I really grasped the plight of reasonable people in the runup to the 2008 election.  In one of the early Republican debates with <sarcasm>powerful</sarcasm> figures like Sam Brownback, Rick Santorum and Mike Huckabee on the stage, the moderator asked for a show of hands of those who did not believe in evolution.  Of the 10 people on the stage, 9 hands went up if I recall correctly.  I knew the nation was screwed at that point.

So why is it that no one of any substance will take the plunge to lead the nation?  I think it is because they have to run the gauntlet of religious whack jobs.  People who live a daily shared fantasy about an evanescent force that allows them to believe all kinds of crazy notions without any reason behind them.  Religion.  The scourge of man.  Religion has given us plenty of beauty, don’t get me wrong.  Chorale music of sublime power.  Charity and love, yes.  But also war and pointless destruction on a mythic scale.  Christians have been largely pacified in recent centuries and now coexist with the notion of separation of church and state that is the signature historical achievement of the United States.  Muslims have taken up the banner of dogmatic intolerance.  Demographics favors them sadly.

But people who would relegate personal matters to the realm of personal choice, such as Mitch Daniels and a few others will not get involved.  Ralph Reed has long since organized the fantasy corps and set up a screen through which only crazy religious types may pass.  Romney stands out as an exception.  He is a billionaire and obviously made a deal with someone.  But he also professes some crazy religious ideas.  And he is really a North East liberal on the issues that matter: economic issues, the nature of the state and society.

And then there is Illinois.  In the 2010 election cycle, when Republicans swept nearly all of the offices nationwide, Illinois put up a candidate for Governor that was right out of the Ralph Reed playbook.  His top issue of course was abortion.  No abortions under any circumstances.  Not for rape.  Not for incest.  He spent election day in church praying.  He lost.  Everyone wanted to throw out the Democrats but still this moron lost because he was incredibly extreme and focused on the wrong issues in his extremism.  Abortion is ugly.  But the issue is settled.  It is not an issue for big stage politics as the top-heavy socialist state crumbles around us.  So we have Quinn.  And we immediately got a tax increase.  And the schools are still underfunded.  And there is rampant corruption and an intractable public pension problem that will drag the state down in the end.  Will Quinn and the idiots in Springfield do the right thing about it?  I am not holding my breath.  Could we have had a better candidate?  Not in a world organized by Ralph Reed and his minions and clones.  A face that needs a fist firmly planted in it.  Bile rises just looking at it.

Democrats are destroyers.  But Republicans will not be saving the day until they throw off the shackles of the religious.

Let us briefly review Mr. Corzine’s history.  Head of the giant squid – Goldman Sachs – from 1994 to 1999.  Not sure how his tenure there was regarded but he was forced out as Paulson took control of the firm.  Next he went on to help destroy the United States as a Demunist Senator from New Jersey.  Not content to inflict pain and death at the national level, he then decided he had to further destroy New Jersey as its governor.  After his maladroit stewardship there, he was put in as the Key Man at MF Global, considered so important to that firm that the codicil to a bond offering by the firm provided for penalties to be awarded to bond holders in the event he left MFG for the US Treasury.  Yep, he was on his way to further destroy the US.  Fortunately for the country, he crashed MFG first.  Unfortunately for everyone who had any nexus with MFG, it seems the firm had the temerity to misuse client funds, leading to the missing $600Million or more.  Democrats are destroyers, but Corzine has a particular knack for it which has now crossed the line, probably, into outright illegality, to the extent that crimes by politically connected and powerful people are any longer considered wrong (see, Congress enriches itself by insider trading).

In the Percy Jackson series of books, the demigods have some kind of Mist they use to confuse mere mortals into seeing something other than what is real.  Somehow guys like Corzine get people to think they are a person to be entrusted with authority instead of sent straight to the nearest prison.  Amazing really.

What is not reported are the consequences for thousands upon thousands of people.  For one thing, all of the employees of the firm have been cashiered, losing any equity they had built up and without severance or benefits.  But more pernicious is what is happening to the clients of the firm.  And though I have never had any dealings with MF Global it has even affected me personally.  One of the clients of MFG, who probably had hundreds of millions of dollars parked there, is an interesting character who gives traders a chance to make their own fortune by sponsoring an account for them.  This persons business is now dead in the water.  But not only is his business dead in the water, all of the people employed by the more than 50 CTAs sponsored are also dead in the water, at least to the extent they depended on the funding they had via this program.  I was set to get some money via this program, literally as MFG was imploding.  That is now gone.

Maybe these people will get their money back and maybe they will not.  If not, and it turns out that MFG misused the customer segregated funds, as seems likely, it boggles the mind how it could be that Corzine is still free, unless his political connections are keeping it that way.  In any event, if that turns out to be the case, Corzine and anyone who shields him ought to be in the set of those that “just needs killing”  (see Consequences of Kerffufluous Tomfoolery below).  Full stop.

They believe, apparently, that the multiplier effect of a government dollar spent is greater than 1 over the medium to long-term. The reason they believe this is that the way we have chosen to measure economic output and growth is via Gross Domestic Product or GDP.  And GDP is defined thus:

GDP = private consumption + gross investment + government spending + (exports – imports)

See that “government spending” part of the equation? Tempting it is to just ramp government spending and – voila! – you have as much “growth” as you want!  Well hell, why didn’t someone tell us it was that easy?!  Of course it is because it is not that easy.  If it were that easy, you would have discovered the perpetual motion machine, we could all lie around all day fornicating and eating grapes because the government will just spend us up some GDP growth and we will all be fat and happy without having to lift a finger.

How would the government do that anyway?  Well I can think of only two ways the government (which remember is supposed to be us, the populace) can spend as much as they want.  Either you take the resources from someone who has them or you print up some money to spend.  You may object that we can borrow to spend – and we are borrowing to finance this attempted government contribution to GDP at a frightening pace – but that borrowing just represents a claim on future resources that have to be taxed from those who have resources, or will result in printing money to pay off the debts.

If the government relies on the confiscation of resources from the private sector, it should be obvious that total wealth of the society will be less than it otherwise would be as government does not have incentives to spend those resources efficiently.  After living through the last 100 years of political experimentation worldwide, the evidence is in and government allocation of resources does not in fact result in more aggregate wealth than private allocation.  Anyone still arguing otherwise needs to go on the list of those who “just need killing” (see below) as they represent a willful threat to the public safety and welfare.

This leaves money printing.  That too has been tried repeatedly throughout history and the result is inflation or its second cousin, hyperinflation.  Ask someone who lived through the German hyperinflation and its consequences what that does to a society (precious few left now).  Regular inflation is also pernicious as it robs savers and ultimately destroys the middle class.

It is clear then that GDP is a very flawed measure that is leading to absurd policies that are actually destroying our aggregate societal wealth rather than enhancing it.  John Tamny wrote a good piece about it at RealClearMarkets here recently.  First we must have a realistic discussion about the assumed multiplier for government spending and we must agree that it is in fact less than zero.  Then we can discount the government spending element in GDP to reflect its ultimately destructive contribution to GDP.

Having come to the belated realization that the size of government is the problem rather than the solution we can take sensible steps to reduce the size of government and bring down the debt.  What you will find is that contrary to the perceived wisdom, the world will not fall apart, it will heal.  And after some uncertainty, the economy will mend and the standard of living will rise.  If we fail to come to this collective realization, more pain lies ahead.  Austerity is not a curse, to the extent it shrinks the Government, it is a boon.

A budget has two components – revenues and outlays. In the past three years revenues have fallen as a result of economic activity dropping in the wake of the housing implosion and resultant economic malaise, a malaise perpetuated of course by the country deciding that it would be good to put an economic idiot and his minions in charge of the executive function of our government, but that’s a story for another day. Such a reduction in revenues can be expected to recover along with economic activity to the 18 percent or so it has averaged over the last 70 years.

Outlays on the other hand have ballooned from 20% of GDP to 25% of GDP as a result of having the two worst presidents in modern history in a row and Nancy Pelosi, who is in fact insane, and Harry Reid, who is in fact a scumbag who thinks congress can take whatever it likes, in charge of the Legislative function from 2006-2010. The Wall Street Journal warned at the time that Congress was ratcheting baseline spending up 3 times as fast as growth in the economy that later on they would say “Well, there is nothing for it but to raise taxes”. That was the plan all along.

The economist has a piece in their most recent weekly edition which is basically a head-scratching piece wondering why Americans hate taxes so much.  They attribute this to people near the bottom of the economic pile not wanting to see those just below them helped so that they are now equal with the bottom of the pile.  I find this pretty cynical.  In light of the blowout in spending in recent years it is more that people are a little miffed at the mismanagement of the budget.  So let us be plain. The idiots in charge need to come up with something like $1 Trillion in ANNUAL spending cuts first. Then and only then will people be willing to say “OK, now that REAL spending cuts are on the board, we can talk about making up the difference with some revenue.” The recent compromise that got us past the debt ceiling problem cuts a few tens of billions in the first two years. It is NOTHING like what is necessary. Spending cuts first, then taxes to fill any gap. Say it again: Spending cuts first, then revenue to fill any gap.

The Simon Johnson piece on Bloomberg recognizes that growth is the problem on the revenue side but then posits essentially that we just need new taxes and all will be well, otherwise we are giving succor to millionaires and billionaires and sticking it to the poor. To paraphrase Al Gore, b*llsh*t. Bring the troops home from Europe. Untangle ourselves from Afghanistan, where we have been for more than 10 years(!!!) and Iraq where we have been for 8 years (!!!), cut the Department of Energy in half, cut the Education Department in half, fire the czars and one could go on. This does not stick it to the poor.

Another article was written by Warren Buffett somewhere pleading for higher taxes on rich people. The guy who used to be known as the Oracle of Omaha, but is now known as the old guy who got bailed out by taxpayers and screwed his children out of their inheritance, has become a soft peddler of collectivist ideas in his support of the Great Lefty we elected in 2008 as noted above. On the other hand, to address Warren’s points, I would see nothing wrong with making capital gains taxable at ordinary rates. Why does income from capital get taxed a preferential rate compared to income produced from labor anyway? Maybe have a threshold taxed at lower rates, like $100k or something so you do not stick it to pensioners. If you do that though, the tradeoff is that losses need to be able to be taken against income as well. And dividends should not be taxed at all.

Finally, we would all do well to realize that there has been a widening disparity in the percentage of national income going to capital rather than labor, and that this is unhealthy. Largely this has resulted from the globalization of labor and goods markets which tilted the playing field in favor of capital. Labor has had very little leverage to press for wage increases in the face of the Chinese export juggernaut. A couple of thoughts on this. First, a new equilibrium is forming as the cheap labor abroad is becoming less cheap. So the problem is not going to get much worse. Labor in China has actually been increasing demands for higher wages.  As a result capital has been looking for other labor pools, like Viet Nam, but honestly, China was the big deep pool and it has been tapped.  Of course the other big bottleneck for growth which is causing stagnation in the US is the high and rising cost of regulation at both the federal and local level.  At the federal level we could relieve a great burden by having a top to bottom review of regulation by all departments with the goal of thinning the federal register by half.  At the local level, well heeled interests have succeeded in greasing enough palms in the state legislatures that more and more activities that were once open for people to pursue as sources of income are now behind walls of licensing requirements and fees.  I am not sure how we can attack this but until it is attacked, the wage disparity and general malaise will continue.  But there ARE ways to ameliorate the problem without resorting to the expedient of raising taxes to confiscatory levels.  I would really like Republicans to ask when pressed on the revenue issue “After all Mr. Demunist, how much is enough for the government to take? 30%, 40% 50%, more?”

The market reaction to this was for everything to sell off initially, with the Dow price-weighted index off well over 200 points, the S&P 500 off over 20, grains off 30-60 cents, crude down $5 and so on.

So lets review the latest action through the “government intervention” prism.  According to the DOE web site:

Established in the aftermath of the 1973-74 oil embargo, the SPR provides the President with a powerful response option should a disruption in commercial oil supplies threaten the U.S. economy. It also allows the United States to meet part of its International Energy Agency obligation to maintain emergency oil stocks, and it provides a national defense fuel reserve.

According to the press coverage surrounding the release, this is only the 3rd time a release has been authorized.  Ok.  So there must be an imminent threat to our oil supply?  Hmm, Libya?   No.  There are enemy soldiers on our shores waiting to attack the United States?  Hmm, no.  And in any event, you wouldnt release the emergency reserve to the public if that were the case, you would save it to fuel tanks and planes.  Oh yeah, that is why we have the Strategic Reserve, to use in real emergencies.  So what is the real emergency today?  With none visible on the horizon, my guess is that the emergency is the plunge in approval ratings for “President” Obama and Fed Chairman Bernanke in the face of irrefutable evidence of the vacuity and failure of their neo-Keynesian-can’t-let-anyone-get-in-trouble-don’t-worry-mom’s-coming-round-to-put-it-back-the-way-it-oughtta-be economic worldview.  And like the underlying refrain in the Tool song from which I took the second half of that run-on description, you had better learn to swim.  What this decision represents is a massive abuse of the President’s authority in order to serve his personal interests in re-election.  The Statists are in control and the longer they are, the more likely we will all fall off the cliff into a sea of prolonged thick stagnant sclerotic economic tar.

So the question is, did someone on the Obama team or at the Fed apply pressure to the CME or conspire with the ECB or pressure the USDA to achieve these drops in commodities to spike the commodity inflation the Fed has engineered? In other words did they use the fist of government to move markets to overcome the effects of their other wrong-headed policies? A couple of years ago few would have taken this idea seriously. But now that the Fed has acknowledged it is outright manipulating stocks and bonds, why not commodities? If so, it is both sad and dangerous. Markets need to function freely. They undershoot and overshoot, but for the government to manipulate them openly as they seem to be doing would be a further signal of the tragic demise of American leadership and culture. It would or should also be grounds for impeachment or dismissal. Though we will likely never know if it is the case, I would not put it past the statists now in control.

A fairly facile assessment of why this has happened would put together the move to a fiat currency system in the early 1970s together with a profound and predictable lack of discipline by Congresses who let no palm go ungreased and no economic rent go uncollected with a final piece which was the move toward a freer global trading system (laudable on its own terms but in conjunction with the other two preconditions, disastrous for the level of domestic wages and hence for our Gini Coefficient which will matter when it matters).  The result has been the rise of a current account deficit of staggering proportions and a world awash with dollars in the hands of mercantilist economies needing to park such dollars – in US Treasuries and other US assets primarily.  The other result has been a move to source labor, the highest proportion of the cost of doing business, to overseas markets where labor was orders of magnitude cheaper.  This of course placed downward pressure on labor prices here in the US, but with the tradeoff that the cost of goods to be bought with remaining wages would also be lower.  It turns out that the stagnation in wages has left the majority of people worse off even considering the availability of cheap goods, resulting in downward pressure on the standard of living.  A temporary cure was found for that problem.  Interest rates were low due to the recycling of dollars into Treasuries and together with official urging, produced a massive inflation in the prices of real estate which allowed people to borrow against the collateral to maintain their standard of living…until the music stopped.

And stop it did in 2007 when enough people who had been given loans they could not really afford to service stopped servicing them in size.  Note that there were two kinds of people and two kinds of institutions – those who exercised some restraint and who did not leverage themselves to the hilt by buying more than they could afford, and those who pushed to the limit.  Once a sufficient number of people stopped paying their loans, the virtuous circle reversed as prices of real estate began to fall, ensnaring more and more people in positions of negative equity and removing the crutch that had allowed everyone to maintain their living standards.  It also threatened the balance sheets of financial institutions to the extent that their capital vanished and they were insolvent.  An insolvent financial institution has to raise liquidity to forestall liquidation, first by selling assets.  This impaired collateral across the economy and the recursive downward shift was on until in September 2008 Lehman collapsed and all transactions were grinding to a halt as banks would not lend funds to anyone for any length of time and companies could not roll over operating loans.

At this point a choice had to be made.  Let the markets clear – which implied a painful reduction of asset prices, which, while it would punish those institutions that had made poor choices as their equity and debt was wiped out, would also punish innocents alike as the value of collateral was impaired.  Or prop everything up to save the innocents, while letting the bad actors off the hook – the so-called moral hazard of bailouts which serves to privatize gains while socializing losses, ie, putting them to the taxpayers.  The compassionate conservatives of the Bush administration in conjunction  with the wild-eyed liberals of the 111th Congress, who could be counted on to help out anyone down on their luck, especially as they had been so helpful with campaign donations, chose the course of moral hazard.  The clearest example of this mindset was the early program to help underwater mortgagees which prompted the Rick Santelli rant that precipitated the formation of the “Tea Parties” and which was haughtily dismissed by Robert Gibbs for the White House as he urged Santelli to actually read the plan, which he claimed did not help those who did not deserve it at the expense of everyone else (I did read the plan – it did help those who acted irresponsibly at the expense of everyone else, the White House lied).  Bernanke even chimed in.  His reasoning was that if the bad people were punished by the market, it would also result in punishment for the good people and we wouldn’t want that would we?  That was very telling as to the mindset of the man in charge of the Fed and the conception of the relationship between the institutions of governance and those governed in the minds of liberals everywhere.

A parent has to decide whether to interject when their child is in peril as a result of their own actions to protect them or to stand aside and let the child learn from the experience, absent some threat of irreparable harm.  This is the pattern in mind for liberals.  But note that this is appropriate when the relationship is that between Parent and Child.  In other words the relationship assumed by liberals and progressives is one of paternalism.  But such a pattern is not appropriate when the relationship is between two adults.  In that case, the adult takes their medicine and better luck next time (of course this assumes that true bankruptcy is available to people, a fresh start – this was removed during the Bush administration at the urging, inter alia, of our current Vice President Joe Biden).

Returning to the main thread of the story, the collapse of the system threatened the banks over whom the Fed IS the protector.  It also threatened pension plans.  This is an underreported aspect of the crisis.  As the Baby Boom generation prepares to retire it would be most inconvenient for them if their 401ks had become seriously impaired.  This in turn would threaten the government who would be looked to to DO something about it.  it also threatened debtors everywhere as deflation INCREASES the real value of debts to be paid as the dollars to be repaid have GREATER purchasing power than the ones borrowed, and in a massively leveraged economy that would result in a lot of bankruptcy and insolvency for everyone including the government.  And especially the government as the debts of the nation were massively increased both because liberals acting in the name of Keynes (rolling in his grave) decided to spend like drunk sailors (also underreported, how many of those tens of billions went straight into the pockets of political supporters in various states) and also as tax receipts plummeted from reduced economic activity.

Enter the saviors.  The cooing could be heard getting louder as the doves at the Fed flew in first, and appropriately, to stem the liquidity crisis resulting from the collapse and then, inappropriately, to continue flooding the system with liquidity indefinitely by facilitating massive further borrowing, making the insolvent even more insolvent.  This of course is the whole idea of pushing on a string in a liquidity trap.  The idea that you give a runner who is choking on water MORE water and keep pouring in more water as if that will help rather than hurt.  The problem with insolvency is too much debt.  And adding more debt is not only NOT going to help solve the problem of too much debt but is going to make it worse.  At first the runner may run some more as the parched condition is better, but eventually he will collapse.

Aside from that though there is the question of who is helped and who is hurt as the Fed monetizes the debt and holds rates at negative real levels.  The Fed Funds target rate has been at 0-25 basis points for nearly two and a half years at this point, even though the recession officially ended something like 21 months ago.  The thing about the zero lower bound is that real people do not necessarily care what real rates are when the nominal return on their savings is zero.  One large class of people hurt, as stated for example by Michael Steinhardt in an interview yesterday on CNBC, are savers.  From a cultural standpoint, it is considered a virtue to save, right?  Except that it is the official policy of the government that savers not get a nominal return on their savings.  What is the message you suppose will be learned?  On the other hand, in a bid to have banks rebuild their balance sheets, zero rates on the short end, where banks can borrow for funding, with an explicit guarantee that the shape of the yield curve will remain stably positive for “an extended period” so that banks can earn the spread between what they pay to borrow (0%) and what they lend it out for to the government (1% or more), works wonders – at the expense of savers.  So Prince Alwaleed of Saudi Arabia, a major holder of Citibank, is made whole on his investment, a person who is a billionaire merely because he was born into a family on a plot of land occupied by people whose religious institutions (with funding by the ruling family) exhort them to kill us and who will not let women go outdoors unless they are with their husband or brother, while ordinary Americans trying to do the right things and play by the rules are screwed.  The message there?  It is better to cheat than to play by the rules.  There is therefore a moral rottenness suffusing the whole enterprise that also is rarely talked about but that represents a real long-term cost to our society.

The official policy of the organs of the US Government is that cheaters prosper and prudent people are screwed or quaintly naive (after all our Senate Majority Leader even said so when the Cornhusker Kickback scandal brewed – “You are not doing your job if you DON’T cheat” was his message -and he was reelected shortly thereafter!!!).  And this doesn’t even take account of the actual TARP bailout that was a direct injection of capital to existing banks.  Is it a surprise then that people were a little bit upset that with our tax dollars and foregone savings flowing into the balance sheets of banks as an official policy of our government, the bankers then turned around and paid themselves huge bonuses out of those guaranteed profits for doing “God’s Work”?

Ben Bernanke, whose work as a Professor at Princeton prior to joining the Federal Reserve Board of Governors in 2002 supposedly makes him an expert on the Great Depression, probably thinks he is doing “God’s Work” too.  Because he views the relationship between the government and the governed as a paternalistic one, he thinks he is protecting us.  But his policy is in fact creating commodity inflation.  The official measures of inflation include housing as 40% of the measure or so.  Housing is in a depression and is deflating.  So official inflation measures look tame.  But the very people who can least afford commodity inflation are the ones getting hammered by it as they pay substantially more for food and energy and these represent a relatively high portion of their discretionary income.  So not only do they not get paid to save, but they are paying out more to live.  At some point anger will erupt here as it has erupted in North Africa and the Middle East if Bernanke does not change course.  Fortunately for everyone, most of the 25-30% of the unemployed young adults and probably some of the 9-14% of unemployed older adults are busy enough playing Wii or Playstation that they are not out rioting.  But that only works while they can somehow afford to get enough calories from cheap foods at McDonalds and Wal-Mart to stave off hunger. Wal-Mart and McDonalds have both come out recently and said price rises are on their way.  With 44 Million people on food stamps the government is doing all it can to keep them in their living rooms in front of their TVs.  How long can that last?

And to top it all off, from a capital markets standpoint, the Fed has interjected itself into the markets to such a degree that our markets, especially the stock market, and every other market which depends on the value of the dollar, can no longer be said to be free markets.  Price discovery? For chumps. A reliable signal of value for long term investment? Whoever heard of such a thing? The Fed Chairman as much as said that the Fed would make the stock market rise in the shocking editorial he wrote in the Washington Post in the days after the QE2 announcement in November 2010.  For years, people had speculated about a “Plunge Protection Team” at the New York Fed but they were derided as fringe conspiracy whack jobs.  Here was the Fed Chairman stating openly that there would be a “Plunge Protection Team” of sorts to  greatly enhance the now openly spoken Greenspan/Bernanke Put under the market.  Amazing.  No wonder the equity indexes have surged with the Fed pumping billions of dollars a day into primary dealers and other banks (and not always at the best prices.  See zero hedge for plenty of instances where the bonds monetized were not the cheapest to deliver). The misallocation of capital continues apace which represents a long term diminution of aggregate wealth.

Finally I cannot end this discussion without mentioning the outright lies to Congress stated by Bernanke in the latest Humphrey Hawkins testimony.  In it, when a Senator talked about the Fed monetizing US Treasury Debt, Bernanke was quick to correct him that they were not monetizing the debt.  Well technically that is true.  They are not buying the debt directly from the Treasury.  Instead it is worse.  They let the primary dealers buy it from the treasury and then a week or two later they buy it from the primary dealers.  And you can bet the primary dealers are getting paid for the privilege of holding the debt for a week or so.  The level of dissembling has gotten to the point that people are not buying it any more.  When William Dudley, the President of the New York Fed and a former Goldman Sachs Chief Economist, was speaking to a group in Queens a week or two ago, he was trying to explain to them how because people were getting higher quality goods like iPads which are more powerful for the same price, that was actually an offset to inflation.  The audience guffawed at that and someone said “I cannot eat an  iPad”.  The Fed is getting out of touch when it is getting caught saying “Let them eat cake”.  Again this will not matter until it matters, but at some point it will matter and when it matters, it will matter painfully.

And another thing. The US Attorney in some district or other just put a man behind bars for what they described as the most heinous act of domestic terrorism, that of creating a currency that competes with that of the US Dollar, because it represents a threat to our currency. Well who do you suppose represents a clear and present danger to our currency? Really? Well, duh, maybe the guys who are debasing it by virtue of keeping real rates of interest negative indefinitely. And yet because they are vested with the imprimatur of authority, somehow they get away with it. Take a look at the chart of the Dollar Index below. Notice anything? Since Ben Bernanke became a member of the Federal Reserve the dollar has accelerated straight down. And this with the blessing of two successive Administrations. Who should be in jail?

Helicopter Genocide Zimbabwe Ben Bernanke’s term as Fed Chairman does not end until January 2014, which is really far away.  Maobama will, by all accounts today, be reelected in 2012 and so may even reappoint Bernanke to another term.  Either our taxes will be raised therefore in a desperate attempt to stave off default, reducing our standard of living even further, or Zimbabwe Ben will have to print until we risk a catastrophic loss of confidence in our currency and interest rates skyrocket and we default anyway.  While I hope we can drastically cut expenditures, after which a modest rise in taxes would be palatable from a morale standpoint, and that the debt can then be worked off without a collapse, the odds of threading that needle do not look high.  The charts below illustrate why the Fed Chairman doth protest too much when he abjures responsibility for the current commodity inflation.  There are many more such examples.  Ben Bernanke’s famous Helicopter speech can be found here.  A timeline of Quantitative easing events can be found here.  The chart on Real Rates of interest can be found here.

Click me (Real versus nominal rates)!

Click me (Annotated Gold Weekly)!

Click me (Annotated Silver Weekly)!

Click me (Crude Oil Weekly)!

Click me (Annotated Dollar Index Weekly)!

Most of those protesting in Madison, the state capital, probably are blissfully unaware of the geological history of their state in which an island arc glommed on to the northern part of the state a couple of billion years ago in the Penokean Orogeny, throwing up some mountains which have since eroded.  They probably also do not realize that there is a continental rift that failed to split North America a little over a billion years ago if memory serves, just like the rift creating a new sea in the Afar region of Africa, which is spreading Saudi Arabia off from Africa, among other things.

I have been watching the story of the public unions protesting against austerity measures imposed by the Republican Governor and Legislature.  I have not heard any of the commentators accurately characterize the union position.  So let me see if I get this straight.  It seems to me the Union position is this:

“We, who make at least 40% more in wages and benefits than people in the private economy, will not accept any reduction in pay or benefits in the form of increased contributions out of our pockets to our pensions or benefits.  We have been promised these wages and benefits by former Demunist politicians in exchange for our campaign money to get them elected and our votes.  We will not give them up.  If the state lacks the revenue to honor these obligations, then it can raise taxes and fees on all those ingrates who make 40% less than we do to pay for our secure retirement.”

Hmmm.  If only conservatives, including the governor could make this characterization in print, on the airwaves and online, I am sure that public opinion would swing against these people.  Never mind that unionization for public employees makes no sense as ultimately the same people are sitting on both sides of the table, with no one having a real interest in representing the interests of the electorate.  There is a reason that roughly half of states have prohibited unionization for public employees.  It is a bad idea.  Yet the left gets out there  making a case how these events are a victimization of the unions.  Walker and others need to better state the case in order to crush the public unions under the weight of public opinion.  The best way to do this is to publicize exactly what it is these unions are really saying.  It could be better said than the stab at it I have taken above, but until the public realizes what an outrage it is that everyone from the “President” of the United States on down are trying to perpetrate in Wisconsin and elsewhere, the problem will continue to threaten everyone with a crushing tax burden which will make the entire country poorer and less secure.

China was closed to the west until Nixon “opened” it some 3 decades ago.  But what really set the current state of affairs was its accession to the WTO in 2002, a scant 9 years ago.  Their inclusion in the global trading framework of low tarriffs is what allowed China to become the producer to the world and creditor to America, resulting in what some now call Chimerica.  There are serious arguments that China has gotten the better of this deal.  They have been able to start building a middle class.  Note that other internal reforms aided this transformation, but trade with the US and Europe was the sine qua non for lifting a billion people out of poverty and creating massive wealth in Asia.  In the US, we have been able to have low prices and greater availability of goods for consumption.  But we have also offshored a great deal of labor, resulting in downward pressure on wages and a downward adjustment to the quality of labor available to workers here.  We have also had very low interest rates as a result of the recycling of trade dollars into US Treasuries.  As a result we have had asset bubbles that have subsequently burst and our profligate leaders have run up the US debt to staggering levels.

One wonders whether the tradeoff between sending jobs involved in the making of stuff abroad and being able to pay less for consumer goods is a good one.  That is the gamble the West made in the creation of Chimerica.  As the high-paying work is now more and more intellectual in nature, we are witnessing a widening rift between those who have and those who have not.  This is not a healthy development.  Is there enough mental firepower in our population, or any population, to provide meaningful standard of living when the jobs that provide such livings pass some high threshold of requiring mental acuity rather than physical?  The early results are not promising.

Finally the other positive outcome that was supposed to result from the gamble of engaging an authoritarian state like China was that increasing wealth there would lead to liberalization.  How long will we run this experiment?  Will it take more than a generation or two to assess whether such liberalization has occurred?  For it has not occurred to date.  I said at the time (2002) that rewarding a state like China with GATT membership was not going to end well.  In fact there has been an dangerous emerging concensus that maybe China has the better system, as opposed to the United States.  And the world is less free.  Is this a blip down which will resolve into greater freedom once China reaches some threshold of wealth?  Or have we passed the peak.  Time will tell.