (Philippians 4:4-6).

[B]e filled with the Spirit...giving thanks always for all things to God the Father in the name of our Lord Jesus Christ (Ephesians 5:18, 20).

Rejoice always, pray without ceasing, in everything give thanks; for this is the will of God in Christ Jesus for you (I Thessalonians 5:16-18).

This Thanksgiving, it is hard not to notice that the country is in dark times that are getting progressively darker both at home and abroad. That presents the Christian with many opportunities to offer prayerful thanksgiving to God the sovereign, wise, and good Father in the name of our risen and reigning covenant Lord, Jesus Christ.

Consider this bad news.

The Heritage Foundation reports a massive increase in our public debt burden over the next decade. The graph is from the Washington Post. "President Bush presided over a $2.5 trillion increase in the public debt through 2008. Setting aside 2009 (for which Presidents Bush and Obama share responsibility for an additional $2.6 trillion in public debt), President Obama’s budget would add $4.9 trillion in public debt from the beginning of 2010 through 2016."

Also, read George Melloan on what the massive expansion of government borrowing means for bank lending to private home buyers, small businesses, and entrepreneurs. Answer: "No money for you!" ("Government Deficits and Private Growth," WSJ, Nov. 23, 2009). Furthermore, as the government is now regulating banker salaries, and linking them to risk aversion instead of risk assessment, lenders have every incentive to prefer risk-free Treasury securities over housing and enterprise.

Have you noticed the price of gold recently? As the value of paper money goes down, the value of gold goes up, e.g., in times of inflation, or when the "full faith and credit of the United States government" comes into serious question.

With the continuing weakness in the US dollar, low interest rates around the world, increasing investor demand and a growing concern about the value of these fiat currencies, it is not surprising that the price of gold is performing so well.  A fiat currency is a currency that a government has declared to be legal tender, despite the fact that it has no intrinsic value and is not backed by reserves. Historically, most currencies were based on physical commodities such as gold or silver, but fiat money is based solely on faith. Most of the world's paper money is fiat money. Because fiat money is not linked to physical reserves, it risks becoming worthless due to hyperinflation. If people lose faith in a nation's paper currency, the money will no longer hold any value" (from Mineweb.com).

Gold is up, and rising fast by about $100 an ounce per month. The world market is bearish on America's economic future thanks to the frantic spending and spending plans of our ruling Democrats.

In world politics, that anarchy of ferocious evil out there, expect a return to 1979. When America withdraws or smiles sweetly and says "Can't we all just get along?," barbarians seize their opportunity, and then all the evil that lurks in the mud catches out. Here, Bret Stephens compares President Jimmy Carter's calamitous naivete with President Obama's equally ill-conceived plans to bring hope and change to the world ("The Carter Ricochet Effect," WSJ, Nov. 23, 2009).

President Obama likes to bemoan the "mess" he inherited overseas, the finger pointed squarely at President Bush. But the real mess he inherited comes straight out of 1979, the serial debacles of which define American challenges in the Middle East just as surely as the triumphs of 1989 define our opportunities in Europe. ... He would do well to cast a backward glance at the tenure of his fellow Nobel peace laureate, as an object lesson in how even the purest of motives can lead to the most disastrous results.

And that's just from today's paper and from what comes quickly to mind.

But you need have "no fear of bad news" if your "heart is steadfast, trusting the Lord" (Psalm 112:7).

Dow 10,000 a Bubble, Not a Boom

Whenever we see a bubble, we want to think it's a bag of gold. And when we enter the eye of a storm, we like to kid ourselves that times of peace has come at last.

Now that the Dow Jones Industrial Average has once again surpassed the 10,000 mark, we want to believe that the hard times are finally over and that ten to fifteen years of unbroken prosperity lies before us. Brace yourself.

The New York Times reminds us ("10,000: The and Now") that when the Dow first passed that point on March 29, 1999, the economy was roaring through it's eighth year of wild prosperity, and unemployment was about as low as it could be. This ten is not the same as that ten.

Yes, unemployment today stands at 9.8 percent. But is that just the economy lagging behind the first indicators of economic recovery? Sorry. No.

The spike in the Dow is the result of huge profits that the banks have posted from their recoveries. But they are still not lending, and without that there will be no recovery for the rest of us. But don't get angry. Get answers. Why are these shrewd people still not lending? Isn't it their business to lend? No, it is their business, as in any business, to make money. They must have reason to believe that if they lend, e.g. to small businesses or to prospective homeowners, they will lose money. So look around for what they are seeing.

Look here. David Malpass, the president of Encima Global LLC, points us to our collapsing dollar as a source of our vanishing prosperity ("The Weak-Dollar Threat to Prosperity"). The Bush administration was devaluing the dollar throughout the decade. That corresponded with runaway government spending. When faced with large debts, government must either cut spending (unthinkable), raise taxes (impolitic and counterproductive), or devalue the currency. How do they do this? By keeping interests rates low, they encourage public and private borrowing, such as government bonds and home mortgages. If anything becomes oversupplied, it's value decreases. As dollars lose their value, it takes more of them to buy things, both at home and abroad. Prices rise across the board.

How much value has the dollar lost? Is this a big deal? You can see how dramatic the fall has been by looking at the price of gold over the past decade. Gold has a stable value. The fluctuation in its price reflects the relative value of the currencies that are used to price it. So as the dollar loses value, it takes more of them to buy an ounce of gold. When President George W. Bush came into office, gold was selling at over $250 an ounce. When he left office eight years later, it was about $850 an ounce. The price climbed steadily over those eight years.

President Obama is making his predecessor look like the king of thrift, and he's not done. The present government has popped the roof off an already large public debt, spending trillions, and preparing to spend trillions more. As a consequence, the dollar is falling faster than ever. Since Barack Obama took office less than a year ago, gold has gone from about $850 an ounce to roughly $1,050. You should expect it to go higher. Much higher. Adjusted for inflation, gold's historic high is over $2,000 an ounce.

As Obama pumps trillions of dollars into the economy, and the economy does not respond proportionately with a vigorously growing GDP (still no sign of that), more dollars chasing the same number of goods will mean inflation. A ridiculous increase in the money supply on top of a stalled economy will give us a devouring plague of inflation further devastating people's lives.

You might be wondering, however, about the upside to a weak currency. Doesn't it make our exports cheaper, and thus boost domestic production and launch us into recovery? Malpass explains how historically this has always been a losing strategy.

As the pound slid in the 1950s and '60s and the British Empire crumbled, the corporations that prospered were the ones that borrowed pounds aggressively in order to expand abroad. Though British equities rose in pound terms, they generally underperformed gold and foreign equities. At the end of empire, the giant sucking sound was from British capital and jobs moving offshore as the pound sank....No countries have devalued their way into prosperity, while many—Hong Kong, China, Australia today—have used stable money to invite capital and jobs.

None of this indicates the American economy returning to boom times any time soon. In fact, this window onto the future reveals just the opposite.

The other place bankers are looking is the second wave of residential mortgage defaults and, on top of that, the coming collapse of the commercial real estate market. Charles Gasparino helps us there ("The Next Bank Crisis").

[The banks are] still holding trillions of dollars in ailing mortgage loans and commercial-real-estate debt that they have yet to fully write down. They're hoping they won't have to -- but continued joblessness is squeezing those portfolios. The banks will tell you that they've written down a good chunk of their consumer loans. But the problem, according to banking analysts like Mike Mayo, becomes acute if unemployment passes 10 percent and nears 11 percent. That's the point, according to many economic models, that American consumers start defaulting on loans in such a way that trillions of dollars in consumer-related loans and debt that haven't been written down start to implode.

And that doesn't account for the trillions in commercial-real-estate loans and bonds that have yet to take any significant hit at all -- but (most analysts predict) will be crashing in the months ahead even if unemployment stabilizes at 10 percent.

Bottom line: If unemployment goes higher than 10 percent, the banks' numbers get even worse. As losses begin to mount, the big banks may well find themselves back begging the government for more bailout money.

So beware of jumping on the bank profit driven bull market, thinking that you are going to ride it into the Obama Boom Years. There is much pain to come, and with it much tragic loss. It is tragic because wise leadership could steer us through it more safely by stabilizing the currency and tightening up on government spending. The administration is doing just the opposite. It's like physics. If you torch your house, it will burn down. We are already feeling the heat.

Dr. Obama Does Economic Heart Surgery

In his speech yesterday at Federal Hall in New York's financial district, President Obama, speaking on the financial crisis, proposed what he called "the most ambitious overhaul of the financial regulatory system since the Great Depression." But if Wall Street is to the economy what the heart is to the body, this legislation is like open heart surgery. It is no work for mechanics or butchers, nor for herbalists and conjurers. Yet, he openly boasts that he is entrusting this task to the most anti-capitalist, anti-business, socialism-first-and-prosperity-second Congressional leadership this country has ever seen. It is for good reason that they are universally distrusted outside the hard-line, ideological left.

Here President Obama in his introductions before the speech draws special attention to one Congressman in the audience: "he is going to be helping to shape the agenda going forward to make sure that we have one of the strongest, most dynamic, and most innovative financial markets in the world for many years to come--and that's my good friend, Barney Frank."



If "Barney Frank" is how the President summarizes what he means by "strong, dynamic, and innovative financial markets," then we need an interpretive key like this for understanding his speeches: "War is peace; freedom is slavery; ignorance is strength." Think of Democratic "health care" reform in that context.

Sen. Jim DeMint spoke at The King's College yesterday saying some of the things he says here regarding the socialistic direction of the administration's reforms. Watch his FoxNews interview here.

His book is Saving Freedom We Can Stop America's Slide Into Socialism.

The Boomers Behind the Bust

David Brooks reports some sobering statistics in his column today, "The Great Unwinding."

"The ratio of debt-to-personal-disposable income was 55 percent in 1960. Since then, it has more than doubled, reaching 133 percent in 2007."

He adds: "Consumption as a share of G.D.P. stood at around 62 percent in the mid-1960s, and rose to about 73 percent by 2008. The baby boomers enjoyed an incredible spending binge." The post-WWII baby boomers have brought us new blessings with each successive decade of their self-absorbed lives.

When credit froze up last year, the government "replaced private borrowing with public borrowing." The result has been a dramatic increase in public debt: "In 2007, the federal deficit was 1.2 percent of G.D.P. Two years later, it’s at 13 percent."

The effect of this and the various bailouts in general has been a historically unprecedented spike in the money supply. This has ominous implications for inflation.

Source: research.stlouisfed.org

To move the country from a mostly consumption based economy (easy credit and imports) to an investment and production dominated economy (which requires much higher rates of savings), "[t]he members of the political class face a set of monumental tasks. First, they have to persuade a country to postpone gratification for the sake of rebuilding the country. This country hasn’t accepted sacrifice in 50 years." Fifty years takes us back to 1959. Again, that's when the boomers started to dominate American society, even as children.

Brooks says the Obama administration is aware of the need for this shift and of what it requires, but he is skeptical that Congress is up to the task. "Congressional leaders have been fixated on short-term conventional priorities throughout this entire episode. There is no evidence that the power brokers understand the fundamental transition ahead. They are practicing the same self-indulgence that got us into this mess." Congressional leaders are...baby boomers.

The baby boom generation is not solely responsible for this and every other mess, but since they were toddlers, they have had the shaping influence on our culture and economy. Brooks subtley identifies the characteristic excesses of his own generation in this present crisis too.

Union Made. Union Proud.

Before there were auto industry bailouts, there was...DODGE AIRES!



GM is now bankrupt. In the 1950s, it employed over 500,000 people and enjoyed a roughly 50% market share. Now it's bust. The reason for this is plain from these figures: GM employs 92,000 workers and supports 500,000 retirees. It is what Mark Steyn calls a vast retirement community that makes cars on the side.

It is the trade unions that brought GM to it's knees. The New York Times reports Don Skidmore, president of UAW Local 735, saying, "I was angry at first, then I cried, then I got angry again." Did he really expect that GM could continue as a viable company with powerful unions forcing such suicidal business conditions on it in a competitive world economy? No, he and his union pals were not thinking past their bellies.

An even larger issue is that these unions dominate the party that is now running the country and restructuring the economy.

In a democracy, you get what you ask for.
David Brooks in "The Quagmire Ahead" gets right to the point in his summary of the evils that will flow from this move. GM execs now have no incentive to improve the company. The government will not let it fail. The way ahead is now conflict avoidance with the unions and the government. In addition, we will soon see what effect the subsidization of one company by the government has on its competitors in the industry. Speaking of the government, despite what the President said about being a "hands off" owner of the company, Democrats are already lining up with with political plans for what they want to do with the company. Building so-called "green" cars that perhaps nobody wants to buy is just one of them.

Bubble and Crash. The History of Now.

Yesterday, the Wall Street Journal gave four of the five columns of its opinion page to Steven Gjerstad and Vernon Smith for explaining housing bubbles, the present financial crisis, and the possibly repeatable Great Depression ("From Bubble to Depression?"). It is highly unusual for the Journal to devote that much of the opinion page to one essay, and I can see why they did. It is the most informative brief explanation (I only read brief ones) of the crisis I have read yet.

Gjerstad and Smith explain what brought about this housing bubble. "Monetary policy, mortgage finance, relaxed lending standards, and tax-free capital gains provided astonishing economic stimulus: Mortgage loan originations increased an average of 56% per year for three years -- from $1.05 trillion in 2000 to $3.95 trillion in 2003!"

Then they get to the good stuff. "The unraveling of the bubble is in many ways the most fascinating part of the story, and the most painful reality we are now experiencing." I didn't now that statistics could make for such a riveting tale.

He concludes this way:

It appears that both the Great Depression and the current crisis had their origins in excessive consumer debt -- especially mortgage debt -- that was transmitted into the financial sector during a sharp downturn. What we've offered in our discussion of this crisis is the back story to Mr. Bernanke's [1983] analysis of the Depression. Why does one crash [the dot com bubble] cause minimal damage to the financial system, so that the economy can pick itself up quickly, while another crash leaves a devastated financial sector in the wreckage? The hypothesis we propose is that a financial crisis that originates in consumer debt, especially consumer debt concentrated at the low end of the wealth and income distribution [DCI: thanks to the compassionate interventions of Rep. Barney Frank and Sen. Chris Dodd], can be transmitted quickly and forcefully into the financial system. It appears that we're witnessing the second great consumer debt crash, the end of a massive consumption binge.

Larry Summers, Save Our Stimulus!

Barack Obama has a team of very smart people helping him address the current economic crisis. So we should be fine.

That would be true, more or less, if they were simply free to do what in their best judgment was good for the economic health of the nation. But they are not. Political considerations at both ends of Pennsylvania Avenue distort the goals, and compromise the policy. The resulting legislation becomes what David Brooks in his column today calls "a sprawling, undisciplined smorgasbord" ("Cleaner and Faster," New York Times, January 29, 2009).

Larry Summers has the most to lose in this legislative circus. He is the President's chief economic adviser, and he made a very public case in 2008 for a disciplined and surgically targeted stimulus for the economy. His criteria, Brooks tells us, were these:

First, the stimulus should be timely. The money should go out “almost immediately.” Second, it should be targeted. It should help low- and middle-income people. Third, it should be temporary. Stimulus measures should not raise the deficits “beyond a short horizon of a year or at most two.”

Departure from these strictures, Summers warned, could produce "worse side effects than the disease that is to be cured.” Read Brooks's column for the ways this proposed stimulus package despises every one of Summers' warnings.

Alice Rivlin, budget director under President Clinton, told Congress this week, “A long-term investment program should not be put together hastily and lumped in with the anti-recession package. The elements of the investment program must be carefully planned and will not create many jobs right away.” So Rivlin has shown that she knows what's fatally and obviously wrong with this plan of action, and as such stands in public contrast with her former associate in the Clinton administration.

I am told that, wherever he goes, Larry Summers is viewed as the smartest man in the room. This is no doubt why Obama has brought this Harvard economist on board as Director of the National Economic Council. This bill, however, as fundamental to Obama's presidency as Reagan's 1981 tax cut bill was to his, leaves Summers standing off at the side with his firm counsel ignored. It leaves him covered with shame.

This situation brings to mind the worldly wise Ahithophel in the Bible whom the handsome and ambitious young Absalom brought into his council of advisers.

Now in those days the counsel that Ahithophel gave was as though one consulted the word of God; so was all the counsel of Ahithophel esteemed, both by David and by Absalom (2 Samuel 16:23 ESV).

From what I gather, Summers sees his own advice in those terms and expects others to do the same. Absalom's life-and-death challenge at start of his reign was not an economic crisis but his father David whom he had displaced from the throne. Of course, Ahithophel recommended precisely the right course of action that would have put an end to David, but Absalom followed the advice of others. Ahithophel, seeing that he was put to utter shame, did not wait for the miserable outcome.

When Ahithophel saw that his counsel was not followed, he saddled his donkey and went off home to his own city. He set his house in order and hanged himself... (2 Samuel 17:23).

As it stands, the bill is a self-defeating mixture of immediate economic stimulus and long-term domestic agenda funding. Larry Summers should threaten to resign if President Obama does not move right away to put an end to this legislative monster, this pushmepullyou response to our continuing economic slide into catastrophe.

Obama needs Summers more than Summers needs Obama. The President should especially wish to avoid someone of Larry Summers' stature resigning in protest, and just two weeks into the administration. If our young President hasn't the good judgment to take this step, Summers should quietly force his hand.

A Merely Political Stimulus

Harvard economist Robert Barro, also at the Hoover Institution, gives a technical, though simple-so-that-I-can-understand-it, explanation of why the Democrats' "stimulus" spending package will fail to stimulate anything, apart from perhaps Chris Matthews' leg.

Read "Government Spending Is No Free Lunch" (Wall Street Journal, Jan. 22, 2009).

But, in terms of fiscal-stimulus proposals, it would be unfortunate if the best Team Obama can offer is an unvarnished version of Keynes's 1936 "General Theory of Employment, Interest and Money." The financial crisis and possible depression do not invalidate everything we have learned about macroeconomics since 1936.

Much more focus should be on incentives for people and businesses to invest, produce and work. On the tax side, we should avoid programs that throw money at people and emphasize instead reductions in marginal income-tax rates -- especially where these rates are already high and fall on capital income. Eliminating the federal corporate income tax would be brilliant.

I find it interesting that we are speaking of this stimulus package as something necessary for "jump starting the economy," as though the economy were a car, and as though it were at a stand still.

But this is rhetoric in the service of covering up a duplicitous government. The Democrats are not interested primarily in economic recovery. That will come eventually, one way or another, in the natural cycle of things. They see this crisis and the unprecedented breadth of power we have handed them as an opportunity to fund "just about every pent-up Democratic proposal of the last 40 years" ("A 40-Year Wish List," Wall Street Journal editorial, Jan. 28, 2009).

Also of interest is that 57% of Americans believe that tax cuts are generally good for the economy compared to 17% who believe they are bad, according to Rasmussen Reports.

Obama Trying On Reagan's Big Shoes

Obama has been compared to FDR, JFK, LBJ, and Jimmy Carter. He has spoken well of Ronald Reagan, and took heat for it in the primaries. Lou Cannon explains ("Obama's Reagan Transformation?" New York Times, Jan. 28, 2009) how it makes sense for him, under these conditions of economic distress, to mimic Ronald Reagan by putting off the social agenda and other domestic priorities until he has the economy back on its feet. There are signs that Reagan is indeed the model he is following.

The trouble is that whereas Reagan understood how wealth is created and thus how an economy grows, Obama's economic medicine is likely to extend and deepen our suffering. In a time of crisis, such as Reagan faced and such as Barack Obama is facing now, it is not enough simply to learn from Reagan the tactician (and Reagan, we learn, took counsel from Nixon), but to learn from Reagan the statesman in general. This necessarily includes understanding the relationship between the substance of his political and economic principles and the flourishing of the nation under his leadership.

Being Reagan is not as easy at it looks.

Signs of Hope in 2009

If you pulled out of the stock market in 2008, if you hope to enter the housing market in 2009, or if you fear either the level of personal debt in America or Democratic taxing and spending plans, Alan Murray has a calming message for you ("2009 Could Be Better Than You Think," Wall Street Journal, Jan. 4, 2009).

He argues five points:

1. This will be a good year to invest in stocks.

2. It will be a good year to invest in real estate.

3. Americans will learn to live within their means.

4. President Obama will have a historic opportunity to reshape public policy.

5. Your (federal) taxes won't rise.

Auto Bailouts and Sinking American Prospects

In the 1970s, my dad bought American cars on point of principle. He thought it was right to support the North American auto industry. Eventually, however, he found that American car manufacturers were doing him no favors in return. So since the late 1970s, he has bought Peugeot, Saab, Volvo, and Acura (which is Honda). I drive a Honda Odyssey.

As consumers, we direct our money to the companies we think will give us the best products. But recently, the so-called Big Three American automakers went to Washington asking for $15 billion of your money and mine to make up for the money we have not been spending on their cars. The trouble has been not only that many Americans have been preferring the products of other companies. But even when we have been buying GM, Ford and Chrysler, we have been paying only the market price, which is considerably less than what the companies need to make a profit. So having failed in the marketplace, they asked the government to take from us what we have freely chosen not to give them.

Congress refused. But on Friday, President Bush gave them, by executive decree, over $17 billion from the Congressionally established $700 billion slush fund (TARP, the Troubled Asset Relief Program) designated for stabilizing the financial markets.

George Will sees not just an unwise use of public funds, but a deterioration of our constitutional system of government.

The expansion of government entails an increasingly swollen executive branch and the steady enlargement of executive discretion. This inevitably means the eclipse of Congress and attenuation of the rule of law.

Mark Steyn tells us why these car companies are failing and will continue to fail.

General Motors, like the other two geezers of the Old Three, is a vast retirement home with a small loss-making auto subsidiary. The UAW is AARP in an Edsel: It has 3 times as many retirees and widows as "workers" (I use the term loosely). GM has 96,000 employees but provides health benefits to a million people. How do you make that math add up? Not by selling cars: Honda and Nissan make a pre-tax operating profit per vehicle of around $1,600; Ford, Chrysler and GM make a loss of between $500 and $1,500. That's to say, they lose money on every vehicle they sell. Like Henry Ford said, you can get it in any color as long as it's red.

Steyn actually takes you on a jolly ride through several aspects of America's present decline: "See the USA from your Chevrolet: An hereditary legislature, a media fawning its way into bankruptcy, its iconic coastal states driving out innovators and entrepreneurs, the arrival of the new messiah heralded only by the leaden dirge of "We Three Kings Of Ol' Detroit Are/Seeking checks we traverse afar," and Route 66 looking ever more like a one-way dead-end street to Bailoutistan."

But he ends upbeat, wishing us all "a very Hopey Changemas."

Whoever said the era of Great Canadians would die with William Shatner haven't been reading Mark Steyn.

Congressional Motors

From the WSJ this morning, under the headline "US Could Take Stakes in Big Three":

WASHINGTON -- Congress and the White House inched toward a financial rescue of the Big Three auto makers, negotiating legislation that would give the U.S. government a substantial ownership stake in the industry and a central role in its restructuring.

But Iowahawk was all over this story way back on November 24th, when he leaked the advertising campaign being considered for the new era of nationalization being planned by the Pelosi Democats.

It's got a "return to the golden 70's" kind of feel to it. What do you think?

************

Innes adds:

Ask any American this question. Would the company that employs you be a better company, make a better product, be more innovative, if it were run by the government? (FYI: Rasmussen finds that "Just 14% Say Government Will Run Big Three Better.")

My closest personal experience with a government run company is the Long Island Rail Road. I like them. The conductors are friendly and the trains run more or less on time. They are yet another reason that I am glad I don't live in New Jersey. But the LIRR runs at a huge loss and the trains travel at half the speed they did forty years ago. That is not what made America great.

How is it that these three companies are faring so poorly in the auto market, whereas Toyota, Honda, Hyundai etc. are all turning profits selling American built cars? Does Congress have any clue? If they did understand, would they have the political will to do what is necessary to free these companies to make a profit? Given their illicit relationship with the unions (it is illicit for Congress, a publicly interested body, to be controlled by unions which are organized to promote narrowly private interests) and their fixation with regulation, especially environmental regulation, it seems highly unlikely.

If the federal government takes control of the banks, the auto industry and the health care system, why should it not also proceed to all the "commanding heights" of the economy? Why should these huge economic entities that control the lives of so many ordinary Americans not come under social control for the benefit of the people instead of the few? As the first post-war British prime minister put it, this would be "the embodiment of our socialist principle of placing the welfare of the nation before any section" or narrow interest. He advocated "a mixed economy developing toward socialism.... The doctrines of abundance, of full employment, and of social security require the transfer to public ownership of certain major economic forces and the planned control in the public interest of many other economic activities."

Perhaps Barack Obama will be remembered as the American Clement Atlee.

If so, we will have to suffer through decades of economic stagnation and self-inflicted misery until we learn our lesson and, in response to our tearful prayers, the Lord mercifully raises up an American Margaret Thatcher to remedy the whole mess.