Apologies for last night’s post on Bernanke.? I have deleted it.? It was not one of my finer efforts (it was late), and I went down some rabbit-trails that overshadowed my main, and valid point.? Bernanke has no business criticizing Congress for running a less accommodative policy, when he is signaling a less accommodative policy.? Congress does not have a communications strategy that investors rely on.? The Fed does, and Bernanke has made a lot out of transparent communications, which I believe is a harmful concept that is bearing bad fruit now.? So when he signals that policy accommodation will be less, and sooner than you think, why should he be surprised at the carnage in the bond market?? Markets are discounting mechanisms, they anticipate.? Why can’t the Fed Chairman recognize that, rather than saying the market misunderstood him?
That was a good thing with the Fed, pre-Greenspan.? It was much easier to understand the Fed when they said nothing.? Onto tonight’s piece:
Borrowing from the Future to Take Care of the Present
I am a fan of balanced budgets.? Why?? Balanced budgets are sustainable.? This is particularly true if budgets are balanced on an accrual basis.
Politicians like to promise more than they deliver.? They are like J. Wellington Wimpy, who said, “I would gladly pay you Tuesday for a hamburger today.”? Goods and services today, payment later.
This happens in a lot of ways, large and small:
- Federal Pension Plans are unfunded, supported by the taxation authority of the Federal Government.
- Running large deficits that don’t do much good for the economy as a whole, while racking up debts that will have to be paid by future generations.
- Running monetary policies that improve conditions today, but will worsen future conditions as a result.? Far better to let recessions bite, eliminating bad debt & projects, and leave behind a less indebted society, ready to grow.
- Social Security & Medicare are unsustainable programs created by our grandparents, sustained by our parents.? These programs will kill the rest of us with their costs.? Our forebears ate sour grapes, and our teeth are set on edge.? And with each generation it gets worse, as the demographic crisis makes it harder to sustain.
- Obamacare front-end loaded taxes, and back-end loaded benefits.? We are now faced with the costs, and the taxes have been spent on other matters.? Aside from that, the estimates when the bill was passed were dishonest.
- States & municipalities played with their pension assumptions for years, offering generous benefits that could not be afforded under intelligent assumptions.? It becomes benefits today, taxes tomorrow.
- Tax policy encourages debt rather than equity, creating industries that over-borrow.
Things could have been better at this point had the Fed done its job and let recessions bite, eliminating bad debts.? Congress could have run balanced budgets, constraining spending on all departments.? The Social Security surplus could have been walled off from the government, and invested in index funds.? States & municipalities could have funded their pension plans fully, and not used the flexibility to fund other spending.? We could have had a tax code that did not tax dividends, but offered no deduction for interest.? We could have constrained the Fed’s ability to act.
We have a mess now as a result of politicians promising, with funding to some later.? In the 1840s over-indebted governments defaulted, and there were many revolutions in Europe.? What will be the price in the modern era, with our over-indebted governments?
I don’t know.? But I suspect it will be ugly.
DM: “…politicians promising, with funding to some later. In the 1840s over-indebted governments defaulted, and there were many revolutions in Europe.”
History sometimes repeats, sometimes it rhymes … but we always hear that this time will be different, and it comes out exactly the same.
The US government is in terrible trouble, and unwilling to face much less attempt to address its failings.
The folks at the NSA have formally declared that US citizens are the enemy of our own government (or at least the crooked bureaucrats therein). Middle class Americans get fined and/or imprisoned for trivial offenses, while James Clapper commits perjury before Congress, on national TV, and yet we are supposed to believe he is as honest as Jon Corzine or Henry Paulson or Tim Geithner or Eric Holt or Alberto Gonzalas.
The Consitution is supposedly the supreme law of the land, yet a bunch of rubber stamping monkeys meet in a secret courtroom and simply ignore written law and the fundamental ideals on which the country was founded.
People will fight and die to protect freedom. Will they fight and die to protect a corrupt regime of bureaucrats?
And is debt secured by an unemployed tax base really money good?
Massive default by the federal government is now inevitable (even if it happens via hyperinflation). Lets hope our stupid leadership doesn’t repeat all the other mistakes that Europe keeps making again and again.
And lets save money by dissolving the US Supreme Court and getting rid of all lawyers. If FISA is legal and James Clapper can commit perjury, than what exactly is the point of a legal system? To send OJ Simpson to prison? Or Jon Corzine?
Or is our legal system merely a means for corrupt bureaucrats to harass and bully the citizenry?
PS — ObamaCare has far more serious structural faults than front loading taxes and back-end loaded *PROMISES*.
Healthcare benefits are provided by nurses and doctors and such. Not by 16000 IRS agents, not by insurance companies, not by a bunch of felons in Washington DC.
ObamaCare only promises healthcare benefits. Not one corrupt bureaucrat or corrupt politician is offering to work pro bono (aka for free). In fact, this criminal class expects to be paid double the national average, plus pension benefits after 20yrs even though the private sector no longer gets any pensions at all. The criminal Pelosi even proposed stealing 401K balances to keep the good times rolling in DC.
What nerve does Obama have to expect healthcare workers to work for free? This is the guy that just spent 100 million of taxpayer money to go visit Africa on personal visit?
ObamaCare is simply fraud. It was jammed through Congress by a witch who openly bribed other members. It was based on accounting fraud. It is based on overcharging younger people for insurance they don’t need in order to subsidize spending on older generations — without any corresponding benefit flowing back.
ObamaCare is nothing more than financial engineering — it has nothing to do with actual healthcare delivery. And much like the securitzed debt bubble we are still struggling under, ObamaCare is based on assumptions that are deliberately concealed from the public — assumptions that range from stealing from babies to pay grandpa to outright fraud.
Even if the country wasn’t buried beneath $17 trillion (and counting) in on balance sheet debt… the crime of ObamaCare is absolutely guaranteed to bankrupt the federal government, just as surely is the private off balance sheet debts destroyed the banks and Enron.
I think Krugman is addressing your issue today, again:
http://krugman.blogs.nytimes.com/2013/07/15/wage-price-flexibility-in-a-liquidity-trap-again-again-again/
Your Mellon-ish suggestion to “let recessions bite” wouldn’t work:
Things could have been better at this point had the Fed done its job and let recessions bite, eliminating bad debts. Congress could have run balanced budgets, constraining spending on all departments. The Social Security surplus could have been walled off from the government, and invested in index funds. States & municipalities could have funded their pension plans fully, and not used the flexibility to fund other spending. We could have had a tax code that did not tax dividends, but offered no deduction for interest. We could have constrained the Fed?s ability to act.
As Keynes wrote in the cited piece:
‘In this quandary individual producers base illusory hopes on courses of action which would benefit an individual producer or class of producers so long as they were alone in pursuing them, but which benefit no one if everyone pursues them. For example, to restrict the output of a particular primary commodity raises its price, so long as the output of the industries which use this commodity is unrestricted; but if output is restricted all round, then the demand for the primary commodity falls off by just as much as the supply, and no one is further forward. Or again, if a particular producer or a particular country cuts wages, then, so long as others do not follow suit, that producer or that country is able to get more of what trade is going. But if wages are cut all round, the purchasing power of the community as a whole is reduced by the same amount as the reduction of costs; and, again, no one is further forward.
Thus neither the restriction of output nor the reduction of wages serves in itself to restore equilibrium.
Moreover, even if we were to succeed eventually in re-establishing output at the lower level of money-wages appropriate to (say) the pre-war level of prices, our troubles would not be at an end. For since 1914 an immense burden of bonded debt, both national and international, has been contracted, which is fixed in terms of money. Thus every fall of prices increases the burden of this debt, because it increases the value of the money in which it is fixed.
……
The preference for liquidity/financial assets in a depression/crisis was noted by Bagehot who recognized this as the channel by which business failure propagates, not just for “overlevered” concerns but all industrialists. Thus the importance of the Bank of England to unburden itself of its reserves by lending freely:
If the Bank reserve has once become low, there are, in a panic, no means of
raising it again. Money parted with at such a time is very hard to get back; those who have taken it will not let it
go not, at least, unless they are sure of getting other money in its place. And at such instant the recovery of money
is as hard for the Bank of England as for any one else, probably even harder. The difficulty is this: if the Bank
decline to discount, the holders of the bills previously discounted cannot pay. As has been shown, trade in
England is largely carried on with borrowed money. If you propose greatly to reduce that amount, you will cause
many failures unless you can pour in from elsewhere some equivalent amount of new money. But in a panic there
is no new money to be had; everybody who has it clings to it, and will not part with it. Especially what has been
advanced to merchants cannot easily be recovered; they are under immense liabilities, and they will not give back
a penny which they imagine that even possibly they may need to discharge those liabilities. And bankers are in
even greater terror. In a panic they will not discount a host of new bills; they are engrossed with their own
liabilities and those of their own customers, and do not care for those of others. The notion that the Bank of
England can stop discounting in a panic, and so obtain fresh money, is a delusion. It can stop discounting, of
course, at pleasure. But if it does, it will get in no new money; its bill case will daily be more and more packed
with bills ‘returned unpaid.’
……
Finally again, this modern indebted world is not that modern, there were periods of much higher sovereign debt in the past, England, France (inter-war and post war) are common examples