by Steven Waechter | Jun 13, 2011
Imagine a plot of land in the desert, consisting only of mesquite scrub and dust. If you assembled a system of sprinklers on this desert land, and ran them heavily enough, you could make the desert green with grass, corn, or even water loving willow trees. But then the water supply you are stealing from runs dry, and the sprinklers sit there, idle. The greenery of your efforts wilts, dies and turns to dust.
This is the story of government stimulus. First, the federal government stole – yes, I said stole – hundreds of billions of dollars to bail out first the banks, and then General Motors, and then spend hundreds of billions more on the President’s stimulus package, which promised to reignite the economy, fight of the recession, and reduce unemployment. The federal government crowded out private borrowers from the capital markets with their enormous deficits, damaging other sectors of the economy – but no matter. The stimulus program would create or “save†jobs elsewhere, making the whole thing worth while, somehow.
It didn’t work. It was never going to work. All we were left with was another economic bubble; this one not in stocks or in housing, but in government spending. Now, the cash supporting this situation – the air inflating the bubble – is being printed, at the cost of inflation and rising prices on everything; essentially theft through increased costs of living. Consumer spending is shifting to cover the increased costs of food and fuel, to the detriment of other goods and services.
As it became an obvious failure, the first impulse was to double down with another stimulus program – digging a deeper well. But not this time; the wealth of the country was depleted, the water was gone.
Now, we stand at the beginning of the double-dip recession – a recession within the depression that was born from the last recession. This time there is no way out and no way to delay. The economy as a whole can no longer afford to supply the cash to keep the government spending bubble inflated, a bubble that never should have existed in the first place.
It is time for the economy to be purged of all the mal-investments of both government and business and finally rebalance itself, something which it has not had a chance to do. Government stimulus was doomed from the beginning because it only stimulated a portion of the economy that depended entirely upon government money; the rest of the economy was damaged by this, not improved by it, and governments can, in fact, run out of money.
The next phase of the recession will be more painful than the first; with an economy that has been further weakened and a government lacking the resources to do much of anything, the next big dip is going to be one for the history books – which is terrifying.
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by DJ Durant | Jun 11, 2011
Yes, the chickens are coming home to roost. All of a sudden, the man who had all the answers three years ago has none. He was calm, cool and collected. He convinced the American citizenry that he could solve all of the country’s problems, and that it was critical that we abandon the “failed policies of the last eight yearsâ€.
We are 17 months away from the next presidential election and the economy is definitely slowing. Aggregate demand for goods and services is weakening. And unless President Obama changes course on legislation enacted in the last two years, we are likely to enter yet another recession. He won’t, though, and it will prove to be his undoing.
Conservative pundits and Republican presidential candidates are licking their chops. The President’s economic policies are failing. People vote with their wallets.  They know Socialism doesn’t work. Should the economy slow further, it would not surprise me to see other Democrats, sensing opportunity, toy with a Presidential run of their own. Even Anthony Weiner’s troubles aren’t enough to take the spotlight off the economy. (Perhaps the President should appoint Representative Weiner to the post of Social Media czar.)
Unfortunately, we predicted extended economic weakness two years ago. It was easy to spot. We had lived through the Carter Administration. Those who don’t understand history are doomed to repeat it. Over-regulation chokes off economic growth. Businesses and individuals thrive on certainty. The health-care legislation, Dodd-Frank, and impending tax increases (unless the Bush tax cuts are extended further), coupled with out-of-control government spending and astronomical deficits have created the uncertainty. Employment is declining. Unemployment is increasing. The stock market, that predictor of future corporate earnings, is falling. Oil, gas, and other commodity prices are high. Aggregate demand is suffering.
This is Obama’s legacy. He can no longer blame anyone else. And we predicted it.
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by Brian Nygaard | Jun 7, 2011
It was a steamy 98 degrees in Atlanta. It was clearly too hot for me to be out running at the local high school track…but there I was. I was not alone, however. Occupying Lane 4 was a guy who I would guess was born somewhere immediately after WWII. But my track-mates age was not the interesting part of the story. The interesting fact was that the man was clad in a long-sleeved sweatshirt. Yes, and it even had a Nike SWOOSH on it. I thought to sweaty self, “This has to be the most bizarre thing I have seen all week!†However, upon a few moments of reflection, I concluded it wasn’t even close to the top of the Week’s-Most-Bizarre List.
My first cataloguing thought was that the Massachusetts tornado was the most bizarre thing that happened this week; but I concluded it only scored 8.0 on the 10 point scale. After all, the weather has been crazy this year. Then it occurred to me that “Weinergate†was about as weird as it gets. And it did involve the Honorable US Representative Anthony Weiner from New York…making it a natural candidate, by definition.  Many of us would have been more comforted by simply hearing him say “That is not mine.†as opposed to “It was pranksters.†But even allowing for a couple of additional Anthony Wiener style points, he only merited 9.0 on the Bizarre Scale.
I then gave passing consideration to Barack Obama’s honoring of our fallen war heroes with an “18 flag tribute†at the local golf club on Memorial Day. And that might have been a winner had the event in any way stuck out from his normal complete lack of respect for people who actually believe in what America stands for. While scoring an impressive 9.5, the President’s behavior still fell short of this week’s winner.
The winner for the most bizarre thing that happened this week, with a score of 9.7, was Clinton’s former Secretary of Labor, Professor Robert Reich, from (of all bizarre places) Cal Berkeley.
In an article in (of all bizarre places) the San Francisco Chronicle, he is quoted:
In response to slow economic growth: “Right now we need more public spending in order to get people back to work. And we need a new Works Progress Administration to get the long-term unemployed back to work.â€
In response to declining home prices: “That means most Americans have to save big-time if they’re going to be able to retire or even send the kids to college. As a result, consumer spending will stay anemic and unemployment will remain high – unless Washington fills the gap.â€
And he teaches our children this stuff…
So if the federal government is currently spending $1.5 trillion more than it receives (an annual deficit representing nearly ten percent of the entire economy), that is not enough government stimuli? What amount might be enough, Mr. Reich? (In the good professor’s defense, he does likely make the highly nuanced distinction between normal unproductive and wasteful federal government spending and targeted unproductive and wasteful federal government spending.)
And what gap is it that Washington needs to fill? I guess this assumes that irrespective of how poorly the economy is managed, and unrelated to how little money consumers have to spend, that the government can just step in and “create an economy.†Does he really not understand the notion of rational investment and the resultant productivity increases that singularly drive economic growth? Is his whole world just one very large social and political abstraction for Mr. Reich? Whatever it is, it is truly bizarre.
Apparently, this is the thinking of people like Mr. Reich: If something isn’t working, has never worked, and will very likely never work, and yet you believe in it very strongly…just do more of it. If you do not find yourself tortured enough by running outdoors in temperatures of nearly 100 degrees, slap on a sweatshirt! The underlying logic embedded in both of these scenarios is both beautifully and brutally consistent.
For his remarkable jeremiad, Professor Reich is credited with a score of 9.7, and is the winner of the “Most Bizarre Thing of the Week†Award. Well done, and congratulations, Bob!
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by Steven Waechter | Jun 6, 2011
At barely five feet tall and armed only with a Ph.D in economics, Milton Friedman hardly had the look of a hero set out to save a nation. Yet, Professor Friedman predicted with near perfection the disastrous economic situation the United States is enduring today. He did this with a simple idea – the Quantity Theory of Money.
MV = PQ. This is the simple mathematical formula which explains the death of American prosperity. Where M is the supply of money, V is the velocity that it circulates, P is prices, and Q is the quantity of transactions. Simply put, if the government prints more money, prices go up unless the number of transactions also increases. Too many dollars chasing too few goods, as they say, leads to inflation.
Enter Quantitative Easing, where the Federal Reserve buys government bonds with money that it printed specifically for the purpose of buying government bonds. This is the only way our government can run $1.6 trillion deficits – which, according to President Obama we must do for the next ten years. The bond market would never absorb this many bonds at interest rates this low unless the Federal Reserve were rigging the market, and in recent months they have been purchasing roughly 70% of federal bonds being offered. The money raised is immediately spent by the federal government, sharply increasing both the supply and velocity of money. In 2000, there was approximately $4.7 trillion US Dollars in circulation, now there are nearly $10 trillion.
The quantity of transactions is going down. Don’t take my word for it, either. Look around your neighborhood for all of the houses that have been for sale for months, all the vacant office space, and all the closed restaurants. These are all a component of the decline in the quantity of transactions. Fewer houses bought, fewer goods sold, fewer meals consumed.
Which leaves us with one last variable: Prices. With double the dollars in circulation, being spent by the government as quickly as they can print them, and with fewer transactions in the overall economy, prices must simply explode.
Pull out your old check records or bank statements, and see what you used to spend on groceries and gasoline, and compare them to what you are spending now. The increase is not the cause of supply problems, speculators or gouging: It is inflation, pure and simple.
The end result has been an inflationary depression, with increasing prices and high unemployment. What the country desperately needs is a sound dollar, stable prices and, of course, a sound fiscal policy based on a balanced budget. Thus, fiscal and monetary policies are inextricably linked, with our deficits leading to inflation and inflation making the deficits possible.
Left-wing ideologues like to repeat the old trope that in America the poor get poorer and the rich get richer. Well, sad to say, it is true. But, it is not capitalism that is doing the pillaging; it is our own government. Rising prices means lowering standards of living. Despite the messianic rhetoric of Mr. Obama, it is his deficits, financed by Mr. Bernanke’s printing press, that are robbing the pensioners and the working class of their standard of living.
The Republican that can best articulate this message, without being pulled into the weeds, will take the Presidency—or at least get my respect.
by DJ Durant | Jun 2, 2011
Every once in a while, and in the case of several of the Wall Street Journal’s editoral staff, there is clarity. Today’s column by Daniel Henniger provides such clarity.
Here’s the link: http://online.wsj.com/article/SB10001424052702303745304576359570364488858.html
Rock on!
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