Economics

What lies ahead, I fear.

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UPDATE: An an article at Belmont Club describes interest in alternative money creation as a way of anticipating inflation. It also goes further into a discussion of general competence.

The idea that Virginia should consider issuing its own money was dismissed as just another quixotic quest by one of the most conservative members of the state legislature when Marshall introduced it three years ago. But it has since gained traction not only in Virginia, but also in states across the country as Americans have grown increasingly suspicious of the institutions entrusted with safeguarding the economy.

What has changed is faith in the federal government, not just in Virginia but in a growing number of places. The lack of faith in the competence of government — and the soundness of the dollar — has been growing leading some states to create contingency plans in case the currency goes bust.

Once again, I apologize for my pessimism but this is what I see. First, there is this article, which quotes a well known financier.

There may be a natural evolution to our fractionally reserved credit system that characterizes modern global finance. Much like the universe, which began with a big bang nearly 14 billion years ago, but is expanding so rapidly that scientists predict it will all end in a “big freeze” trillions of years from now, our current monetary system seems to require perpetual expansion to maintain its existence. And too, the advancing entropy in the physical universe may in fact portend a similar decline of “energy” and “heat” within the credit markets. If so, then the legitimate response of creditors, debtors and investors inextricably intertwined within it, should logically be to ask about the economic and investment implications of its ongoing transition.

Certainly “growth” seems to be fundamental to our economic health. That, of course, presumes a growing population but it also would be affected by a stagnant population with a growing age disparity. The obvious example of the latter is Japan.

The creation of credit in our modern day fractional reserve banking system began with a deposit and the profitable expansion of that deposit via leverage. Banks and other lenders don’t always keep 100% of their deposits in the “vault” at any one time in fact they keep very little thus the term “fractional reserves.” That first deposit then, and the explosion outward of 10x and more of levered lending, is modern day finance’s equivalent of the big bang. When it began is actually harder to determine than the birth of the physical universe but it certainly accelerated with the invention of central banking the U.S. in 1913 and with it the increased confidence that these newly licensed lenders of last resort would provide support to financial and real economies. Banking and central banks were and remain essential elements of a productive global economy.

The effect of asset bubbles on such a system is worrisome as the history of Japan and the recent history of the US have shown. The Panic of 1907 was largely responsible for the creation of the Federal Reserve. That financial crisis is thought, by the authors of a recent book, to have been a consequence of the 1906 earthquake in San Francisco, which destroyed a large amount of real assets and the insurance costs that were associated. The immediate cause was financial speculation but the real losses had added to the fragility of the system.

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The Republicans in opposition

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Bill Kristol (corrected thanks to Joe) has an excellent column today on where Republicans could go in the next four years. I have little confidence that the House GOP can bend Obama to their will on the deficit or spending. He is riding high with the aid of the mainstream press and TV. The public does not understand the spending issue, or at least not enough of us do. The Republicans represent the “Eat your vegetables or there will be no dessert” philosophy and that is not popular right now. What do we do ? Here is one suggestion.

He quotes UN Ambassador Pat Moynihan in 1975.

The United States goes into opposition. This is our circumstance. We are a minority. We are outvoted. This is neither an unprecedented nor an intolerable situation. The question is what do we make of it. So far we have made little—nothing—of what is in fact an opportunity. We go about dazed that the world has changed. We toy with the idea of stopping it and getting off. We rebound with the thought that if only we are more reasonable perhaps “they” will be. .”‰”‰.”‰”‰. But “they” do not grow reasonable. Instead, we grow unreasonable. A sterile enterprise which awaits total redefinition.

I feel much the same way. I would have much preferred the GOP to have voted “present” when the “fiscal cliff” matter was before the House. I would like to see them do the same when the debt ceiling issue is voted on. Let Obama have his way but show that we do not agree.

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Happy New Year

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I wish I were more enthusiastic but I still wish everyone a good year. The “fiscal cliff” talks have ended about as I expected. The Republicans have pretty much rolled over. The House has yet to vote and I wonder how that will go. If they all grew a spine (or some other anatomical parts) they would vote “present” and let the Democrats pass the bill by themselves. Drudge has a link to the Breitbart story.

According to the Congressional Budget Office, the last-minute fiscal cliff deal reached by congressional leaders and President Barack Obama cuts only $15 billion in spending while increasing tax revenues by $620 billion—a 41:1 ratio of tax increases to spending cuts.

When Presidents Ronald Reagan and George H.W. Bush increased taxes in return for spending cuts—cuts that never ultimately came—they did so at ratios of 1:3 and 1:2.

“In 1982, President Reagan was promised $3 in spending cuts for every $1 in tax hikes,” Americans for Tax Reform says of those two incidents. “The tax hikes went through, but the spending cuts did not materialize. President Reagan later said that signing onto this deal was the biggest mistake of his presidency.

“In 1990, President George H.W. Bush agreed to $2 in spending cuts for every $1 in tax hikes. The tax hikes went through, and we are still paying them today. Not a single penny of the promised spending cuts actually happened.”

This will be another such fake compromise. However, The Gods of the Copybook Headings are coming.

In the Carboniferous Epoch we were promised abundance for all,
By robbing selected Peter to pay for collective Paul;
But, though we had plenty of money, there was nothing our money could buy,
And the Gods of the Copybook Headings said: “If you don’t work you die.”

Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew,
And the hearts of the meanest were humbled and began to believe it was true
That All is not Gold that Glitters, and Two and Two make Four —
And the Gods of the Copybook Headings limped up to explain it once more.

It’s too long to post all of it and, for those who are unsure of the source of the title, copybooks were supplied for all school children in England, when it was still England. The copy books had traditional aphorisms on each page that children were expected to learn.

Another expression that relates to the books was someone “blotted his copybook.” This meant making an error that was difficult to correct.

The “copybook headings” to which the title refers were proverbs or maxims, extolling virtues such as honesty or fair dealing that were printed at the top of the pages of 19th-century British students’ special notebook pages, called copybooks. The school-children had to write them by hand repeatedly down the page.

The work has been described as “beautifully captur[ing] the thinking of Schumpeter and Keynes.”[2] David Gilmour says that while topics of the work are the “usual subjects”, the commentary “sound better in verse”[3] while Alice Ramos says that they are “far removed from Horace’s elegant succinctness” but do “make the same point with some force.”[4]

I don’t think I would agree that Keynes is an example of the copybook headings’ wisdom although his recommendations have been wildly distorted by politicians.

We are coming to a period when math will be far more determinant than wishful thinking in terms of our lives.

As it will be in the future, it was at the birth of Man —
There are only four things certain since Social Progress began —
That the Dog returns to his Vomit and the Sow returns to her Mire,
And the burnt Fool’s bandaged finger goes wabbling back to the Fire —
And that after this is accomplished, and the brave new world begins
When all men are paid for existing and no man must pay for his sins
As surely as Water will wet us, as surely as Fire will burn
The Gods of the Copybook Headings with terror and slaughter return!

Hopefully, not this year. Happy New Year.

They are all lying.

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I’ve tried to think about anything but the coming economic calamity but this column from the Daily Telegraph is too perceptive to ignore. Of course, the liars include most of the US media, press and TV. We have to get our news from the British media about American politics. The US media has become an arm of the Democratic party.

Must we assume now that no party that speaks the truth about the economic future has a chance of winning power in a national election? With the results of presidential contests in the United States and France as evidence, this would seem to be the only possible conclusion. Any political leader prepared to deceive the electorate into believing that government spending, and the vast system of services that it provides, can go on as before or that they will be able to resume as soon as this momentary emergency is over was propelled into office virtually by acclamation.
So universal has this rule turned out to be that parties and leaders who know better whose economic literacy is beyond question are now afraid even to hint at the fact which must eventually be faced. The promises that governments are making to their electorates are not just misleading: they are unforgivably dishonest.

I have not believed that Romney’s problem was one of poor communication or salesmanship. Certainly, the turnout numbers show that Obama’s organization made the most of a very intrusive data mining system. The possibility that the system of the campaign will become part of the political party’s permanent infrastructure is worrisome. I don’t want to be an alarmist but one feature of totalitarian governments, after the French Revolution, was the intrusion into daily life.

Of course, once in power all governments must deal with reality even if they have been elected on a systematic lie. As one ex-minister famously put it when he was released from the burden of office: “There’s no money left.” So that challenge must be met. How do you propose to go on providing the entitlements that you have sworn never to end, without any money? The victorious political parties of the Left have a ready answer to that one. They will raise taxes on the “rich”. In France and the United States, this is the formula that is being presented not only as an economic solution but also as a just social settlement, since the “rich” are inherently wicked and must have acquired their wealth by confiscating it from the poor.

I see no sign of any recognition of reality yet by Obama or his government. The “fiscal cliff” negotiations, if they can be called that, have been a farce. The Republicans have allowed themselves to be maneuvered into secret negotiations which have been demagogued and which have set them up for blame for what is coming. They would have been far better advised to insist on open negotiations, on C-SPAN if necessary.

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Reports of the economy’s demise are premature, but not by much.

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UPDATE: The publication of this column by Amity Schlaes adds a bit of prophecy to my concerns expressed here.

Will 2013 be 1937? This is the question many analysts are posing as the stock market has dropped after the U.S. election. On Nov. 16, they noted that industrial production, a crucial figure, dropped as well.

In this case, “1937” means a market drop similar to the one after the re-election of another Democratic president, Franklin D. Roosevelt, in 1936.

If I could be more worried about the future, this column might do it. Read it.

Russ Douthat’s column in the NY Times today points out a few problems with the left’s gloating about winning the election. I apologize for my pessimism but I can’t help looking at the facts beneath the surface.

The first comment beneath this article confirms my belief that the left ignores economics and is solely concerned about social issues and “stuff.”

The ideas that Republicans championed in the last election could have easily been heard at a segregated lunch counter in the ’50s. Suspicion about immigrants, fears about socialism, the subservience of women, back-of-the-bus-style racism, and disgust at the very thought of homosexuals were cornerstones of the Republican ethos. If there was an underlying wholesomeness in their belief in God, family, and tradition, I couldn’t detect it over the din of hateful, destructive rhetoric aimed at the majority of ordinary Americans.

The re-election of Barack Obama has ended the possibility of a serious effort to deal with out of control spending and debt in this country. The “fiscal cliff” is coming soon and there is speculation that one side or the other will “cave” in negotiations. It doesn’t really matter as no serious proposal is under consideration. The tax rates on the top 2% of incomes don’t matter. It’s not worth the trouble for Republicans to defend these tax rates for a group that may not even vote for them.

The whole world cartel of spending is coming to an end and it may not just involve national bankruptcy. It may be the end of an era, maybe of democracy which seems to be incapable of managing debt. An article in Der Spiegel sounds to me like a prediction of the future.

In the midst of this confusing crisis, which has already lasted more than five years, former German Chancellor Helmut Schmidt addressed the question of who had “gotten almost the entire world into so much trouble.” The longer the search for answers lasted, the more disconcerting the questions arising from the answers became. Is it possible that we are not experiencing a crisis, but rather a transformation of our economic system that feels like an unending crisis, and that waiting for it to end is hopeless? Is it possible that we are waiting for the world to conform to our worldview once again, but that it would be smarter to adjust our worldview to conform to the world? Is it possible that financial markets will never become servants of the markets for goods again? Is it possible that Western countries can no longer get rid of their debt, because democracies can’t manage money? And is it possible that even Helmut Schmidt ought to be saying to himself: I too am responsible for getting the world into a fix?

The answer will not be pleasant to consider. We may have run the course on modern national financial competence. Japan, twenty years ago, was a warning we did not heed. Stimulus, as in spending billions on infrastructure, did not work. Japan had a real estate bubble and the response was to try to reflate the bubble. It failed.

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