Why Obamacare can't work

The logical tendency of Obama's insurance reforms, despite his explicit denial, will be an inexorable movement towards a single-payer system as his reforms will not control costs or utilization, and the only alternative left will be to enhance the control of the plan via explicit rationing, by a bureaucrat, of the care delivered. The central authority must then decide which health services are provided and which denied, who should receive them and who should not, when they should be given, all in addition to its current function of attempting to determine prices. Such a centralized system must logically retrograde into chaos because pricing signals to patients, doctors, and hospitals will be so distorted that they cannot guide resource allocation.

Obama concludes his speech by stating,

we're a nation that cares for its citizens. We look out for one another. That's what makes us the United States of America. We need to get this done.

Besides the obvious demagoguery to justify accelerating further control of healthcare by the federal government, we should ask ourselves how we have devolved from a collection of independent states founded by a war of secession from a central government power into one nation with a powerful central state. The justification for independence from the rule of King George III that these states gave was based on the doctrine of natural human rights,

that all men are created equally free & independent, & have certain inherent natural Rights, of which they cannot, by any Compact, deprive or divest their posterity; among which are the Enjoyment of Life & Liberty, with the Means of acquiring & possessing property, & pursuing & obtaining Happiness & Safety.

These words are from the original draft written by George Mason for the Virginia Declaration of Rights. Nowhere in this document or in successive drafts by Mason and Thomas Jefferson do we read words that could lead the reader to conclude that the federal government ought to care for its citizens or that we ought to look out for one another or that a central government ought to violate our individual natural rights to freedom, independence, and property to achieve the absurdity of mandatory equal access, equal price, equal quantity, and equal quality of health care for all.

-- from "Why Obamacare Can't Work: The Calculation Argument" by Gabriel E. Vidal

The wild ride of the Chinese stock market

--from "Chart of the Day "

The scientific consensus on global warming takes a big hit

[A] remarkable drama has been unfolding in Australia, where the new Labor government has belatedly joined the "consensus" bandwagon by introducing a bill for an emissions-curbing "cap and trade" scheme, which would devastate Australia's economy, it being 80 per cent dependent on coal. The bill still has to pass the Senate, which is so precisely divided that the decisive vote next month may be cast by an independent Senator, Stephen Fielding. So crucial is his vote that the climate change minister, Penny Wong, agreed to see him with his four advisers, all leading Australian scientists.

Fielding put to the minister three questions. How, since temperatures have been dropping, can CO2 be blamed for them rising? What, if CO2 was the cause of recent warming, was the cause of temperatures rising higher in the past? Why, since the official computer models have been proved wrong, should we rely on them for future projections?

The written answers produced by the minister's own scientific advisers proved so woolly and full of elementary errors that Fielding's team have now published a 50-page, fully-referenced "Due Diligence'' paper tearing them apart. In light of the inadequacy of the Government's reply, the Senator has announced that he will be voting against the bill.

The wider significance of this episode is that it is the first time a Western government has allowed itself to be drawn into debating the science behind the global warming scare with expert scientists representing the "counter consensus" – and the "consensus" lost hands down.

-- from "Climate change: The sun and the oceans do not lie" by Christopher Booker

Pat Buchanan looks at the decline of America

Taxes drove the American Revolution, for we were a taxaphobic, liberty-loving people. That government is best that governs least is an Americanism. When "Silent Cal" Coolidge went home in 1929, the U.S. government was spending 3 percent of gross domestic product.

And today? Obama's first budget will consume 28 percent of the entire GDP; state and local governments another 15 percent. While there is some overlap, in 2009, government will consume 40 percent of GDP, approaching the peak of World War II.

The deficit for 2009 is $1.8 trillion, 13 percent of the whole economy. Obama is pushing a cap-and-trade bill to cut carbon emissions that will impose huge costs on energy production, spike consumer prices and drive production offshore to China, which is opting out of Kyoto II. The Chinese are not fools.

Obama plans to repeal the Bush tax cuts and take the income tax rate to near 40 percent. Combined state and local income tax rates can run to 10 percent. For the self-employed, payroll taxes add up to 15.2 percent on the first $106,800 for all wages of all workers. Medicare takes 2.9 percent of all wages above that. Then there are the state sales taxes that can run to 8 percent, property taxes, gas taxes, excise taxes, and "sin taxes" on booze, cigarettes and, soon, hot dogs and soft drinks.

Comes now national health insurance from Nancy Pelosi's House. A surtax that runs to 5.4 percent of all earnings of the top 1 percent of Americans, who already pay 40 percent of all federal income taxes, has been sent to the Senate. Included also is an 8 percent tax on the entire payroll of small businesses that fail to provide health insurance for employees. . . .

While the hardest working and most productive are bled, a third of all wage-earners pay no U.S. income tax, and Obama plans to free almost half of all wage-earners of all income taxes. Yet, tens of millions get Medicaid, rent supplements, free education, food stamps, welfare and an annual check from Uncle Sam called an Earned Income Tax Credit, though they never paid a nickel in income taxes.

Oh, yes. Obama also promises everybody a college education. . . .

China saves, invests and grows at 8 percent. America, awash in debt, has a shrinking economy, a huge trade deficit, a gutted industrial base, an unemployment rate surging toward 10 percent and a money supply that's swollen to double its size in a year. The 20th century may have been the American Century. The 21st shows another pattern.

"The United States is declining as a nation and a world power with mostly sighs and shrugs to mark this seismic event," writes Les Gelb, president emeritus of the Council on Foreign Relations, in CFR's Foreign Affairs magazine. "Astonishingly, some people do not appear to realize that the situation is all that serious."

Even the establishment is starting to get the message.

-- from "Socialist America Sinking" by Pat Buchanan

It was stimulus that caused the crisis

So it will be stimulus that will solve the problem?

In the USA, the deadheads are at it. They didn’t see the crisis coming. Then, they didn’t understand it when it hit. But that doesn’t stop them from trying to fix it - by giving the world more of what caused the crisis in the first place: stimulus!

What caused U.S. consumers to go so deeply into debt? Stimulus. What caused the Chinese to build so many factories? Stimulus. How come Americans have so many malls, so many houses, and so many bills they can’t pay? Stimulus! They were stimulated to borrow by low interest rates and rising house prices - both produced in whole or in part by federal policy.

In the old days, a country would have to settle up its trade deficit in gold. As gold was called away by surplus countries, deficit countries would have to raise rates to attract more gold and reduce consumption. They system always rebalanced itself. Then, when the United States went off the quasi-gold standard, the imbalances became huge. Americans were able to go deeper and deeper into debt…while the foreigners built up more and more capacity (and more and more dollars).

But who cut the dollar lose from gold? The feds. Who made it possible for US consumers to spend far more than they earned for far longer than they could afford? The feds. Who held down the prime rate below the inflation rate for nearly four years - long after the supposed “emergency” that called for such drastic action? Oh dear reader, we don’t have to tell you, do we? The feds.

That was how the feds caused the bubble in the property and the financial sector. But after the bubble blew up, they blamed Wall Street, called for more regulation, gave Wall Street trillions that taxpayers hadn’t even earned yet…and provided more stimulus! And now they’re talking about a “son of stimulus,” yet more stimulus to an economy that is already fritzed out on stimulus.

Dead companies are kept alive. Smelly, dead-fish assets are kept on the books. And brain dead economists find employment in the Obama administration… explaining why more stimulus will set everything right again. Has the average taxpayer seen any of that ’stimulus’? Not likely.

-- from "This Too Shall Pop" by Bill Bonner

In 2005 the government knew the housing bust was coming!

[I]n America, the citizens are increasingly turning to their government to fix the mess that the country is in. But the irony here is that the our friends on the Hill knew exactly where this speeding train was heading…and let it just keep right on going, turning a blind eye to wreck that would inevitably occur.

As our own Addison Wiggin recently told an interviewer, “The House of Representatives did an investigation in 2005, following a paper that was published on their own website, showing that the derivatives risk that both Fannie Mae and Freddie Mac had exposed themselves to was potentially a disaster for the mortgage market.

“And they buried that paper, and fired the guy who wrote it. So, they were well aware of what was going on in 2005, but the market for mortgage-backed securities continued for two more years.

“They [the government] could have put the breaks on there.”

-- from "This Too Shall Pop" by Bill Bonner

What we need is the separation of health care and state!

In a previous post, I wrote, "This is from a great article on health care, which I highly recommend. I might be posting additional excerpts from it in the future." Well, the future is here:

There is an alternative called a free-market system or, as some might put it, a separation of health care and the state. Because medical care is a scarce good, and because markets alleviate scarcity better than any other mechanism, it makes sense to trust health care to free markets. Indeed, to restore both freedom and health, there is no other way.

-- from "Socialism and Medicine" by William Anderson.

"Free markets" means free from coercion

There is one thing to remember that is very, very important when speaking of free markets: they are entities that are free of coercion. We often fail to remember that free markets are called such precisely because they involve voluntary and consensual behavior on behalf of the individuals involved in those exchanges. This does not mean that people are acting solely on a whim or without urgency, but is rather a reminder that free-market exchanges exist in an atmosphere of freedom – freedom from coercion.

Much of modern medicine and health care does not operate without coercion, and if the advocates of universal health care have their way, there will be even more coercion.

-- from "Socialism and Medicine" by William Anderson.

This is from a great article on health care, which I highly recommend. I might be posting additional excerpts from it in the future.

I wonder if people would respond differently to the phrase, "coercion-free market" than to the phrase, "free market"? The latter phrase has acquired some unsavory connotations, but who could object to a market that is free from coercion?

Bernie Sanders and government-funded healthcare vs. the unhampered market (II)

"Snoop", a reader of my previous post, "Bernie Sanders and government-funded healthcare vs. the unhampered market", writes,

Could you elaborate on what you call "the unhampered market"? Please explain how that would improve the delivery of medical care while enabling patients to manage the potentially catastrophic expenses.

Unhampered market: no government intervention in the market except to prevent force (or the threat thereof) or fraud.

An example: one of the factors that results in the large number of uninsured in the USA is that in the USA health insurance is tied to employment. Lose your job and you lose your health insurance. But this employment tie is a result of the government imposing wage controls during WWII, which led employers to use employer-provided health insurance as a way of attracting employees. So one government intervention in the market (wage controls during WWII) led employers to offer health insurance in lieu of cash compensation, which led to the tying of health insurance to employment, which led to a higher number of uninsured than would be the case otherwise (an undesirable, unintended consequence). We now have Bernie and others proposing to correct this undesirable, unintended consequence of the earlier government intervention (wage controls during WWII) with additional government interventions (government option, making insurance mandatory, single-payer, etc.). If you haven't already read the article by Gene Callahan to which I linked, I urge you to do so.

Most families would continue to require insurance to cover catastrophic events, but in a market unhampered by government intervention such insurance would be much less expensive than it is under the present "system". (People who expect government-funded healthcare to be "affordable" must have been asleep when government set out to make housing "affordable".) Some families would undoubtedly rely on the voluntary charity of their fellow citizens to help pay for their healthcare and/or their health insurance, but many, many fewer than under the present "system" or under the forced charity (an oxymoron, by the way) that would be the basis of a government-funded system.

Exactly how would an unhampered market in healthcare work? I don't know, but neither does anyone else! How could anyone draw a diagram of 300-plus million Americans continually modifying their behavior as the result of price signals? You can draw a diagram of the government's plan, but that's only because--despite the fact that it's pretty darned complex--it's orders of magnitude simpler than what would happen under the unhampered market. Besides, the government's plan doesn't allow for dynamic adjustments as supply, demand, and prices fluctuate. In fact, adjusting the government's plan would require an Act of Congress! :-) :-) In contrast, adjustments in the unhampered market would take place automatically and continuously, as citizens voluntarily modified their behavior in response to price signals.

It's odd that most people who oppose the unhampered market and who are advocates for government-funded healthcare probably do not believe in Intelligent Design; instead, most likely most of them believe in the evolution of life under natural law, similar to the evolution of the unhampered market under economic law and the price system. If an Intelligent Designer is not needed to explain the variety of life forms, why is government needed to design a healthcare system? (I just could not bring myself to put "government" and "Intelligent Designer" in the same sentence!)

If you think that the unhampered market can't do a better job than either our present "system" or some form of government-funded healthcare, you are saying that 300-plus American brains, coordinated by the laws of economics and the price system, are somehow less capable than the brains of the "geniuses" who have "designed" our present "system" or those of a few politicians and government bureaucrats who would design a government-funded system.

Advocates of government-funded healthcare--be it single-payer or some other variety--have been basing much if not most of their case on the fact that the present "system" is so flawed. I agree that the present "system" is flawed, but that doesn't mean that government-funded healthcare is the only or best alternative. Citizens and voters alike need to educate themselves regarding the unhampered market as an alternative to the present "system" and as an alternative to government-funded healthcare. Go to websites like cafehayek.com, fee.org, fff.org, lewrockwell.com, and mises.org and search for "healthcare". Learn about the unhampered market alternative to both our present "system" and government-funded healthcare. And be sure to look for articles that analyze the many problems with government-funded healthcare systems in other countries (Canada, the UK, etc.).

It's an imperfect world, so the unhampered market will not be perfect, but government-funded healthcare is no panacea, no silver bullet.

"Fool II", another reader, writes,

I assume if we take your proposal( which is probably one of a thousand) and implement it, then we will have to wait some 50 years to see the results. That seems unnecessary to me.
Canada, England, Germany, France, Japan and many more industrialised nations have already a system in place that has worked well. Why don't we build on their experience?

My reply:

You write, "Canada, England, Germany, France, Japan and many more industrialised nations have already a system in place that has worked well."

The correctness of this depends on what you mean by "worked" and "well".

I'd urge you to go to websites like cafehayek.com, fee.org, fff.org, lewrockwell.com, and mises.org and search for, e.g., "problems with Canadian healthcare". A good place to start is "Private Enterprise Grants Us Life" by William Anderson and "Socialism and Medicine" also by William L. Anderson.

"Fool II" replied,

I really do not have to listen to the opinions that I am not sure where they are coming from.
I have talked to many Canadians who are absolutely happy about their health coverage. And more, they will not exchange it with our system for any price. Doesn't that tell us something?
Sure, there is nothing perfect, but compared to our broken system, the majority of us would be more than glad to have the Canadian system with all its problems.

Here's my response:

You write, "I really do not have to listen to the opinions that I am not sure where they are coming from."

OK, so here's where I'm coming from: I'm a small-L libertarian and a student of the Austrian school of economics. If you take a look at websites like cafehayek.com, fee.org, fff.org, lewrockwell.com, and mises.org you'll know where I'm coming from, especially if you take the time to read the articles by Gene Callahan and Bill Anderson (here and here) that I linked to previously.

It's easy to point out the problems with our current "system". It's also easy to point out the problems with Canada's current, single-payer system. It's interesting to me that the American advocates of single payer spend most if not all of their time pointing out the problems with the current American "system" and little if any time considering the problems with Canada's current, single-payer system. And I've never heard any America advocate of single payer discuss how and why single payer would be better than simply undoing all of the numerous government interventions in the healthcare market that have caused most if not all of the problems with the current American "system".

You write, "I have talked to many Canadians who are absolutely happy about their health coverage. And more, they will not exchange it with our system for any price. Doesn't that tell us something?"

Yes, it tells us something, but it doesn't tell us enough. There are many other Canadians who get tired of the long waiting lines in Canada for many procedures and come to the US to get the procedures they need in a more timely (and thus more compassionate) manner.

You seem to be assuming that single payer (a la Canada) and our present broken "system" (which very few Americans want to preserve) are the only two options, but they are not the only two options. You think that moving from our current "system", which is a healthcare market riddled with government interventions and their consequent undesirable side effects, to a system that is even more riddled with government interventions will be an improvement over the current system. Why is that better than moving to a system that has few if any government interventions and few if any of the undesirable side effects of the current "system"?

Meanwhile, I'm still waiting for the advocates of "Medicare for all" to explain their plan for closing Medicare's $86 trillion fiscal gap. That's "trillion" with a "T".

Bernie Sanders and government-funded healthcare vs. the unhampered market

Bernie cites Medicare as shining example of government-funded healthcare, but Medicare suffers from a fiscal gap that Richard Fischer of the Dallas Fed estimates to be $86 trillion. Does Bernie have a plan for closing this gap?

This is not an argument for the healthcare status quo. I believe we can do better than our current "system", but I also wonder, can't we do better than how government-funded healthcare actually works in practice (in Canada, the UK, etc.)?

Our current "system" is a healthcare market that has been highly distorted and hampered by government intervention. The question is, are the problems in our current "system" due to the market elements or are they due to the government interventions? Bernie and other champions of government-funded healthcare never really address this question. They have jumped to the conclusion (or simply assumed the conclusion) that the problems in our current "system" are due to the market elements.

I invite you to read "I Tip My Hat to the New Revolution" by Gene Callahan. It is a little bit dated now (e.g., it was written before the Medicare drug benefit was enacted into law), but it gives a clear exposition of how government intervention in the market leads to undesirable, unintended consequences ("side effects"), which lead government to introduce further interventions, which lead to further undesirable, unintended consequences, ad infinitum. Several cycles of this process have given us our present healthcare "system", with all of its problems--i.e., the undesirable, unintended consequences that are the result of government intervention in the healthcare market.

This is one of the reasons I have been putting the word "system" in quotation marks. What we have is not really a healthcare system, it is, rather, a highly distorted and hampered healthcare market in which many of the problems arise from the fact that much of the money changing hands in the "system" is coming from third parties. Changing the identity of the third parties from insurance companies to governments doesn't solve the problems that are the result of third-party payments.

There is an alternative to both the current "system" and government-funded healthcare. This alternative involves the undoing of all of government's interventions in healthcare until we return to an undistorted, unhampered healthcare market. Neither Bernie nor any of the other advocates for government-funded healthcare compare government-funded healthcare with the unhampered market. Instead, they continue to tear apart the straw man of our present "system", a system that almost no one advocates.

Prognosis: more Great Recession ahead!

And get ready for the coming flood of option ARM resets!

Beginning on March 9th, we also got a big bounce in the world’s stock markets – just as we should. US stocks are up about 40% since then. Some foreign markets are up even more. Russian stocks, for example, have more than doubled. Chinese stocks are up more than 60%.

As the bounce continued, people began to get the wrong idea. They thought they saw ‘green shoots’ and the ‘light at the end of the tunnel.’ But if the economy is really improving, we haven’t seen much evidence of it here at The Daily Reckoning headquarters. As near as we can tell, housing prices are still going down and unemployment is still going up…and most important…people are still acting as though we were on the downward slope of the credit cycle. The latest numbers we’ve seen show that they saved more money in the first half of the year than the total in extra ‘stimulus’ that they received. Savings – last reported at 5% in this space – are now close to 7%. This is a just what you’d expect. But it is a huge turnaround, too.

As to housing prices, there are a million option ARMs still to be reset over the next four years. They won’t peak out until 2011…with average increases of about 80%. That will cause hundreds of thousands more houses to be dumped onto the market…and probably push the bottom of the housing decline to 2012.

As long as housing prices are falling, jobs are declining, and consumers are inclined to save rather than spend, there will be no real recovery.

-- from "An Economy on Life Support" by Bill Bonner

Is inflation back?

Two charts tell the story:




-- from "Inflation’s Back Already, Sell This Sector, The Next Bubble, A Worthy “Green Shoot” and More!" by Addison Wiggin and Ian Mathias

“The market clearly is not worried about inflation right now,” says Chris Mayer. “That is the only way to explain 10-year Treasury yields of 3.5%. The deflationist view is the one that prevails. This view, which makes some compelling and elegant arguments, maintains that the credit losses far surpass the monetary and fiscal stimulus. All those trillions in destroyed debt, plus the yanking of credit from consumers and businesses, overwhelm new money creation.

“So, this reasoning goes, the greater risk is that asset prices continue to fall. This is the classic debt-deflation point of view. The theory seems to fit the facts of what we are seeing in the marketplace right now.

“I don’t dismiss these arguments easily -- and there is more to it than what I’ve given you here. I’ve spent some time going over the arguments of some of deflation’s most persuasive and sophisticated advocates: money manager Van Hoisington, economist David Rosenberg and others.

“Still, I think the endgame is for inflation -- which is when paper currencies buy less. Given the choice of holding U.S. dollars or real assets (such as gold or iron ore or land), I’ll take real assets.”

-- from "Inflation’s Back Already, Sell This Sector, The Next Bubble, A Worthy “Green Shoot” and More!" by Addison Wiggin and Ian Mathias

Bill Bonner loses his faith in government?

Is he losing his faith in government's ability to inflate?

We figured the economy would continue to worsen (after all, you can’t correct a half-century credit expansion in a few months)…and that the feds would continue to fight it. As more and more people lose their jobs, the feds would become more and more desperate. Gradually, they’d come to see that they needed to use stronger, more experimental techniques. This would lead them to be a bit bolder with their ‘quantitative easing,’ otherwise known as “a little technology called the printing press,” to quote Ben Bernanke.

We figured that sooner or later, the feds would get the hang of causing inflation. So, we could just buy gold and wait.

But now we see; we are trapped…just like the feds themselves. Do we hedge against further economic deterioration…deflation…and falling asset prices? Or do we hedge against inflation…a falling dollar…and a collapsing bond market? What if we hold our big position in gold…and feds NEVER are able to cause inflation? What if the pain of the depression is never severe enough to make them go whole hog on quantitative easing? What if the Chinese put it to them straight: if M2 goes up more than 10% a year…we stop financing your deficits? Gold could sink…or go nowhere…for the next 10 years.

-- from "An Economy on Life Support" by Bill Bonner

The effect of a healthcare mandate is to increase the price of labor

And employers will employ fewer workers at a higher price than at a lower price.

requiring employers to provide health benefits to employees and potential employees will make the job situation today worse not better. It will intensify the current problem that people want to work more but are having a hard time getting employers to hire them.

The answer is the same in every recessionary environment. The price of labor must fall in order for the surplus of workers to be absorbed into the market. Raising the cost of hiring only further entrenches the problem and creates new forms of unemployment.

There is no real reason to prove these assertions empirically since they flow from the logic of economics. Nonetheless, Richard Vedder and Lowell Gallaway spent years accumulating evidence of the link between full employment and lower labor costs, on the one hand, and higher labor costs and unemployment on the other. What they found in their book Out of Work was that the entire problem (or nearly the entire problem) of unemployment can be explained through the issue of the costs of hiring and employing. In other words, there is no mystery here. Unemployment can be created or solved by the application of policies and laws.

In a free market, however, there is no unemployment that persists that isn't chosen by the workers themselves. That's because the price of labor is continually fluctuating based on supply and demand. Everyone who wants to work can work, simply because we live in a world in which there is always work to do. Only artificial interventions can generate the unemployment problem we have today.

Even so, and for reasons that are unknown and can only mystify the learned person, the Congress and the Obama administration keep trying to pretend as if reality doesn't exist. Here they are imagining that they can just order businesses to give everyone health care and then suddenly health care for all comes into being.

As with all programs, we have to ask: what is the cost? I don't mean what the cost adds up to in terms of government spending. I mean: what is the social cost of overpricing labor relative to what the market would bear? In this case, there is no way to know in advance, but we can know that fewer people will be hired than otherwise.

And then what happens? Business goes to government hoping for a subsidy or for fully socialized medicine as a way of sloughing off the costs on the whole of society instead of bearing them directly.

Sadly, there is no way that free health care can be granted to all living things with the stroke of a pen. Broadening availability will require that the entire sector be turned over to the private sector, so that it can be controlled through the price system like everything else.

As it is, the imposition of new penalties on business will make them less, not more, likely to hire people, which will thereby intensify the labor problem. It is like trying to cure a drug overdose with the injection of poison. New mandates on business are exactly what we do not need.

In other words, the whole idea is just plain dumb, not to mention incredibly ill-timed. The worst possible time to be imposing new mandates on business of any sort is during a downturn. Make the mandates labor specific and you have a recipe for causing the unemployment rate to land in the double digits and go up from there, higher and higher until the entire economy shuts down.

Presumably, not even Congress and the President would benefit from this result.

--from "Government Creates Human Suffering" by Llewellyn H. Rockwell, Jr.

William Anderson criticizes Krugman

Austrian economists do not respond negatively to what Krugman says because we “hate” government for “ideological” reasons (even though most of us look askance at government and its coercive ways), but rather because we understand the differences between private and government spending. They are not mirror images of each other, no matter what Krugman says.

In the Keynesian viewpoint, all assets and all capital are homogeneous. It does not matter if one spends money on a “bridge to nowhere” or invests in a new line of production; what is important is that money is spent.

Furthermore, in Keynesian thinking, as long as there are “idle resources,” then government spending — if it is enough and enough money is printed — ultimately can result in “full employment” of those resources. Why those resources might be idle in the first place is not up for discussion; the important thing is that government “stimulates” enough spending to put those resources back to work.

This is short-sighted and crude analysis. In the real world, capital matters, for it is in the development of capital that we make workers more productive, thus increasing individual wealth and the overall standard of living in a society. Capital spending is not just money dropped from a helicopter; it is undertaken for a specific productive purpose.

Austrians hold that typical Fed-created credit booms are not sustainable and that when once-productive assets become idle in the downturn, it is because the capital was malinvested. Granted, to understand the entire concept of malinvestment, one must be able to differentiate between the kinds of capital investment that can be sustained and what will have to be abandoned. Keynesians, unfortunately, have decided to ignore that kind of thinking or unilaterally to declare it “discredited.”

--from "The Lowdown on Crude Keynesianism / Keynesian "economists" push a second stimulus" by William Anderson

Worse than Madoff!

Madoff caused people to lose billions of dollars. The U.S. government has caused people to lose trillions of dollars, and it’s not finished yet. The public’s losses mount during every minute of every day. By its effects in discouraging work, saving, and investment, and thereby reducing capital accumulation, the U.S. Social Security system has caused the nation’s gross domestic product to fall significantly below the levels it would otherwise have reached. According to Professor Edgar K. Browning, a leading researcher in this field, “the available evidence suggests that Social Security has reduced [current] GDP by 5 to 10 percent.” Ten percent of GDP is now approximately $1.4 trillion – or about 28 times the maximum amount Madoff is believed to have cost his clients. Moreover, Madoff’s harm is a one-shot loss, whereas the U.S. government’s Social Security harm is an ongoing loss that grows annually. In the future, the annual loss will be even greater than the currently estimated $1.4 trillion or so. . . .

Madoff, in contrast to the government, carried out his fraud in a civilized way: he merely misrepresented what he was doing, purporting to invest his clients’ money and to obtain a high rate of return on these investments. People dealt with him voluntarily. Those who suspected something was fishy did not do business with him, and some people went so far as to give substantial information to the SEC to show that Madoff’s business had to be fraudulent (which information the SEC ignored for years on end, of course).

The U.S. government, however, does not bother to claim any prowess in investing the money it forces people to surrender to its scheme. It admits that the “client’s” return is now close to zero (varying a bit according to the client’s age and other factors). Nor does it carry out its admitted Ponzi scheme in a civilized way. Not only is participation in the scheme involuntary, but the government threatens violence against anyone who fails to participate as it commands him. Thus, the government operates its Ponzi scheme in a markedly more thuggish manner than Bernie would ever have dreamed of. He might have been a crook, but he was not a thug.

Everyone (including Bernie himself) agrees that Bernie Madoff was a crook. What is the correct term for the U.S. government, or does the word government tell us everything we need to know about the honesty, humanity, and justice of its actions?

--from "Bernie Madoff Was Only a Petty Crook Compared with Uncle Sam" by Robert Higgs

Inflation is on its way!

I think the FED can and will inflate. It can and will force commercial banks to lend, if only to the U.S. Treasury. Anyone who says there are no solvent borrowers for banks to lend to is out of touch with reality: a $11.5 trillion Federal debt, which is growing by a trillion dollars a year. The Treasury must roll over $250 billion each month. No borrower?

-- from "Why Gold's Price Rose in the Great Depression" by Gary North

Andy Mukherjee (ET Now) interviews Jim Rogers

The commodities rally seems to have paused. The Rogers International Commodity Index has come off 13% since June 12. This pullback, essentially as I can see, is because of tin, energy and silver even as some of those agri commodities like orange juice, sugar and cotton have done well. What are your expectations going forward for commodities?

That's the way I know you know about commodities. You read The Economic Times and your ET TV. So, you know that the markets always have corrections whether they are going up or down. Nothing goes straight up or down forever. So, it's having a normal correction. In my view, the best place to be is in real assets commodities, because if the world is going to recover, they (commodities) will recover first because of the shortages and if the world economy is not going to recover, they are still the best place to be, because governments around the world are printing huge amounts of money. So, if you got to own something, I don't much to own besides commodities. . . .

The last time we met here in Mumbai you had a sachet of sugar in your pocket and you pulled it out to underscore your point of impending shortage about agri commodities. You have been right about sugar as far as we can see from the price charts. What are you hiding today in your pockets? A silver coin, a hip flask full of crude oil, may be?

I do actually have a silver coin in my pocket. I don't know how you knew. I also have a gold coin, but the silver one is probably my better play. If I were a bright young man, I would be buying sugar now and silver, given the state of the world. That's not a recommendation, but I am just saying I do own some silver. Silver is cheaper than many things on a historic basis and I do own some silver. The dollar has fallen almost 10% since the beginning of the stocks rally in March. Commodities have risen 94% of the time that the dollar has fallen. A very strong correlation. Do we expect the dollar decline and the commodity run-up, therefore, to continue? It's not always a strong correlation. You are right; there has been (a correlation) in recent months, recent years even. But no, there are many times when the dollar and commodities go entirely separate ways. So, don't get it into your head, and I know many times that the press do have it in their head that commodities and dollars go opposite ways. I am not terribly bullish on the dollar in long term. US dollars are a terribly flawed currency and down the road I hope I don't own any US dollars. I still own some of them at the moment, but it's not getting better for the US. The dollar any way is getting worse. The fundamental for commodities continue to improve. The fundamentals for the US dollar do not continue to improve. They are deteriorating. . . .

I have not bought any stocks anywhere in the world in the last couple of years except China. I did buy some Chinese shares back in October-November. I have not been buying anything other than that for some time. I have been worried about the world economy, about the world stock markets. If you got to be somewhere and if there is going to be a recovery, it will show up in commodities best of all, and if there is not going to be any recovery, commodities are still a better place to be. . . .

If you want to put in your money somewhere, put it in commodities. That's the only thing I bought recently. I have bought some yen and swiss francs. If you know enough about currencies to figure out who is going to benefit, if I am right about the currency turmoil coming, then you can buy some of the currencies
and if you think that the rupee is the place to be, then you can buy some rupees. . . .

I cannot conceive of lending money to the US government for 30 years in US dollars for 3, 4, 5 or 6% interest. It's just inconceivable to me that I would let them have my money for 30 years and they would pay me back someday in US dollars at such a low rate of interest. I expect problems in the bond market. I don't know when. I am not sure about the bond market. I was short in the bond market, but I got out. I expect to see serious problems in the bond market down the road.

-- from "Commodities are sizzling, says Jim Rogers" by Andy Mukherjee

Is it "eat the rich" or is it TANSTAAFL?

TANSTAAFL = There ain't no such thing as a free lunch!

Back in the U.S., another slimy bill is slithering its way through the halls of Congress. The latest proposed health care legislation would both eat the rich and introduce another mandatory government program. Oy…

Under the proposed bill, a 1% tax hike on couples earning over $350,000 would raise an estimated $500 billion over the next decade -- barely half the total cost of the program. Those taxes would help finance subsidized health care for the lower class, for which enrollment would be mandatory (or risk being fined).

“If you earn less than $350,000,” writes Bill Bonner, “you feel that you are getting something for nothing. But that money -- had it not been confiscated -- wouldn't have disappeared. It would have been put to work in one way or another -- added to the nation's capital formation, lent to the government, used to buy a new car or take a vacation. Instead, it is to be sucked out of the benefits of the willing economy and used to give people something they couldn't afford or didn't want to pay for themselves.”

“Don't bet against us,” the president assured us. “We are going to make this thing happen.”

-- from "$1.1 Trillion Deficit, Why the Euro is Still Down, Eating the Rich, Tech Convergence and More!" by Addison Wiggin and Ian Mathias

As P. J. O'Rourke (author of the great book, "Eat The Rich") has said, "If you think health care is expensive now, wait until you see what it costs when it's free."

The dollar, down 95% since 1913, is doomed!

[I]nflation is no sure thing, at least not in the short-run. But Chris Mayer believes that “the problem with the deflation arguments long term, it seems to me, is that you are betting against a government’s ability to destroy its own currency. Governments are seldom good at anything, but one thing they are undeniably good at is destroying their own currencies. The dollar has lost 95% or so of its value since 1913. That’s a pretty darn good job. Other countries have been even more thorough.”

It takes a determined and suicidal central bank to pull off hyperinflation. Like the Central Bank of Zimbabwe, for example.

--from "Preparing for the New Economy" by Bill Bonner

Naomi Wolf: Obama No Better. “Has the right to lock any US citizen up forever without trial”

Chilling interview with Naomi Wolf on "Russia Today".

Also see We Are All Fascists Now (Live Free Or Move!)

Who could be worse than Madoff?

I wonder, "Why would this guy Madoff, who jilted people via a voluntary choice, be more worthy of condemnation than American Presidents, who routinely kill, enslave, and steal from people using coercion and the threat of violence?" Seriously, if Madoff deserves to be imprisoned and tortured, certainly someone who kills a family he’s never met soon after his first day in office deserves similar punishment, no? Interestingly, I’m not the only person who wonders about this aloud . . . .

-- from "What Presidential Legacy? / Pulling Back the Curtain on the Existence of a 'Good' President" by Wilton D. Alston

Kazakhstan's oil

“Kazakhstan is one of the biggest prizes in the great game of natural resource control,” reports Chris Mayer.

“Many of the world's largest oil companies are now active in Kazakhstan. Today, Kazakhstan has about 3% of the world's oil reserves. Vast areas remain unexplored. And more than $130 billion in spending is on tap for the region.

“China would love to expand its oil supply from Kazakhstan. It helps diversify away the risks China takes by relying heavily on oil from the Straits of Hormuz (out of the Persian Gulf) and the Straits of Malacca (from across the Indian Ocean; the U.S. Seventh Fleet controls these Straits, only adding to China's oil security concerns). By getting its oil from an overland source, China is less susceptible to oil blockades. That must make Chinese defense ministers smile.

“But Russia has ambitions here as well, in spite of a cruel history toward Kazaks. That makes things much more complex. Kazakhstan's closest ally is Russia, historically speaking. About a third of the population is of Russian descent. And the two countries maintain a tight dialogue. The president of Kazakhstan meets with Putin once a month.

“Even the U.S. has tried to make nice with Kazakhstan, but it runs a distant third. Kazakhstan is like the girl everyone wants to date in high school.

“Meanwhile, billions of dollars from oil sales flows to Kazakhstan's coffers. Oil and gas now make up nearly 60% of the country's exports. Economic growth tops 8%.

“To invest in the boom directly, you can own a Kazakh oil producer. The one that stands out is JSC KazMunaiGas. JSC is the second largest producer of oil in Kazakhstan. Even if you have no intention of buying a Kazakh oil producer, this is a fascinating story on the face of it.”

-- from "Canada’s Coming Crisis, Goldman’s Profits, Russia’s Dollar Replacement and More!" by Addison Wiggin and Ian Mathias

The dollar is doomed!

Russian President Dmitry Medvedev is so serious about a new global reserve currency, he brought a demo to the G-8 meeting.

Would have been cooler if he pulled it
from behind Barack Obama's ear...

“This is a symbol of our unity and our desire to settle such issues jointly,” Medvedev said as he called for a “united future world currency.” The Russian didn’t really go into detail about how the money would be balanced or what nations would contribute, but we take note of two items:

Medvedev is the first to suggest that a new world reserve currency would actually be used by everyday people. The previously proposed Special Drawing Rights currency was supposed to be one of those shadow monies that doesn’t really exist… just this invisible running tab swapped back and forth between nations. Yet Medvedev suggested on Friday that his money be used by people around the world.

Second, we haven’t heard if there is physical gold in that coin… but we doubt the Russians picked that color just by chance.

--from "Canada’s Coming Crisis, Goldman’s Profits, Russia’s Dollar Replacement and More!" by Addison Wiggin and Ian Mathias

We Are All Fascists Now

The real original fascism of Benito Mussolini and his followers combined militarism and collectivist economics with the leadership principle. . . . No Hitler is rising in the American firmament, nor can we imagine genocide within our shores. But we have come dangerously close to the thuggery of original Italian fascism.

Let’s start with militarism. Thankfully, the current administration has taken a less bellicose posture than its predecessor. But we still have troops stationed in distant lands even though the Cold War ended twenty years ago, and they won’t be coming home soon.

The federal government still spends vast sums on “defense,” and those sums are not likely fall far or fast in the foreseeable future. Finally, we are still fighting a war of choice in Iraq, a nation that was no threat to our safety at the time of our attack. . . . Obama may be less foolish than Bush, but we have seen no clear signs that he will tear down the “military-industrial complex” that President Eisenhower warned us of.

Economic historians tell us that there was no “fascist model” of economics. Fascist economic writers mostly prattled on incoherently without proposing any clear plans for how the economic system would really work. Nevertheless, there is a kind of essence of fascist economics that distinguishes it from capitalism, communism, and traditional socialism. Fascist economist retains the form of private ownership while imposing state control on all aspects of economic life. The captains of industry are allowed to keep their lavish offices, but they take their orders from government officials.

In a fascist economy, private property and the right of contract are not attacked head on. They are covered over in a bramble of rules and regulations that render the distinction between “private sector” and “public sector” meaningless.

Long before George W. Bush or Barak Obama, the American economy had been covered over in a bramble of rules and regulations. Bush acted on the economic downturn of the end of his administration by bailing out Big Finance and forcing the nine largest banks to sell ownership shares to the federal government. The Obama administration has followed Bush’s example in the industrial sector by grabbing a majority share in GM stock. The combined efforts Bush and Obama to end the economic downturn have wiped out any meaningful distinction between the private and public sectors.

As our militarism has grown more entrenched, as our economic system has fallen more fully under state control, our personal lives have grown more dependent on the personal judgment of one named person, the President of the United States of America. Instead of pulling back from militarism and collective economics, however, we have chosen to place more and hope and more confidence in the specific individual who happens to be President or whom we would like to see become the President.

We worship the President or contender that we prefer and we vilify the Presidents and contenders we do not prefer. No one is neutral toward George W. Bush or Sarah Palin. Barak Obama is either a god or the End of America. We have grown increasingly convinced that our affairs will go well if – and only if – the right leader sits in the Oval Office. The President is no longer the servant of the people, but their holy savior. In other words, we have completed the move to fascism by adopting the leadership principle.

We have forgotten the foundations of liberty and we may not have long to save them from oblivion. The search to recover our lost heritage of liberty will begin when we question the leadership principle, when we begin to wonder what might keep our “leaders” from oppressing us. The search to recover our lost liberty will begin, in other words, when we remember to ask the question the ancient Roman satirical poet Juvenal asked: Sed quis custodiet ipsos custodes? “And who will guard the guardians themselves?” . . .

It is time to turn away from state power and the leadership principle. We are all fascists now. Let us remember, however, that we were once Americans and can be so again if we so choose.

--from "We Are All Fascists Now" by Roger Koppl

Also see "Naomi Wolf: Obama No Better. 'Has the right to lock any US citizen up forever without trial'" (Live Free Or Move!)

A Ponzi scheme worse than Madoff's

Just how unusually evil were Madoff's actions? Not that unusual. In fact, the whole notion of paying off past investors with the funds of present investors is at the very core of the Social Security system. At least Madoff sought the consent of his investors who let him care for their money based on their own volition. And at least he didn't attempt to defend himself with the claim that he was conducting wise public policy.

-- from "Free Bernie Madoff" by Jeffrey A. Tucker

Has global warming vanished?

‘I’m a natural scientist. I’m out there every day, buried up to my neck in sh**, collecting raw data. And that’s why I’m so sceptical of these models, which have nothing to do with science or empiricism but are about torturing the data till it finally confesses. None of them predicted this current period we’re in of global cooling. There is no problem with global warming. It stopped in 1998. The last two years of global cooling have erased nearly 30 years of temperature increase’. . . .

One of the things that so irks him about modern environmentalism is that it is driven by people who are ‘too wealthy’. ‘When I try explaining “global warming” to people in Iran or Turkey they have no idea what I’m talking about. Their life is about getting through to the next day, finding their next meal. Eco-guilt is a first-world luxury. It’s the new religion for urban populations which have lost their faith in Christianity. The IPCC report is their Bible. Al Gore and Lord Stern are their prophets’. . . .

In the days when most people felt rich enough to absorb these extra costs and guilty enough to think they probably deserved them, the politicians could get away with it. But the global economic meltdown has changed all that. As countless opinion surveys have shown, the poorer people feel, the lower down their list of priorities ecological righteousness sinks. ‘It’s one of the few good things to come out of this recession,’ says Plimer. ‘People are starting to ask themselves: “Can we really afford this green legislation?”’ . . .

Reading Plimer’s Heaven And Earth is at once an enlightening and terrifying experience. Enlightening because, after 500 pages of heavily annotated prose (the fruit of five years’ research), you are left in no doubt that man’s contribution to the thing they now call ‘climate change’ was, is and probably always will be negligible. Terrifying, because you cannot but be appalled by how much money has been wasted, how much unnecessary regulation drafted because of a ‘problem’ that doesn’t actually exist. . . .

Has it come in time to save the day, though? If there’s any justice, Heaven And Earth will do for the cause of climate change realism what Al Gore’s An Inconvenient Truth did for climate change alarmism. But as Plimer well knows, there is now a powerful and very extensive body of vested interests up against him: governments like President Obama’s, which intend to use ‘global warming’ as an excuse for greater taxation, regulation and protectionism; energy companies and investors who stand to make a fortune from scams like carbon trading; charitable bodies like Greenpeace which depend for their funding on public anxiety; environmental correspondents who need constantly to talk up the threat to justify their jobs.

Does he really believe his message will ever get through? Plimer smiles. ‘If you’d asked any scientist or doctor 30 years ago where stomach ulcers come from, they would all have given the same answer: obviously it comes from the acid brought on by too much stress. All of them apart from two scientists who were pilloried for their crazy, whacko theory that it was caused by a bacteria. In 2005 they won the Nobel prize. The “consensus” was wrong.’

--Australian geologist Ian Plimer in "Meet the man who has exposed the great climate change con trick" by James Delingpole

So what if the health care market isn't a perfect free market?

Incentives still matter!

Even in the weird real world of health care, far, far away from the textbook model of perfect competition, incentives and supply and demand still influence behavior.

If we put price controls on pharmaceuticals and lower the return to discovering new drugs, then pharmaceutical companies will spend less money on research and they will discover fewer new drugs.

If we mandate insurance coverage of new eyeglasses, people will buy more eyeglasses. The price of health insurance will be higher.

If the government pays for old people or poor people’s health care, the demand for health care will increase, and prices will rise.

If we restrict the number of people who can go to medical school, prices will rise.

If we pass tax laws that encourage employers to offer health insurance, more health care will be used and prices will rise.

And so on and so on. The fact that the health-care market isn’t a perfect match with the textbook case of supply and demand does not repeal the laws of human nature. Incentives matter.

-- from "Medical Care and Market Forces" by Russell Roberts.

China's Dai Bingguo: ditch the dollar!

“We should have a better system for reserve currency issuance and regulation,” said Dai, a Chinese state counselor, “so that we can maintain relative stability of major reserve currencies exchange rates and promote a diversified and rational international reserve currency system.”

-- from "The Power Shift of 2009, Sell This Sector, Buffett’s Housing Cure and More!" by Addison Wiggin and Ian Mathias

Warren Buffett's prescription for ending the recession

Let the market work things out--without "help" from government!

“If you want to end the recession as soon as possible,” Warren Buffett told CNBC yesterday, “do nothing to encourage new home builders. That’s tough on the home builders, but that’s the prescription for getting supply and demand back in balance… The best thing we can do is not to be building a lot of new houses.”

-- from "The Power Shift of 2009, Sell This Sector, Buffett’s Housing Cure and More!" by Addison Wiggin and Ian Mathias

The trend reverses! (II)

-- from "The Great Deleveraging, China’s Bubbly Data, The U.S. Bread Line, A Breakthrough Development and More!" by Addison Wiggin & Ian Mathias

You have to look closely at the right-hand side of the chart, but sure enough, the curve has hit a maximum and has headed back down. But, as Addison Wiggin and Ian Mathias say, it has a long way to go!

Why do smart people do stupid things? (II)

An economist, of the modern variety, is a statistician…an extrapolator…and a mountebank. If numbers go up two months in a row, he predicts they will go up another one. He rarely stops to ask whether his numbers really make any sense. Instead, he merely adds them up and rolls them out. Thus - at the bubbly top in 2006 - he was he able to describe the likelihood of default on a certain derivative instrument as a “Six Sigma event” without laughing. A Six Sigma event happens once every 2,500,000 days. Then again, when the Bubble of 2002-2007 popped, they happened once a week.

The blogs are full of chatter on the subject. What good is the economics profession, asks Paul Samuelson, if it cannot foresee the biggest single economic event in at least a quarter-century?

Yet, those same economists - who had failed so miserably at diagnosis and prevention - they barely hesitated. Rather than spend months in drunken shame, contemplating their own incompetence, and wondering what a bubble really is, they denied the wild bubble side of life altogether…and tried their hands at prescription. President Obama’s economics advisors went to Congress last autumn to predict that without the stimulus measure joblessness in the United States could rise to 8%! Bernanke made it seem that if the bill wasn’t passed that day, the economy may cease to exist all together. How he could know the future, when he demonstrably knew so little about the recent past, was a mystery. Still, the politicians responded by enacting the biggest bank bailout boondoggle in history.

What would have happened had the legislators failed to jump when economists threw them a bone? We don’t know. But we know what happened after the stimulus measures were passed - they failed to stimulate. The employment numbers for June showed that economists had misjudged both the direction and the speed of the oncoming bus. Instead of shifting down, the rate of job losses increased to 9.5% in the United States. Instead of going forward, the economy was backing up!

Do these setbacks cause economists to stop and wonder if their theories are bogus and their numbers are nonsense? Nope, they do what McNamara did. They turn up the heat. They propose to spend more money they don’t have on more programs that don’t work. Predictably, Obama advisor Laura Tyson now suggests that the stimulus thus far is “too small.” Other economists too are talking about a “son of stimulus,” that will offer even more credit to the debt-saturated consumer. Only trouble is, neither consumers, businesses nor banks cooperate. Despite trillions in cash and credit to the financial system, lending is still going down.

-- from Bubble Deniers by Bill Bonner

Why do smart people do stupid things?

07/10/09 London, England “War Criminal says Sorry, Sobs,” was the headline in the Nation on February 9th, 2004. Robert McNamara had just done something extraordinary for Secretaries of War: with tear in his eyes, he apologized for his role in the Vietnam War. The war made ghosts out of 58,000 American soldiers. On the Vietnamese side, the total was over a million. This week, McNamara went to meet them.

Why do smart people do such stupid things? The French had already shown what Western powers were up against in Indochina. De Gaulle had warned Kennedy that it was a “rotten” country. Still, the United States sent in troops…and McNamara, to his credit, spent the last 40 years of his life regretting it.

We do not disrespect the shades here on the back page. But once they are down, we can hardly wait for the autopsy report. We want to know what was wrong with them. McNamara had a brain “like a computer,” say the morticians. Too bad. He needed more than that.

Robert McNamara was described in the obituaries as the “architect” of the Vietnam War. This is libelous to real architects; as near as we could tell, the war went on without plans or blueprints. Instead, Robert McNamara took an economist’s approach to war. His formula had only three numbers: how much damage he could inflict on the enemy; at what price; and how much pain the Vietcong/North Vietnamese could stand. Later, he discovered that the enemy wasn’t even counting. . . .

Robert McNamara was as smart as any of today’s number crunchers. A Harvard “whiz kid’ with a ‘can do’ attitude, he was one of the ‘brightest and the best,’ the kind of American that makes you proud to be one. He was an efficiency expert. But everything has its place. Poetry is not much in demand from bridge builders. In love, war and bubbles, on the other hand, rational efficiency is at best a second tier concern.

When asked to take the job at the Defense Department, McNamara replied to John Kennedy that he was “not qualified.” That was the last thing he was right about. As to everything else, he missed the point completely.

Sometimes it is the brain that fails. Sometimes, it is something else.

-- from Bubble Deniers by Bill Bonner

Barack Obama is a smart guy. Why is he doubling down on Bush's bad bet in Afghanistan, the graveyard of empires? Does he think that the cause in Afghanistan (whatever that may be)--like the economy at home--just needs a bigger stimulus?

China's worried about the future of the dollar

And you should be, too!

The reason for the dollar’s decline and gold’s rise was given in the front-page headline of today’s Financial Times. China launched a “new dig” at the dollar, it says. As near as we could tell, China merely stated the obvious - that the world is going to have to find a better monetary system. The US dollar won’t be king of the hill forever. And China, which is up to its neck in dollars, would like to find a solution sooner rather than later - that is, before the dollar goes the way of all paper.

The dollar will eventually give way to inflation and devaluation, but probably not soon.

“I’m absolutely worried about inflation,” says John B. Taylor.

But here at The Daily Reckoning, it is not inflation that worries us…it’s the lack of it. Making a long story short, as long as the feds see no inflation they will continue trying to create it. In the end, they will get more than they wanted.

Though, right now, instead of inflation, we have deflation. Today’s New York Times tells us that deflation in Ireland has reached 5.4% — the highest since the Great Depression of the ’30s.

You know the reasons for deflation as well as we do. The world suddenly has too many people who borrowed too much money buy too many things they really didn’t need and really couldn’t afford. This caused the world’s producers to greatly over-estimate the ‘real’ demand. Their customers began to disappear in 2007. Their factories are still standing.

-- from "The Great Credit Contraction Cometh" by Bill Bonner

The trend reverses!

Americans have stopped borrowing and have started saving!

In 2005, Americans saved nothing. Not even aluminum foil or string. Now, the savings rate is approaching 5% of disposable income - a big turnaround.

We know from logic and experience that saving money - not spending it - is the key to getting wealthier. Saving money gives you capital. And it’s capital accumulation - in the form of factories, roads, ships, buildings, machines…and raw savings - that gives people the ability to produce more. It may take a man with a shovel a whole day to dig a decent grave. Give him capital - in the form of a backhoe - and he can bury everyone in town. That’s why capitalism works. It rewards the fellow who saves his money.

Yet every yahoo economist in the year of our Lord 2009 takes news of rising savings rates like the death of Michael Jackson. If households don’t consume, they reason, how can a consumer economy grow?

The problem is that you can’t really grow an economy by borrowing and spending.

Recent history proves it. Despite the biggest splurge of borrowing and spending in history, the US consumer economy barely grew at all.

“In the five years to December 2007,” reports Grant’s Interest Rate Observer, “America’s credit market debt climbed by nearly 57%, to $18 trillion. However, in the same half-decade, nominal GDP was up by only $3.3 trillion.”

For every five dollars people borrowed, they only increased their incomes by $1. . . .

And now this from David Rosenberg:

“The ultimate question is where all this cash is going to be deployed, and we believe it will ultimately be diverted toward debt repayment.”

Let’s see. We can figure this out from the numbers above. American consumers must have added about $7 trillion in extra debt during the Bubble Epoque, 2002-2007. Now, instead of buying things, they use their money to pay it down. The average household has about $43,000 worth of income. Let’s keep the math simple by saying there are 100 million households in the United States…and that they save 5% of their income. And let’s say they use every penny of savings to pay down debt. Hey…it will only take about 30 years to pay it off! Get ready for a long, long slump.

-- from "The Great Credit Contraction Cometh" by Bill Bonner

Peter Schiff interviews Marc Faber

The interview was held in late February 2009.

Faber recommended shares in emerging economies, physical gold (not stocks of gold-producing companies), real estate in the countryside (not in the city), REITs in Singapore (what Faber calls the richest country in the world), and cash.

With respect to cash: in February, Faber thought the U. S. dollar would be OK in the short term. However, by April he was much less sanguine about the U. S. dollar:

With all the money printing, I begin to have doubts about the US$. I am aware that there is nothing particularly favorable about any currency in the world (sadly indeed) but if I were a US based investor and if I had all my assets tied to the US dollar, I would certainly use the US dollar rally over the last 12 months as an opportunity to diversify my assets into non-US dollar assets. When I look at Mr. Obama, Mr. Geithner, and Mr. Bernanke it is difficult to envision a scenario under which the US dollar would be in the long term the world's strongest currency!

On commodities:

The problem is for the individual to play the commodity markets if he doesn't have a commodity-trading account and he can't buy and sell; he gets stuck because he has to stay the course. And so for individuals the best way to play commodities is to buy a good mining company, a good oil company, or a good exploration company, or just physical gold. I don't believe that individuals are very successful at investing in commodities and commodity-related structure products.

On government:

[Y]ou have these clowns in government that think that they can solve any problem. As Mr. Geithner said recently, "we know how to fix the problems." Well, if he knew so well how to fix the problems, why did he let the problems happen in the first place? He was the New York Fed Chairman when the conditions were created! And Mr. Bernanke was the Fed Chairman since, I think, 2005, and he was the architect of this ultra-expansionary monetary policy. They have no credibility at all, and in my opinion they're going to make matters worse. . . .

When you have a perfect free-market, it's difficult to predict the future. But when you have a market that's disturbed by government manipulation and money-printing, it's impossible to make any predictions.

If Barack Obama is the new Lyndon Johnson, who's the new Paul Volker?

“The Obama team doesn’t seem to know what it is doing on economic matters, does it? They had a good man on the team – Paul Volker. He was the only one who really knew what he was doing. And they seem to have edged him out.

“This is a very bad sign. It was Volker who saved the day the last time the US dollar seemed to be headed for the scrap heap. This time, it looks as though they have no intention of saving it.”

The dollar hardly looks like it needs saving now. It rose slightly yesterday. Generally, throughout the crisis of the last six months, the dollar has been favored as a safe haven.

Yesterday too, prices of gold and commodities fell – in dollars. The greenback rose against cotton, coffee, silver – just about everything

Why is the dollar so (seemingly) strong right now? Master FX Options’ Bill Jenkins believes it is because the United States isn’t facing the same sort of ‘social upheaval’ that the Eurozone has. . . .

Though the dollar doesn’t look like it needs saving right now, there are two things going on…two things that appear contradictory…and which lead investors to make big mistakes. On the one hand, the world economy is contracting – which is naturally deflationary. Demand goes down…prices go down…the currency in which prices are quoted goes up. On the other hand, the people who control the currency are doing all they can to cause it to go down. The Congressional Budget Office tells us that the US national debt is rising by about $1 trillion per year. It will hit $12 trillion this fall. By next fall, it will be at $13. The interest alone this year is $565 billion – about 4% of the nation’s total output.

The last time the United States overspent on anything approaching this scale was during the ‘guns and butter’ years – the 1960s. Lyndon Johnson wanted a war in Vietnam and a Great Society at home. He got both. He also got inflation. Inflation rates hit double digits in the late ‘70s. The dollar seemed to be going the way of all paper money – to nothing.

But “Tall Paul” Volker was called to the Fed. He said he was going to snuff inflation…and he meant it. Against widespread criticism – his effigy was burnt on the steps of the Capitol – he took the yield on 10-year T-notes all the way to 15%. The economy entered its worst recession since the Great Depression. Politicians howled. The press roared. Everyone seemed to want Paul Volker’s head. But Reagan backed him up. And he beat inflation and saved the dollar.

But that was then. This is now. Now, the country is far deeper in debt…with a much weaker economy…and much stronger rivals. Not even Paul Volker could play Paul Volker’s role this time.

-- from "No Recovery in Sight" by Bill Bonner

We’re in a depression, not a recession

According to the headline in the Financial Times, the International Monetary Fund says the recession is ending. Digging deeper into the story, we find that the IMF thinks the recovery may be “weak” and may require more stimulus to get consumers spending again.

As usual, the bank is wrong about everything. There is no recession; it’s a depression.

And it’s not ending; there is no recovery in sight. And more stimulus won’t cause consumers to spend more money.

“It’s really not very complicated,” we told our audience of publishers in London yesterday. “We’re in a depression. Not a recession” . . . .

“It’s a depression. And it will remain a depression until this huge pile of debt accumulated over the last quarter century has been paid down. Until businesses and banks that are no longer viable have gone broke and been restructured. Until consumers have real money to spend – not just more credit. Until those things happen, there is no way for a genuine recovery to take place.

“For more than half a century, the driving force of the world economy has been the willingness of English-speaking consumers to go further and further into debt. That permitted businesses to expand sales and profits

“Now, that trend – that lasted longer than the lifetimes of most of the people in this room – is finished. Consumers aren’t going further into debt. Bankers aren’t lending them more money. Their houses aren’t going up in price…so they have nothing to borrow against. It’s over. And now, after working your whole careers in a growing economy…you have to figure out how to survive in a declining one” . . . .

The feds have put trillions into the financial system. And that’s where it stays. The banks don’t lend because consumers can’t borrow. Their houses – the major source of collateral for the middle class – are going down in price. . . .

[N]ot only is the shift from credit expansion to credit contraction the biggest thing to come along since WWII…there’s also a major shift of wealth and power taking place. The Anglo-Saxon commercial (and military) empire has peaked out. The wealth and power of English speakers has been expanding, relative to the rest of the world, for the past three centuries. That trend, too, seems to have come to an end.

-- from "No Recovery in Sight" by Bill Bonner

Live free or move--to Switzerland!

Bill Bonner compares the debt/gold ratios of the U. S. (48), Britain (139), Japan (323), and Switzerland (2):

Governments are fighting this [depression]…just as they did the last one…but with much more money. The cost is in the trillions – most of it in the form of public debt. How will these debts be paid? We all expect that they will ultimately be eased by inflation – in full or in part. But suppose the feds had to pay up in real money?

Colleague Simone Wapler compared government debt to government gold. The United States has gold worth about $241 billion, she reports. Its official national debt is $11.5 trillion. That gives it a debt/gold ratio of 48 – meaning; the feds have 48 times as much debt as gold.

Britain is even worse. Prime Minister, then Chancellor, Gordon Brown sold much of England’s gold at the worse possible moment – about 10 years ago. This leaves the island with only $9 billion worth of gold compared to $1,274 billion of government debt – a ratio of 1 to 139. But Japan is the worst of all. It has $23 billion worth of gold and $7.3 trillion of government debt, for a ratio of 1 to 323. (Of course, Japan has vast holdings of dollars too!)

What nation has the best gold/debt ratio? Switzerland. It has only twice as much in government debt as it has in gold.

-- from "The Long Road to Ruin" by Bill Bonner

War is a blow to reason and civilization

People leave reason and civilization behind in both war and bubbles.

“Uighurs are beasts” shout crowds of Han Chinese in the remote northwest of the country. Uighurs are the Moslem minority. Han Chinese are the majority. And, judging from the photos, the Han want to kill the Uighurs.

One thing smart people always do is to underestimate the power of foolishness. It is wild and reckless to stir up a race war. But that doesn’t stop people from doing it. Any kind of war is a blow to reason and civilization. But that hasn’t made war unpopular, even among the most reasonable and civilized people on the planet.

It was within the lifetimes of many people reading this Daily Reckoning that the most advanced countries on earth began a war of annihilation. At the beginning of the 20th century, high culture and science were dominated by Germans. German musicians and composers…German poets and writers…German mathematicians, physicists, painters, philosophers – even the German economy was a world leader, second in output only to the United States of America.

Then, the Germans went off their heads – along with the Italians, the Russians, the Japanese…and many others.

But the Han have it right. The Uighurs are beasts from time to time. So are the Han…the Teutons…the Anglo-Saxons…and all the tribes on earth. Occasionally, for no apparent reason, the masks and restraints of civilization give way to mobs…and the old beast starts howling at the moon.

It happens in markets too. What is a bubble, if not a wild and reckless thing? A kind of madness? A mass illusion…a foolishness, in which people leave reason and civilization behind?

-- from "The Long Road to Ruin" by Bill Bonner

The government remains stuck in deep economic illusion

Economists are still talking about an “exit strategy.” But in view of what is actually going on in the economy, they’ll probably want to stay on this highway a lot longer. This is the long road to ruin, of course. It may be fatal, but it is not – yet – unpopular. Broadly, what is happening is exactly what should be happening.

The stock market rally is getting old…and may have already peaked out. The consumer is running out of time, money and credit. He has no choice but to cut back. Savings rates are rising fast – from zero to about 5% of disposable income.

Naturally, businesses are finding it hard to make sales. Earnings are collapsing…stock dividends are down sharply…

…and of course, businesses try to cut expenses by lightening up on their payroll.

When the correction began, it was led by losses in the financial sector. Those losses led to cutbacks throughout the economy. Now, it’s the cutbacks that are leading to financial losses. The economy followed the markets; now the markets follow the economy. Investors are realizing that their favorite companies will find it hard to prosper in this new economic environment. . . .

Once again, we see the feds’ plans failing. They give trillions to the bankers; the bankers cut back on consumer credit. And why shouldn’t they? They can see what the rest of us see – the consumer can’t keep up with the debt he’s got already. . . .

[T]he consumer has wised up. He’s sick of debt. He’s seen where that road leads. What he wants is to get out of debt…to be free…to be safe.

It’s the government that remains stuck in deep illusion… The feds know that it was too much credit that got consumers into trouble. Their solution? Give them more credit! The banks are issuing fewer credit cards than they did last year – 38% fewer. They’re pushing credit limits down too – the average limit on a new card is down 3% so far this year.

Instead of passing money on to customers, the banks are using the feds’ free cash to build up their own reserves…raise their salaries…and pass out bonuses. Makes sense. What else could they do with it?

-- from "The Long Road to Ruin" by Bill Bonner

Meet the new emperor, same as the old emperor

Barack Obama is the embodiment of the “ism”. From his early political days, Obama’s unerring theme has been not “change”, the slogan of his presidential campaign, but America’s right to rule and order the world. Of the United States, he says, “we lead the world in battling immediate evils and promoting the ultimate good . . . We must lead by building a 21st-century military to ensure the security of our people and advance the security of all people.” And: “At moments of great peril in the past century our leaders ensured that America, by deed and by example, led and lifted the world, that we stood and fought for the freedoms sought by billions of people beyond their borders.”

Since 1945, by deed and by example, the US has overthrown 50 governments, including democracies, crushed some 30 liberation movements and supported tyrannies from Egypt to Guatemala (see William Blum’s histories). Bombing is apple pie. Having stacked his government with warmongers, Wall Street cronies and polluters from the Bush and Clinton eras, the 45th president is merely upholding tradition. The hearts and minds farce I witnessed in Vietnam is today repeated in villages in Afghanistan and, by proxy, Pakistan, which are Obama’s wars.

-- from "Mourn on the 4th of July" by John Pilger

The Emperor's New Stimulus

The government hasn’t be able to spend $500 billion fast enough to stimulate the economy, so the only thing to do is . . . give the government even more money. . . .

The first “stimulus” package under Obama was no such thing. As has been noted many times, any money the government spends must be acquired from somewhere in the economy first through borrowing or taxation. While moving money around may stimulate a given activity, it comes at the price of the other activities to which that money would have been directed. And since bureaucrats, not entrepreneurs, direct the “stimulus” projects, this redirection of scarce capital is detrimental to consumer welfare. If the projects served consumers and thus were profitable, they would have been undertaken privately and more efficiently than bureaucracies could have accomplished them.

The money in the earlier bill was supposed to be used for what we were assured were “shovel-ready projects.” But the truth seems to be that precious few were shovel-ready. They won’t get started for a year or more. . . .

When the bill passed in February, the unemployment rate was 8.1 percent, Today it is 9.5 and rising. That doesn’t seem terribly stimulating. . . .

Outside advocates of stimulus, such as Paul Krugman, will say the unabated rise in unemployment only proves what they said all along: The spending package was too small. But that is not a satisfying rebuttal. First, as noted, if government agencies can’t disburse a half-trillion quickly enough to jolt the economy, logic compels us to conclude that they can’t disburse a trillion. . . .

Second, economic theory refutes the Krugmanian claim. Since government can spend only what it has first taken from someone else (by borrowing or taxation), the spending can’t create jobs on net. So even if the government-created jobs were real jobs — in the sense that they ultimately contributed to consumer well-being according to consumers’ own priorities — they were created at the cost of other productive jobs that would have been created in the absence of government intervention. Resources are scarce; government spending displaces private economic activity. There is no way around that.

If the Stimulus I was a bad idea, Stimulus II is even worse.

--from "Son of 'Stimulus' / They Can't Spend a Half-Trillion, So They Should Get a Trillion More?" by Sheldon Richman

The World Bank: just another way to make poor people suffer?

The establishment thinks Robert McNamara, who ran the Vietnam War for Lyndon Johnson, made amends by later directing the World Bank. Actually, he just found another way to make poor people suffer.

--from "McNamara Gone" by Sheldon Richman