Banks and the financial systems around the globe are still recovering from the banking/real estate crisis of 2008 and many banks particularly in Europe suffered losses and levels of insolvency, could this weekend’s ‘mini-emergency’ in the small island of Cyprus and their banks be another fire starter?
The Eurozone in conjunction with the IMF for the first time required a depositor tax or confiscation of deposits in lieu of a bailout. At this writing it stands at under 100,000 Euros 6.75% and over 100,000 9.9% deposits could be seized. Henry Blodgett of the Daily Ticker summed it up this way,
Some of Cyprus’s banks, like many banks in Europe, are bankrupt.
Cyprus went to the eurozone to get a bailout, the same way Ireland, Greece, and other European countries have.
The eurozone powers-that-be (mainly Germany) gave Cyprus a bailout and insisted that the depositors in Cyprus’s banks pay part of the tab — a startling condition that has never before been imposed on any major banking system since the start of the global financial crisis in 2008.
The deal did not touch the bondholders. Why the depositors? These are folks who had their money in the banks for safe-keeping.
When Cyprus’s banks reopen on Tuesday morning, every depositor will have some of his or her money seized. The current plan is that accounts under 100,000 euros will have 6.75% of the funds seized. Accounts over 100,000 euros will have 9.9% seized. And then the eurozone’s emergency lending facility and the International Monetary Fund will inject 10 billion euros into the banks to allow them to keep operating.”
This leads to the question, “Could this spread to other banking systems? Particularly where banks are as insolvent or as in Ireland, Greece and even Spain where depositors had been calmed from bank runs through EU/IMF intervention with no threats to their deposits. The new game is if banks suffer further capital problems, deposits are fair game. Will depositors start to move their money?
While someone could say, “That’s why I keep my money in a highly rated bank or financial institution?” The reality is that no bank in the world (fractionalized banking) could survive a bank run and with the global financial markets as linked as they currently are, exposure and risks could change exponentially.
Wait! There may be good news. Like most systems (political, economic, etc) around the world, the ‘global financial system’ has become complex, monolithic and threatened by ‘fatal failure’ over the past 70 years, where a depositor run on a small Island bank in Cyprus or as we saw 5 yrs ago, a larger commercial investor run on a financial services firm like Lehman Brothers could lead to global financial collapse.
In recent history we’ve been seeing the unwinding of centralized government like the USSR in the late 1980s-90s which has led to decentralization and more autonomy in smaller nation groups like in the eastern block of Europe. We’ve also seen talks and moves away from a Britton Wood style reserve currency system as the US Dollar has enjoyed since 1944. Russia and China and other nations have entered into trading arrangements that don’t require settlement in USD. In addition, countries like Russia, China and India have made unconventional moves to pursue trading agreements in South America, Africa and other places.
These new trading and monetary policies may seem like a threat to the US in the short term as they may decrease the demand for the US Dollar and affect the ability of the Federal government to finance its debt, but that may be a blessing in disguise.
A decentralized system leads to robust, competitive and failure absorbing entities in governance, economics and monetary policy. Open or freer market opportunities facilitates this.
Christopher M. Mahon, Editor
As America returns to work today, nursing hangovers, fatigue and wincing at FaceBook pictures, so Washington and the media return to figure out what exactly happened in the wee hours of the night of the ‘Fiscal Cliff’.
If the Chinese Zodiac proclaimed 2012 the ‘Year of the Dragon’, politically it was the ‘Year of the Donkey’ as Progressives and the Democrat Party celebrates a pretty good year: Affordable Care Act upheld by SCOTUS, a vanquished GOP Presidential candidate, winning most national congressional challenges and a potential budget deal (sequestration aside) that raises taxes on 77% of Americans and virtually no spending cuts.
As we entered into 2012 and considered the consumer confidence level, unemployment, debt and a sluggish economy it seemed more likely the ‘Year of the Elephant’ but, that was a year that wasn’t. Just as Tony Romo or a Mark Sanchez were able to clutch defeat from the hands of victory, so at the beginning of 2013 after approving what one analyst called a ‘Hobson’s Choice’ in the budget bill in the midnight hours closing out the year, GOP politicians run for cover, and the Republican Party ponders not only it’s future but also it’s purpose.
Contrary to Jay Leno’s skit ‘Jaywalking’ where Leno asks people questions about current news and other topics in public areas around Los Angeles and get answers like: ‘Abraham Lincoln was the first President’ or are stumped when asked, ‘What color is the White House?’; the ‘Man on the Street’ is a lot smarter and intuitive regarding what’s pertinent to his/her world and what is on their life’s ‘windshield. While they find most of Washington irrelevant, they will make the necessary adjustments to react to a ‘Gamed system’. Welfare recipients will stay on Welfare regardless of any public condemnation because the math tells them that the effort expended through employment has no net benefit than receiving cash and benefits through government subsidies. But it is not only the individual who is intuitively smarter than Washington, it is the small employer groups too. As they watch big business, industry groups and unions cut deals in Washington through their invitations to K Street, the smaller business owner/investor seeks out shelter and creative accounting to avoid paying growing levels of tax and regulations. Just today I witnessed a conversation on a social network of avoiding the Affordable Care Requirements and increases in payroll taxes by creating ‘Independent Contractor’ (1099) relationships with their current employees. Even under reporting revenues is becoming increasingly morally acceptable.
In an article in the NYTimes by columnist Maureen Dowd, The Man Who Said ‘Nay’ that references Senator Michael Bennet’s (D-CO) tough decision to part with his party’s support of the last minute budget deal in the Senate. Bennet says, “The burden of proof has to shift from the people who want to change the system to the people who want to keep it the same,” he said. “I think if we can get people focused to do what we need to do to keep our kids from being stuck with this debt that they didn’t accrue, you might be surprised at how far we can move this conversation.
“Washington politics no longer follows the example of our parents and our grandparents who saw as their first job creating more opportunity, not less, for the people who came after. My mother’s parents were refugees from Warsaw who came here after World War II because they could rebuild their shattered lives. But the political debate now is a zero-sum game that creates more problems than solutions.”
While we can understand Senator Bennet’s frustration in Washington as power and the game goes back and forth from one side of the table to the other with little accomplished, as the GOP wins in certain years (1968, 1980, 2000) while the Democrats win in other years (1992, 2008, 2012). The frustration of the ‘Jaywalker’, small business owner, ‘Man on the Street’ is that power and choice remains in Washington and that ever increasing Federal power and potential to intervene into his/her life further is readily apparent with no evidence of abatement.
Washington power elites scoff at individuals and small businesses as they tin foil and duct tape their lives around the latest Federal Laws that threaten to encroach their personal liberties, threatening fines and incarceration; meanwhile there’s a growing resentment around the country as more and more are figuring out that the ‘Utopian Promises’ of both parties aren’t being delivered, only excuses and demands for more money and more control. The Right’s promise of a ‘Moral America’ and a better ‘World Order’ through laws like Defense of Marriage Act, stronger Drug enforcement and foreign Military intervention has wrung at best hollow while the unintendeds are readily apparent. The same is true on the Left as Progressivism of the late nineteenth century through private initiatives like: the Settlement Houses, Mutual Aid and other private charities went a long way to solving social problems as workable solutions were funded and others either adapted or failed. However, this drastically changed as Progressivism became entrenched and made it’s home in the political process; the idea was, what works on a local level in Chicago, should work on an even grander scale through Washington. Of course the disappointment and failure of this theory continues to come home to roost as Progressive goals of Education, Poverty and Equality continue to be missed with the excuse: ‘More money and control needed’.
The good news going into 2013 is that just as people outside of Washington go about their business and figure ways to ‘creatively’ cope and adjust to overreaching policies in Washington, so the States are becoming more proactive in the process. Controversial concepts like: Nullification, Interposition and Article V Conventions are being bantered about more and more. While even more encouraging is that many states are actually exercising those powers, as Michigan’s state house approved 151-0 to not comply with NDAA 2012 that allows for the Federal government to commandeer state resources and many states refuse to create an Insurance Exchange as required by the Affordable Care Act and draw up language in their state’s charter/constitution to prevent further federal intervention.
A year from now how will we close out 2013? Will it be the ‘Year of the Elephant (GOP) or the Donkey (Democrats)? Or could this be the ‘Year of the Eagle (Individual Liberty) through state initiatives and individual’s who refuse to comply with federal mandates, taxes and regulations?
Wishing you a great year!
Christopher M. Mahon, Editor
As we finish out 2012 we can reflect on ‘the year that was’ like a Time Magazine expose or as the media outlets are doing even as I write this. But as we look back and take an account, shouldn’t we look forward and apply what we’ve learned?
To be sure it was an interesting year as the President won reelection fairly handily and the GOP was hit hard with a loss that the political consultants are having a hard time reconciling, let alone explaining.
We had a devastating hurricane on the east coast where too many lost their lives and many more their homes, cars and even today remain homeless. On the positive side of Sandy, which unfortunately is less reported, we saw so many step up and volunteer their time, finances and expertise in helping their neighbors. Even fire fighters from Louisiana who were at the receiving end of a fire truck and volunteers when they went through Katrina in 2005, returned the favor and flew into NYC to help with the disaster. Also unreported is the under performance of Federal aid and programs like FEMA which dropped the ball during Katrina and by all accounts today have dropped the ball in Sandy as well.
There was the Sandy Hook Elementary School shooting that tragically left 27 dead, including 20 children, 7 adults, including the shooter himself (suicide).
While we point out these tragic events, there were obviously many more we haven’t mentioned but there were also exponentially even more positive events and ‘average day’ occurrences that are left out by the media and quite frankly taken for granted by you and I. Contrary to what the media reports: food, clothing, work and play is for the most part readily available and that even with market distorting intervention from government that has lead to higher unemployment, prices and an unacceptable quality of education and level of poverty, the reality is for most of us the markets adjust and allow for volunteer (free market) exchange and association that allows for a ‘robust’ society and continued higher quality of life. Is political change needed? Absolutely. Has government failed us and morphed into a centralized system that is resistant to change and more prone to monolithic ideology? Again – absolutely.
The funny thing about human nature is that most of us are inherently critical and like to voice our ’2 cents’ worth of criticism. Whether it’s ‘giving advice’ to our spouse or children from our lounge chairs about how to perform housework, yard work or even just to scream at Tony Romo and the Dallas Cowboys with beer in hand, we all subscribe to being ‘Amateur Critics’ to some degree. Even regarding how society works or doesn’t and the role of government and what we think about the political system, most of us are more than willing to voice our opinion about political parties, personalities and Washington in general.
We’ve often heard that, ‘if you are not part of the solution, you are part of the problem’ or that ‘you can’t complain unless you’ve participated in the process’ with the idea that you and I should be engaged in creating a better society rather than only complaining about what we have.
Here’s a suggestion for the New Year that will cost you time and resources – Volunteer.
First, find out what you find yourself complaining (criticizing) about most. If it’s ‘those blood sucking welfare recipients’ then volunteer your time at a food bank or charity like Salvation Army where they give out clothing, economic and housekeeping advice. If education (or lack there of), offer to volunteer at your local schools: tutoring, mentoring or even as a crossing guard – get involved. If you are ‘rupturing blood vessels’ over politics and the inefficiencies (in your mind) of government then volunteer your time to go to local district meetings like precinct committees where you’ll find out that most there would welcome you as there hasn’t been a continuous flow of ‘new blood’ and unfortunately many of these groups are bogged down in myopic self examination and could benefit from greater diversity and fresh ideas.
There’s a Bible verse, Luke 6.68 “give, and it will be given to you. Good measure, pressed down, shaken together, running over, will be put into your lap.” While our motivation shouldn’t be self aggrandizement and Ayn Rand if she were alive might criticize you for being ‘altruistic’, the reality is that as you invest your time and resources, like any investment there will be a return; and part of that return comes back to us in the experiential knowledge we gain, the character changes that happen and the valuable process of becoming ‘other person centered’ and as the Bible suggests – ‘a servant to all’.
We at Ambidextrous Civic Discourse wish you a Happy New Year and an enriched 2013, full of life, love and contentment which I have personally found through Jesus Christ.
Christopher M. Mahon, Editor
For those of us old enough to remember ‘Supply-side’ Economics during the Reagan years can appreciate the nostalgia as it is being bandied about in the media as either an economic pariah or last hope in solving the ‘Fiscal Cliff’. In some ways as most other public policies for either party, this is the other side of the tennis match for Republicans.
The two economic philosophies at play in the budget/tax/spending negotiations is ‘Demand-Side’ economics or Keynesianism (John Maynard Keynes) that the Democrats believe if you stimulate demand by putting money in the consumers’ hands you can spend your way out of a recession. The other philosophy as mentioned earlier is ‘Supply-Side’ economics that believes if you instead put money through tax breaks, credits, subsidies in the producers hands that they will produce more product and presumably less expensive which will in turn cause the consumer to show up in the marketplace.
Both of these philosophies and economic principles are flawed and here are some reasons why:
First, the presumption that belies these beliefs is that government can manage the complexities of the market and has the knowledge of both how much and what the market needs and what the demands and wants are from the consumer.
Second, neither system accounts for malinvestment and human behavior responses, that results from market intervention and neither allows for the correction that the market provides which leads to a healthier economy.
Third, both systems and beliefs are latched onto by the parties precisely because they support the need for larger government that oversees all market activity, rather than the federal government playing a more passive and negative position that ‘stands down’ until the freedoms of the individual and the markets are violated. The private sector through competition, success and yes – failure, does a much better job in regulating economic activities and where necessary states and local government could get involved with the Fed as a far away ‘watch dog’ mostly interceding where there’s disputes between the states. The recessions and depressions of the past where there were no centralized banking or financial systems saw failure but they were decentralized, diffused for the most part and allowed for the market to clear resources more efficiently.
Finally, the `Fiscal Cliff’ and the choice in solutions offer an interesting dialogue regarding ‘Tax Cuts, Credits and Deductions’. As was mentioned earlier, Supply-Side uses incentives through tax cuts but also credits and deductions to pass money through to Producers and Higher Income Earners with the philosophy that they would do better with it than the consumer. So a $2,000 car purchase credit would make consumers show up at the local dealerships or a mortgage deduction on Schedule A would make consumers purchase homes. This month around the nation, clients are showing up in Accountants’ offices seeing what new equipment needs to be purchased in order to take advantage of ‘Section 179’ deduction, which allows for certain asset purchases to accelerate depreciation as a ‘onetime expense’ instead of over the life of the asset.
The problem with Section 179 and other deductions is that it creates malinvestments, as market dynamics are temporarily thwarted through government planning and intervention. Just like you and I show up at Costco and buy tins of stuff we don’t need or over purchase, when this is done collectively it leads to malinvestments. Businesses misread the market and see demand rise so they build bigger facilities (tying into long term debt) and start to hire. This can be seen through the housing market crisis as consumers and investors purchased homes, builders built, lender lent, as prices skyrocketed and lost their fortunes as the market (which it always does) brought correction. Both the builders and purchasers suffered greatly as they signed onto long term debt agreements while both prices and demand were artificially inflated. Unfortunately the government which created the mess rather than allowing for the market to clear, thinks it has another solution.
Of course we haven’t touched on spending which is a function of the size of government and should be constitutionally aligned and restrained but that’s for another article. Tax Policy in general should be based on a low (flat) rate, with no deductions or incentives which distorts the markets as we’ve seen. If the GOP could understand this and present lower marginal rates for individuals and corporations but the elimination or phase out of deductions this would go a long way to signaling to the marketplace that a capricious runaway government has been at least for now restrained. This would free up capital on the sidelines (which there’s a lot of) to consider risk and long term investments once again.
Tell us what you think.
Christopher M. Mahon, Editor
Many in Europe said it would never come to this, whereby the European Central Bank would buy the bonds of countries like Spain and Italy who have the potential of going down the road of other debt ridden EU nations with rising borrowing costs and the inability politically to cut spending.
In a NYTimes article this morning, Central Bank Sets Bond Plan Meant to Ease Euro Debt Peril “We will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area,” Mario Draghi, ECB President said at a news conference. “The euro is irreversible.”
While such programs will be managed by other EU governing bodies, the ECB will have the power to make decisions on which nations, bonds and the terms for the transactions. They will most likely have a monitoring mechanism to keep track of bond performances as well.
“By forcing governments to impose fiscal discipline on each other and remake their economies along lines dictated by the E.C.B., power will inevitably drift from national capitals to Brussels and Frankfurt.”
The E.C.B. will buy bonds with maturities of three years or less, and it will maintain a policy of ‘Sterilization’ at least initially, where they will match the buying and removing from circulation in their portfolio in order to minimize inflationary affects.
Mr. Draghi said that the vote for the bond buying policy was not a unanimous vote by the board as Jens Weidmann, president of the Bundesbank was the lone dissenting vote, he warned that this was a bad course to head down as nations become more dependent upon ‘cheaper financing’ and relieves the pressure of real spending cuts.
German chancellor, Angela Merkel, expressed similar concerns and cautioned that a continued move to a more rigidly defined and centralized EU system, that both Germany and the UK fought against at the EU’s inception, is a potential threat to national sovereignty.
One can’t help but draw the comparisons to the US Federal Reserve system, a central bank created in 1913, which has stepped more and more into the role of ‘Lender of Last Resort’ who also has potentially similar hard decisions as city and state governments face rising borrowing costs and spending while decreases in revenues. A few cities in California have recently declared bankruptcies.
Recently over a discussion of the function of government with a good friend of many years we came to a crossroad as he expressed how he didn’t understand my ‘faith’ in Laissez-faire, a marketplace with little to no government regulation. While I think it is a legitimate concern as there are potential abuses in all relationships and transactions including the marketplace, my response back should have been, “While I understand your concerns with individuals taking advantage of one another, I don’t understand your ‘faith’ in government to ‘make it right’ and not to be exponentially more abusive as power is concentrated in the hands of a few and they have the force, law and money to do as they will.”
Whom should we fear more, the millionaire across town who can use his money and influence to deny me and a limited number of other people access or the government with unchecked power that can confiscate our wealth, send our children to war and deplete our livelihoods for a Utopian vision? Even the billionaires we read about have limited powers until they hook that power to government influence and coercion.
There are two assumptions made by both the ‘Left’ and the ‘Right’. The Left believes it has a natural ‘Altruistic’ compass while the Right believes it has a ‘Moral’ compass built in. So that both believe if they as a collective are heading the ship of ‘big government’ that even if for a greater good they need to steer into the cliffs of suppressing Individual Liberties they have the internal fortitude to not destroy the ‘Ship America’. Unfortunately this is either a lie or extremely arrogant and naive.
While my friend’s question ‘how do you have faith in Laissez-faire?’ is difficult to answer because historically societies have had government structure to varying degrees; the settling of the ‘Wild, Wild West’ and the ‘Free Banking Era’ are two good examples to consider in US history. We’ve been lied to by Hollywood and Historians regarding western expansion and the violence it entailed, a study ‘The Not So Wild, Wild West’ by Montana State University Economics Department shows the opposite to be true; the settlements of the western states were a safer place than almost all our major cities today as well as many suburbs. What was unique is that it mostly was settled through private contract law rather than government systems.
Even law enforcement was through private means as they hired Sheriffs and Deputies directly or through contracts like the Pinkerton Services who pursued many ‘outlaws’ like Jesse James. Cattlemen and Frontier Associations and Fraternities were formed out of common interests (voluntarily) to negotiate property rights and easement agreements.
Laissez-faire “is an economic environment in which transactions between private parties are free from tariffs, government subsidies, and enforced monopolies, with only enough government regulations sufficient to protect property rights against theft and aggression.”
Private banking with less government regulation and less centralization of power historically has also worked better. While there were banking crisis’ prior to today’s US centralized banking system, they were generally smaller and the market was quicker to dissolve failures, realign malinvestment and reallocate assets and labor more efficiently. The ‘Panic of 1819′ which was in part due to monetary expansion and debt from the War of 1812 and all other Panics that followed were due to violations of market principles and where economic conditions were less regulated by government the time period for adjustment and recovery was shorter as the market cleared bad investment while determining value. The ‘Free Banking Era’ of 1836-1864 is a bit of a misnomer as there was state regulations at the time but there was competition in the currency market and between banks regulated by the states. During economic growth some banks took greater risks going off species (gold, silver, etc) and offering more competitive portfolio returns and investors bought those risks. When the economy slowed and the market corrected many of the banks who took risk went under and the investors holding those risks took the losses as well. But with less government intervention, the losses, valuations and reallocation of assets was orderly and recovery was quicker. When you consider more recently the history of US banking and Currency laws and the degree of federal intervention since the Bank Panic of 1907 which led up to the Federal Reserve Act of 1913, the last century of centralized banking reveals economic and monetary crises of a monolithic system that lacks competition and is supported by ‘too big to fail’ versus a decentralized system of competitive banks and currencies that allowed for market failure and correction with the latter evidencing more stability. Even as recently as last week Federal Reserve Governor Jerome Powell described the new ‘Single Port of Entry’ provision and ‘Living Will’ that charter banks determine ahead of time to go through a bankruptcy-like procedure that basically enshrines the taxpayer as on the hook for the cost.
Here’s a ‘Jenga’ exercise we should play from time to time. If our Jenga pieces are government structure to maintain a society to protect freedom, how many pieces of today’s government can we dismantle without it falling apart? How many pieces of federal government have centralized power in Washington and created a monolithic system that is impervious to change and fragile to systemic failure? It’s amazing in the game how many pieces we can remove but I think most would be surprised how much of government we can remove that has only gotten in the way, distorted values and restrained the liberties of the Individual. The US Constitution is a good plumb line and starting point.
Christopher M. Mahon, Editor
In ‘Money, Method, and the Market Process’ Ludwig Von Mises wrote, “The socialists of Eastern Germany, the self-styled German Democratic Republic, spectacularly admitted the bankruptcy of the Marxian dreams when they built a wall to prevent their comrades from fleeing into the non-socialist part of Germany.” If the East German wall stood as a testament to the failure of German Socialism, then maybe Obamacare and the strict participation into other government managed services like Public Education, Social Security and Medicare stand as a testament to US Socialism failure of the FDR administration and subsequent policymakers who built upon it.
Of course today’s US Socialism is more subtle and genteel as it uses the weapons of regulation, fees and taxes instead of direct public ownership to coerce participation and to make alternative choices punitive.
To be fair, both parties do it. There are GOP socialists as well as Democratic ones, who believe in government support (subsidies) of particular industries (companies) and managing behavior that their policymakers and intelligentsia believe are appropriate for the Utopian common good.
The headline going into the fall election isn’t ‘Romney vs Obama’, that was the safe bet; the headline is the ‘Big Win’ by the national GOP, which marshaled corporate and social activist contributions to defeat those looking for change in party positions. DC GOP policies of a ‘Managed business environment’, ‘Federal power to manage social value goals’ and the continued ‘War on Terrorism’ was on the ‘primary voting block’ over the past year. Some wanting to realign the GOP party to Constitutional principles and others, Libertarian or even more to the Right than the current party positions, but going into the fall it looks like the national party has survived.
Unfortunately for Mises, he did not see the day when the German wall would be torn down, hopefully for us and our children we’ll see the day when the social experiments of a government managed society in education, health care, retirement and even as it dangerously careens into more intimate areas like what we eat and lifestyle choices, we’ll see inroads in the 21th Century that allow Individual Liberty and markets to choose.
Government as Washington warned was a `fearful master’and as Jefferson also suggested, that it’s `nature was to grow’; the US Constitution was designed to limit federal powers and restrain it’s natural encroachment into state sovereignty. Those voices have been silenced for now in the 2012 election, the question going forward is where and when will they surface again in the form of party representation. The Whigs died in the mid-nineteenth century giving rise to the Republican party, will another party rise to replace a current one or will as Nick Gillespie suggests in a coauthored book, ‘Declaration of Independents’ see the death of a `duopolistic’ party system.
Christopher M. Mahon, Editor
Nevada this Saturday July 14th is an important day regarding the GOP nomination process but you haven’t heard that while tuning into FoxNews or other GOP influenced media mouthpieces. If Ron Paul wins Saturday’s race, he will qualify as a nominee in the Tampa convention and will have a speaker’s spot at the event. Some like MSNBC are calling it Ron Paul’s Last Stand. There has been a boat load of national GOP and Romney campaign money directed into Nevada to prevent that from happening.
While the Tea Party movement with its clarion call of ‘limited government’ and focus on Individual Liberty that resulted in a spectacular gain for the GOP in 2010 and initially embraced by the national GOP in Washington, has been slowly divided, conquered and marginalized by the party today; Libertarians, Independents and ‘free market’ fundamentalists are treated carefully but with a watchful eye of suspicion. The national party today is designed like a sports team to win elections no matter what. Special interests that will support GOP candidates are favored over what many in Washington consider ‘non-money raising’ issues like limited government and the Constitution as a plumb line. The liberties of the Individual which are protected by the Constitution fall just as easily through the GOP cracks of a greater Utopian good of a moral society or a society protected against terrorism as they do through Democrat ones of equality and justice like, universal health care.
This is not to say that the national party has scored an uncontested victory even if it seems like they spike the ball on FoxNews every week. There are several states partly as a result of Paul’s candidacy most recently and the Tea Party movement over the past few years that has activated interest at the grass roots to participate in local politics through precinct and delegate involvement. The result has been a healthy friction between the state/local GOP and the national party in deciding economic, social and defense policies, and choosing candidates.
The national GOP in Washington doesn’t like it however and in some states are looking to bypass the state party and go directly to the voter; while the active participation of some in local politics could have much greater influence on their neighbors, family and friends. As in the last line in Casablanca Sam says, “Louis, I think this is the beginning of a beautiful friendship”, so the GOP, in a more market driven manner might just illustrate to our nation the answer to our problems. One can only hope.
Christopher M. Mahon, Editor
A line by Dorothy Gale from Wizard of Oz played by Judy Garland, an allegory written by Frank Baum in the late 19th century that parodies the eastern banks’ desire for a gold system vs the mid-west farmers’ desire to keep silver open as that was what they predominantly owned and traded with.
In the story Dorothy makes her way through following gold (follow the yellow brick road) into the government of OZ where they make all kinds of promises not realizing until later that she had the power to get back to Kansas all along because she was wearing silver (changed to red in 1939 movie) shoes which would get her there. The cowardly lion was William Jennings Bryan who made the case for silver but was no match to the eastern banking interests. The banks not only won on the gold issue as they consolidated their power but they would go on to win even bigger as the 1907 bank panic followed which lead to centralizing the bank system under the Federal Reserve in 1913 legislation.
This morning, the Wizard (Bernanke) once again told congress with a wink, wink, nudge, nudge that the banks could get another ‘helicopter drop’ of cash. Yes, you and I are today’s Dorothy, but instead of following the ‘Yellow Brick Road’ we’re following a different ‘Road to Serfdom’ (Hayek).
The question that we can ask ourselves allegorically is what do we like Dorothy already have that we’ve forgotten about, that will get us back to what had been working for us? The answer has been there all the time: Understanding the power that each state has to defend itself and its people against federal encroachment and the importance of decentralized government and currency. Tools like nullification and state’s party insistence that their candidates be held to the responsibility of saying to the federal government, “Thus far and no further” while at the same time resisting the temptation of federal aid that comes with strings attached. It will take readers of this article, getting involved in state and municipal politics to make the difference and educating themselves on the reason why the Constitution separates the powers of government between limited federal and greater state power. Please help yourself to the articles on this website and the Library tab at top that includes many free books, essays and articles regarding why Liberty should be the goal of government based on a ’Negative’ (nonintervention) posture rather than ‘Positive’ and why free and unmanaged markets do much better in determining value than managed markets.
As the powers in Washington scatter about to preserve their corrupt and crony power that dates back to the Lincoln administration, shouldn’t we start clicking our heels together that a rebalance of constitutional alignment would take place. Find your silver slippers and get going.
Christopher M. Mahon, Editor
Well of course if you’re not worth $1 million or made $200k ($300k joint) over the past few years they wouldn’t be able to sell it to you anyway, because under Rule 501 Schedule D of the SEC you have to be an ‘Accredited Investor’ because otherwise you’re stupid or too poor to take the risk – government knows best you know.
So here’s what generally happens. The door is shut on John & Jane Q Public but the ‘well healed’, connected and those in the game (brokerage, hedge funds, etc) get the offering for a fraction and then they sit back and watch as it runs…probably to $100 or more. Then they sell all or part of it and make several times their investment. Johnny and Janey of course jump in on the resale paying close to the high price and take a bath all the way down.
You remember the ‘soak the rich’ slogan to get the John & Jane Publics of the early 20th century to jump on board for Fed Reserve and SEC regulations, well here’s the result of those regulations. The struggling hard working small business owner, tradesman, teacher, etc are shut out while the connected get the goodies as the game is rigged. Oh and if we have a crisis, of course government will need to pass the cost onto the disconnected. The Left cries, “Business is corrupt and we need government to protect us” and the Right cries, “Government is corrupt and we need to protect (big) business and create markets for it”, but the voices of both of those schools have been cutting in line to get ‘myz’ leading up to Friday’s open.
In an upcoming article I’m writing, “The Government of FAVEAA”, (fa-Vee-ah) which is an acronym for ‘Free And Voluntary Exchange And Association’, we’ll show why Left and Right politics are in fact similar and that ‘Free Market’ is not synonymous with ‘Self Government’ as many pundits and politicians believe. It is the friction of the market (deciding who/what to associate and trade with) that produces the best results of marginalizing bad behavior while promoting good. This is done in a rational way – bottom up and not in an irrational way – top down (Platonic Model).
The irony of the stock going public is that while FaceBook appears to offer a ‘voice’ to the common man who drives FB profits on his personal information, it is the common man that stands outside behind the velvet chain with the bouncer.
Christopher M. Mahon, Editor
The Iowa Caucus is less than a week away and political rhetoric by all candidates is at a high level, a good part of that is directed at Ron Paul who currently is the leader as indicated from most polls. He not only pulls from Independent and Libertarian voters but also Conservatives who have become disenfranchised with almost 10 years of military conflict at the expense of a balanced budget and debt. The latest accusations portray Congressman Paul as not only out of the `mainstream’ in his ideas on federal powers (even though by all accounts they are constitutional) but also that a Ron Paul presidency would be dangerous for the US as Iran could go nuclear and Paul is an `Isolationist’.
In a November 2011 Cato Institute article Ted Galen Carpenter makes the opposite claim that Military Interventionists and NeoCons like Gingrich, Santorum and Bachmann do us much more harm than good. For interventionists to not realize the beneficiary of a war with Iraq was Iran was a failure….“For neoconservatves to argue that the withdrawal of the few thousand remaining U.S. troops from Iraq significantly worsens that aspect is either obtuse or disingenuous. If they didn’t want Iran t…o gain significant influence in the region, they should have thought of that danger in 2002 and early 2003, instead of lobbying feverishly for U.S. military intervention against Iraq. The United States has paid a terrible cost — some $850 billion and more than 4,400 dead American soldiers — to make Iran the most influential power in Iraq.”
In another article by Per Bylund, Bylund makes the case how the `Endowment Effect’ theory, (people place more value on things they own versus things they do not) illustrates the shortcomings of economic and military intervention in not understanding human action (Praxeology) and the unintended consequences. Or why Ron Paul’s theories on domestic and foreign policies while more aligned to constitutional principles are also more sound than policies of the other candidates.
Does US military policy of Intervention into the affairs of other nations (occupation, embargo, etc), prop up the dictators of the world like Hugo Chavez or Mahmoud Ahmadinejad who rally their people and crusade against US military might and US monetary policy? What part did Federal Reserve Quantitative Easing (1 and 2) play in the Middle East uprisings and other struggling nation’s financial affairs? What part did troops in Iraq, Afghanistan and Pakistan play? Tell us what you think?
Christopher M. Mahon, Editor
What would you do if this morning when you woke up, you couldn’t access the funds in your banks or brokerage accounts, the cash in your pockets (what little there is) substantially diminished in value and your mortgage company was on the phone and they’ve decided to call your loan?
While our website is less than a year old, many of our articles date back several years since we’ve been writing on US and World Economic, Social and Political conditions. I invite you to peruse the past articles and I believe you will find most of them accurate in plotting trends and in pointing out potential consequences that governments, institutions and individuals haven’t considered in economic, political and public policy decision making. This is not due to an inherent skill but through the use of Classical Economic Theory and the principles of Negative Liberty and Risk that speak to the nature of government, centralized systems and human behavior. Economists, Philosophers and Statesman like: Ludwig Von Mises, Socrates, Nassim Taleb and Thomas Jefferson have proven accurate, while John Maynard Keynes, Paul Krugman, Plato (Hegel, Marx), FDR, and most of today’s political and financial class is in error.
For a few years we’ve been watching as the gradual decaying of our financial, political and social infrastructures here in the US has been unfolding. Around the world we’re seeing political and social unrest as economic conditions become more fragile and worsen. As of this writing, Europe is dealing with a debt crisis as Greece is at risk of defaulting on its bonds and the Middle East is reeling over rising prices and unemployment. Here in the US, Fed Chairman Bernanke confessed yesterday that he doesn’t know why the US economy won’t turn around and (indirectly) admits quantitative easing has not worked. While we hope for the best, do what we can to pray that it turns around, it is now time to prepare for some degree of social collapse or dysfunction here in the US. We’ve all heard the `Chicken Littles’ of the past who prophecy, fortell or predict doom; in fact, the year 2012 among the youth has become an urban legend and recently Harold Camping’s organization was predicting the `End of the world’. But irregardless, we don’t want to become like an ostrich who puts their head in the sand at such a time as this. A little preparation now, could go a long way tomorrow, and there’s some basic things we could start doing that would probably improve our lives anyway.
I’ve held off on this blog piece for almost a year now, adding information and looking for the proper time to publish it. Tone, was important, as I wanted to provide information minus hype and political blame. Below you’ll find we’ve collected information from many sources one source in particular we’ve gleaned a lot of information and more importantly insight from is Dmitry Orlov. Orlov was born in Leningrad (now Saint Petersburg), who moved to Boston at age 12 when his parents moved to the US. He is an engineer who writes on political and economic subjects and in particular what he observed while in Russia in the late 1980s and early 1990s as the Soviet Empire collapsed. Orlov believes as more of us are starting to, that an economic collapse is becoming more and more possible here in the US. In a video presentation below, Orlov makes his case before a distinguished crowd recorded for Fora.TV. This article and material contained here shouldn’t cause alarm but hopefully motivate you to some level of preparedness. We’ve layed out 7 specific areas to consider, many of which are common sense items you should consider anyway for a blackout or severe storm (as part of this article was written, most of the east coast was closed down by snowstorm and we had the nuclear disaster in Japan).
Dmitry Orlov (paraphrased):
“The more centralized the system, the more severe the collapse. In an economic crash, what was once positives become negatives and visa versa.”
Men don’t handle collapses of empires as well as women, they tend to get angry and useless. Possibly because they are more invested into the system, while women tend to become more resourceful.”
“The US food supply is long and thin and only days away from sparsity.”
“The best prepared are the rural poor. It takes a lot of practice to build resourceful skills to do without. The Amish also are better prepared.”
“Physical resources and assets, as well as relationships and connections are worth more than cash and those who know how to “do it themselves” and operate on the margins of society will do better than those whose incomes and lifestyles have plummeted.”
1. Food: Important to accumulate surplus inventory, either look into buying a food storage package (6mos-1 yr) from companies like Costco or start now to buy extra canned and dry goods weekly. Keep goods (including water) in a dry, safe location. Have on hand: Can opener, other kitchen utensils, battery, sewing and tool kits. Also, look into growing fruit & vegetables if you have property that permits or consider small land area outside of your community that your family or group could use.
2. Shelter: We need to think outside the box, while the traditional four bedroom colonial was the goal in the past, during a crisis extra space is expensive to heat, a/c and run electricity. In Russia during the collapse of early 1990s they became creative in their living arrangements, three generations living under one roof. They also sought out beneficial relationships based on skills and resourcefulness.
3. Medications: While it is difficult to store medications, many plans have the possibility to order 3 months in advance plus it is usually cheaper. Store up on aspirin (multiple uses), over the counter antibiotic salves, bandages, vitamins. Prepare a First Aid kit:
4. Transportation: While we enjoy today’s independence of multiple cars, during a crisis sharing a car within families or a community block becomes more likely. If economic downturn occurs, many vehicles will be repossessed, it is important to have access for transportation, if you, family member or friend have a paid off vehicle that will become very important.
5. Relationships: Identify, secure and develop good relationships. This is where Churches, Synagogues, Mosques and community centers can help, if not attending a church or connected to a community group, seek out those relationships now, they will become very important during a crisis. Get to know your neighbors and assess skill sets and barter potentials.
6. Security: As mentioned above identify with a group or community and create an action plan for protection and securing your food source and shelter. Decide on and handle ahead of time firearm decisions and defense tactics.
7. Monetary Value: In a financial crisis many times the national currency can go through a hyperinflationary period (Argentina, Germany, etc) and merchants will not accept the currency. While it is important to maintain some amounts of gold, silver and other precious metals for common exchange and portability, it is also important to look for opportunities to barter and exchange services. This again emphasizes why it is important to be part of a community and to identify each member’s skill set and resources.
Action Plan: Speak to your family members, friends and hold a community meeting. Watch the video and discuss openly the possibilities and potential risks of a collapse and practical preparations to undertake. Create a `Next Step’ process if collapse occurs.
FEMA Emergency Preparation Guide
In an article on CNBC’s website, the IMF is quoted as seeing the need for the US to continue on the path of quantitative easing. This is an interesting departure from the global financial community’s (including IMF) criticism of the Federal Reserve’s policy of printing money to save the US economy at the expense of world economic conditions. Some have blamed global rising food, energy prices and unemployment on US monetary policy.
In an article last month, Raghuram Rajan, IMF economist told a forum held by the Council of Foreign Affairs, “The function of the Fed monetary policy adopted in November 2010 to boost the U.S. economy is relatively limited, the biggest problem in some sense is that the Fed’s monetary policy actions are essentially transmitted to the rest of the world, when the rest of the world doesn’t allow their exchange rates to move and protect their own monetary policy and keep that as a separate policy as its own.”
The mixed message being sent by the IMF is at best simply monetary policy conflicts between economic academics or maybe more sinister, the world’s next `central bank’ trying to move along the process of transferring the world’s currency reserve responsibilities from the Federal Reserve to the IMF.
To add to the intrgue, George Soros was quoted this weekend as saying, “The US could still absorb taking on more debt” and that a rush to pay down the debt could hinder its slow economic recovery.
These comments coming from the Paul Krugman’s of the world, who follow to the letter Keynesian government stimulus and monetary easing policies wouldn’t be surprising but the suggestions come from those most likely to benefit from the greased slide.
Before you sit back in your easy chair and turn on reruns of Lou Rukeyser’s Wall Street Week, there’s probably something else you should consider; the same group of soothsayers were spreading the elixir of calm and `happy days are here again’ in 2008 and using pretty much the same message.
Zandi, speaking before the National Governor’s Assn winter meeting in Washington said, “I think that the very loud hand-wringing over the prospects for major municipal-bond defaults is entirely misplaced.”
The Bloomberg article ‘Risk of Widespread Municipal Defaults’ by Mark Niquette and William Selway goes on, “Thomas Doe, founder and chief executive officer of Concord, Massachusetts-based Municipal Market Advisors, said he has seen nothing to change his view that general-obligation debt at both the state and local level is secure.“I don’t want to be Pollyanna about it,” Doe told the governors. “I have great confidence in you all, the markets do have confidence in you as well, and the informed investor, the institutional investor, understands that your debt is good.”
What Zandi and Doe fail to see or recognize is that much of the past year’s state revenues were subsidized in part by the Federal bailout that was a ‘one and done’ stimulus to teachers and other state employees which is now gone. Also as Meredith Whitney of the Whitney Group and other muni bond analysts have commented that 49 out of 50 states have mandatory balanced budget requirements and there needs to be substantial cuts in spending (particularly retirement/health care for govt employees) which is now starting to be addressed as seen in some of the collective bargaining controversies stirring in a few states.
Zandi and Doe and others who are now forecasting recovery and dismissing troubles in the muni market are the same ones who called bottoms too early in the housing collapse and never even saw the financial crisis of 2008. Zandi is a student and believer of Keynesian economics in the same vein as Krugman and Bernanke, that if government steps in to support the economy when private industry and household spending falters then recovery is right around the corner. Ironically, Zandi wrote a report on economic stimulus packages and their effect on the United States economy which was cited in Christine Romer’s report back to President Obama which influenced bailout legislation (American Recovery and Reinvestment Plan). Harvard economist Robert J. Barro and many other economists are now questioning Zandi’s model and the need for federal government intervention.
While Whitney and others who forewarned the 2008 financial crisis are hopeful, they are also realistic in gauging the political and wrong-headed economic principles like Zandi’s that governs public policies. There is a way out of this mess but it doesn’t come from creating more debt, quantative easing or any other government led options; it is rather cutting government, reassuring markets that there aren’t any government surprises coming so that prices will stabilize and surpluses (housing inventory) will wind down through private market mechanics.
In another ill forecasted article by Mark Zandi, he proclaimed, “I’m an Optimist!” Are you an optimist when it comes to government stimulus packages or federal reserve quantitative easing schemes? Well just like Burt Lancaster’s character in Elmer Gantry, they are firing up the revival organs to the sound of ‘happy days are here again’ as the message is being preached of government salvation that comes at a great price…your money and your freedom. ‘Do you hear me brothers and sisters!’
While new home sales took an ‘unexpected’ drop of 12.6% in January, the jobs report showed promise as new jobless claims dipped below the 400,000 level. But does the jobless number really reflect what is happening in the jobs market? We know that individuals who can’t find employment after a ‘reasonable’ amount of time give up looking and might rotate in and out of jobless numbers, but is there an unregulated, unstructured ‘jobs market’ that is unaccounted for?
In a December 2009 article by Cato Institute’s Richard Rahn,’New Underground Economy’ lays out the characteristics of how underground economies ebb and flow. He starts out, “Here is the evidence. The Federal Deposit Insurance Corp. (FDIC) released a report last week concluding that 7.7 percent of U.S. households, containing at least 17 million adults, are unbanked (i.e. those who do not have bank accounts), and an “estimated 17.9 percent of U.S. households, roughly 21 million, are underbanked” (i.e., those who rely heavily on nonbank institutions, such as check cashing and money transmitting services). As an economy becomes richer and incomes rise, the normal expectation is that the proportion of the unbanked population falls and does not rise as is now happening in the United States.”
Rahn, in his article goes on to say that the underground economy is affected by federal and state tax, regulatory policies and inflation. When Sarbanes-Oxley was implemented in 2003 as a reaction to companies like Enron who didn’t account for off balance sheet liabilities in their reporting, it had the unintended consequences of building huge costs for large and mid-size companies to come into compliance. Most complied but some started to move headquarters out of US. Even today, while new start ups have slowed due to economic environment, there’s an increasing ratio of new companies starting up in Europe or Asia.
The smaller US businessowner has different alternatives than mid-size and large companies that are more public, they can simply take their business offline or underground.The trades and some services are more likely to go ‘offline’ to avoid heavy local, state and federal taxes which can eat up substantial profits and add time consuming additional recordkeeping and compliance. Carpenters, painters, lawn maintenance, home cleaning and many other small businesses who reported income for years are taking risks by pulling if not all their business, a good part out of the above ground economy. This is reflected in January 2011 federal tax revenues which are up from the previous year. “Total government revenues rose by $21.4 billion for the month (Jan 2011) from a year ago to $226.6 billion, a 10.4% increase. Year to date, revenues are up by $65.4 billion to $758.4 billion or by 9.4%. Total outlays for the month though increased by $28.4 billion or by 11.5%. Fiscal year to date, spending is up by $53.4 billion, or by 4.8%” Dirk Van Dijk, CFA ‘Federal Red Ink Less Than Expected.
When you look closer at federal revenue for January however, you see that payroll revenue is down even when factoring in the lowered employee tax rate by 2% (6.4 to 4.4), which only took affect in January and that the increase had more to do with liquidation of qualified money out of IRAs and 401(k)s, profit taking and asset repositioning as the estate tax issue wasn’t settled until year end.
In the trades like Carpentry, an owner might take his full business underground and work for cash without reporting or he may take his labor offline by hiring help that they pay in cash. The worker takes the risk of not entering social security and of possibly not building his credit profile and the employer takes the risk on an unlikely audit or insurance claim if payroll not accounted for. These are risks that are considered either consciously or unconsciously everyday as the cost of business continues to rise.
The budget battles happening in Washington and in the states like Wisconsin and now breaking out in other states like IL, OH and NJ is of particular interest to businessowners who hope for spending cuts but weigh the advantages and disadvantages of moving out of states or the country for larger companies and for small business owners, cutting another employee or taking their business underground.
In an article last year we warned of a possible Muni default crisis, this is an update to that article which you can find at ‘The Coming Municipal Bond Collapse’.
The recent Wisconsin stand off between the GOP Governor Scott Walker, his legislature and the teacher’s union has now started to break out in other states like Ohio who are battling budget deficits. Yield spreads are starting to reflect growing possibilities of defaults. Meredith Whitney of Whitney Group, bank and Muni analyst had came out early and suggests short positions, but even PIMCO says, “Now, however, with many states and local governments struggling to close large deficits, it’s time to acknowledge that defaults could happen, even in large and systemically important municipal issuers.”
In a CNBC article by John Carney, ‘The Bulls and Bears Agree’, ”The debate underway now is about the likely severity and scale of Muni defaults. Or, more precisely, we have a debate about how to fairly price the default risks inherent in Muni credits. On the one hand, there are analysts like Meredith Whitney and hedge fund managers like Jim Chanos who warn that investors are taking on too much risk for too little yield. Whitney has predicted a “wave of defaults” that could be in the hundreds of billions of dollars. On the other hand, there are the bond fund managers and economists like CNBC reporter Steve Liesman, most of who are more bullish on Muni credits.” As a footnote, Whitney has been fairly accurate in forecasting banking and real estate crisis, while Liesman has not.
John Carney in a second part of the Muni Series explains why he doesn’t trust muni managers. He reflects back on the 2008 financial crisis and points to overconfidence in models and risk assessment which were exposed to be flawed as the dust clears from the subsequent collapse. Carney says, “The reason I find this so striking is that this is the same sort of thing we’re now hearing about muni-bonds. The “muni people” are pretty much united in the view that munis are safe, that talk of large losses is irresponsible and the product of novice minds looking at a market they don’t understand. After all, investment grade munis never default.I’m worried that the same kind of tunnel vision that blinded so many of the smartest minds on Wall Street to the fragility of the mortgage market may be operating in munis.
Of course, as Nassim Taleb, Peter Schiff and Nouriel Roubini have pointed, modern portfolio management theory is vulnerable to fragility due to models that underestimate risk. Taleb goes even further in his NYTimes Best Seller, ‘The Black Swan’ saying that our current financial system is designed to ‘blow up’ every 25 years or so. With growing unrest around the world and in US States, the shift in currency and credit markets, it’s a good idea to reassess risks in our portfolios.
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In Greek Mythology, Procrustes (who’s name means ‘The Stretcher’) the son of Poseidon, lured weary travelers from Athens to Eleusis to stay with him where he would make them stay on his iron bed. He would stretch those too short to fit his bed and amputate the legs of those too long. Procrustes continued his reign of terror until Theseus traveling the same route killed Procrustes, by convincing him to fit himself to his own bed.
A Procrustes bed is used as a modern analogy of an arbitrary standard by which exact conformity is required. It has been used as comparisons in literature, math and computer science. In his recently released book, ‘The Procrustes Bed: Philosophical and Practical Aphorisms’ Nassim Taleb says that it is not only that many times we try to fit into wrong boxes, but that the emphasis is on the box rather than the object. He also points out the danger of overestimating or under estimating variables as in Modern Portfolio Theory that uses risk assessment like Bell Curve distribution sigmas to gauge investment pairing and balancing. In a sense, Modern Portfolio Theory is a Procrustes Bed as it lops off 3rd or 4th sigma risk as inconsequential, only to find out later as we have with the recent financial crisis those variables played a greater role.
The Procrustes Bed analogy of government policy can be made in areas like health care and education. As Procrustes would stretch his shorter victims and amputate his taller ones, government health care policy would give more health care to the healthy and less to the very sick. Individuals with health care needs ‘out of the bed’ of protocol would either have to look for it on the private or black market while the healthiest would be required an annual exam and other benefits that they don’t want. The analogy could also apply regarding cost sharing as healthy and unhealthy would be in the bed with the same premiums. Alternative care options which even now are generally only available to those with discretionary income, might under government health care be outlawed or even more expensive. Those who have the money might be joining those already fleeing other nation’s government health care, like a Danny Williams former Canadian MP who flew to Miami, FL for a heart procedure last year.
The Procrustes Bed of public education as it exists today is particularly cruel. I’d refer to an earlier article on a brief history of US education, that was loosely state regulated, decentralized and adaptable to different regions of the country and even up until the early 20th century was local and neighborhood focused. Today education is highly centralized through the Dept of Education, federal mandates and state enticements of money and credits to cash strapped states. Public school children are at the mercy of every new lab project coming through teacher colleges like Columbia, that weigh priorities of traditional skills of reading, writing, arithmetic and critical learning against socialisation and tolerance which was John Dewey’s goal in the early 20th century, who believed changes in societies have to start in the classrooms. But the experiments are failing dramatically as US test scores have plummeted against other nations and the US has even pulled out of some competition. Hindsight being 20/20 if these experiments had been done on a decentralized state by state basis as was the original system, the failure would have been isolated, less impacting nationally and there most probably would have been successful models in orther states to adapt to.
The Procrustes Bed can be applied in so many areas where federal government in particular creates arbitrary policy with rigid compliance. There is almost a unamimous conclusion that something is wrong in Washington, DC, while some consider the government as being ineffective and needs to be ‘fine tuned’, most believe it is doing too much and needs to do less.
As a fitting (pun intended) end of the mythological story, Procrustes is done in by his own device. Wouldn’t a fitting end to an uncontrollable and runaway federal government be a Procrustes Bed of Constitutional measures?
Statists, Governmentalists, Collectivists for over a century now have lured weary citizen travelers journeying through life, into the secure and comfortable bed of federal government powers to solve all problems, only to find out too late the limits it put on individual freedom. There is an inverse relationship between Government and Individual Liberty – as government power increases, individual liberty decreases. The framers of the Constitution understood the natural process of government was to grow and that it needed to be limited through constitutional restraint.
Is there a Theseus who can lure the Federal Government back into the bed of constitutional restraint so we can once again ‘fit it’ so it functions as was intended as a protector of individual liberties and not as a provider of rights and services.
To paraphrase Isaiah Berlin from his essay, ‘Two Concepts of Liberty’, When men lose interest in their ends, they lose control of their means. When we hand over the education of our children, or our healthcare to experts we also lose control over it as well, keeping our fingers crossed that men and women of excellent education and pedigree themselves can figure it out. But like Saint-Simon understood, caregiving except by the closets of relationships or through an individual’s compassion with their own resources, warps into duty and the object into a byproduct of the means.
Wisconsin, arguably the birthplace of Progressivism, is ground zero of the upcoming budget battles between the states and unions; contracts negotiated during better times, that are benefit-rich, stand in contrast to plummeting state revenues and many private workers who are unemployed or underemployed.
There is a strange irony, as this plays out in Wisconsin, where Robert La Follette, the former Senator and Governor of the state, championed the early Progressive movement. Like a thread that enters into the first stitch of a garment, could the same thread becomes it’s unwind?
The early Progressive movements started as modest private initiatives in the cities such as Chicago, Boston and NY in the late 19th Century to address wages, poverty, illiteracy and shelter in the growing immigrant population and later in the post war African American population through settlement house, labor, education and other social movements that made their way from Europe.
Women such as Jane Addams and Ellen Gates Starr, founders of the Hull House in Chicago, came from well to do families (Duponts, Carnegie) that benefited from the industrial age and believed that they had a `personal responsibility to clean up their cities’ and give back to society. Addams’ father like many of that generation were ‘Lincoln Republicans’ who saw the charitable needs of their day. By the turn of the century there were thousands of settlement houses throughout the major cities in the US with facilities to feed, shelter and educate the masses. Successful ventures like Hull House in Chicago and Henry Street Settlement in NYC were the beneficiary of discriminating donors who inspected their facilities and results. Because these were private initiatives at the outset they were free to raise funds, experiment with methodology and be exposed to competition. Competition at the time was mostly from national organizations like the Salvation Army. What was unique about the settlement house movement and made it effective was that it was local, flexible and responsive to the needs of their neighborhood clients. What worked in one neighborhood might not work in another.
There also was labor and education movements that were growing as well. Initially the labor movements were setup as European Guilds which focused on training and skill development, later the movement turned more toward collective bargaining for higher wages. The labor movement gained traction in the early 20th century, which was aided by the derogatory termed ‘Muckrakers’ of the time like Upton Sinclair and his book, ‘The Jungle’ which described the working conditions in the slaughter houses of the Midwest.
While public education has always been a part of American history on some level; until Horace Mann, Secretary of Education in MA in the early 19th century introduced the ‘Prussian Model’ of professional teaching, most education if not home schooled were a loose collection of neighborhood schools with parents volunteering to teach the children. During the progressive era John Dewey, who taught at University of Chicago and Columbia, where he experimented with radical changes in education theory, purported that in order for society to change it must first be introduced into the classrooms. He was the first to suggest that curriculum, teacher certification and methodology should be centralized and more directly managed through the federal government. While public education existed before as a function of state and local administration with little federal guidance, Dewey radically changed it so that the states were mere agents of federal management and planning.
Robert La Follette and Wisconsin’s Progressive legacy is similar to the early beginnings of the movement. While La Follette championed a number of progressive reforms, including the first worker’s comp system, railroad rate reform, the minimum wage, the open primary system, women’s suffrage, and progressive taxation. He created an atmosphere of close cooperation between government and the citizens. Unfortunately, La Follette like the early progressives of the 19th century never imagined what the mixture of admirable causes (poverty, education, wages), unions and politics would turnout. The unintended consequences come from the insulation of bad theory, protocol and application that no longer has to compete for dollars or victims.
Social reform that is fueled by private initiative has proven to bring about wanted change, however once it has been ‘weaponized’ through union and political power it becomes something else. That ‘something else’ is protesting on the streets of Madison this week.
One summer my brother and I stayed with relatives in a tony area of Connecticut; our family was middle class from a suburb of NYC and not schooled in the finer things, we were however, very good in sports. We’d show up at the tennis courts in mismatched shorts and tees, torn sneakers (high-tops not Tennis) but we’d kill anybody we’d play. The elites at the club tolerated us for a time, but refused to recognize our skills and couldn’t wait for us to leave.
In a recent interview with Bill O’Reilly, Charles Krauthammer commenting on CPAC (Conservative Political Action Committee), and their year after year top vote for Ron Paul in their straw Poll, belittled Paul’s support for ending the Federal Reserve, calls for substantial cuts in the defense budget and his constitutional discipline of separating federal and state power that would extremely realign not only government but also political fortunes.
While Krauthammer is my favorite elitist and intellectual he does unfortunately suffer from a condition, ‘Elitist Intellectual Ailment’ (EIA), which is characterized by ideas and policies that emanate from a small group of schools and think tanks that has a love for information and the need to connect causality. I call it the ‘Joe Frazier’ Socio-political style of `leading with your head’. This group believes that there isn’t a problem that can’t be intellectually worked out in a lab on an Ivy League campus through the hands of elitists (sons and daughters of the same) who then can through government management of society process their answers. To elitists, Government has never been the problem, the problem has been either differing elitist theories on the use of government or the improper use of government by the rare occasions that Commoners (non-elitists) have been in power. While Progressives favor the government as a re-distributor of wealth and income and Conservatives favor government as a protector of traditional values, they both favor government. They reject the ideas of Ron Paul and true free market believers who suggest that in an open society, through voluntary exchange and association, societies don’t necessarily collapse but ‘self-correct’.
Krauthammer who honored in political and economic studies, has a degree from Harvard Medical School in Psychiatry and practiced until 1978 when he went to work for the Carter Administration is like many Conservative and Progressive elitists, they at times can move back and forth between political philosophies and political parties. While they may hang out in different areas of the ‘Country Club’, at the end of the day they still sit down at the same table and enjoy hot toddies in front of the same fire. Both believe that society is better managed by experts (another name for elites) who can steer resources, labor and values for the greater good.
To Krauthammer and other elitists, Ron Paul is the most peculiar of anomalies; he is bright, well educated, understands Washington like elitists, but yet he doesn’t see government as the overriding solution to society.
In a NYTimes best seller, ‘The Black Swan’, Nassim Taleb (University of Paris, Wharton School) wrote about the fragility that was inherent in financial, economic and public policy models coming out of the best schools and think tanks, that didn’t account for unknown variables. He says unlike nature which protects against exponential growth and centralization, the hybrid derivatives built in the financial markets and the government built banking behemoths would lead to a financial crisis. “If I shot an elephant, the biggest animal on earth you’d be unhappy. I will probably get some bad press as well. Will it impact the ecology of the planet though? No. If, before the financial crisis 2 years ago, I shot a company called Lehman Brothers, would it have had an impact on the world economy? Yes. The lesson learned here from the elephant is that it is not too big. Companies get too big” Taleb.
The reason that companies get too big, is the same reason that values like home prices, USD and drugs are distorted because of public policies built upon flawed interpretation of data and not properly accounting for risk. You could never have monopolies or the size companies we have today without government regulations that protect industries and corporations from competition and provide subsidized capital. But monolithic structures become prone to stress and create system failures when they fall. Nature allows for the largest tree in the forest to fall with little impact, while if the largest entity in almost any industry failed it could cause substantial impact to a community, state or a nation’s economy.
In another book, ‘Open Society’, Karl Popper traces the elitism of Conservative and Progressive theories back to Plato. Plato saw societies as machinery that would decay and become obsolete over time if not managed and planned for, he felt decay could be forestalled by ‘managing’ society to an ideal that would need to be reinterpreted over time. This would be done by a special class of individuals called ‘Philosopher-Kings’ who would set the vision. They would need to go to special schools for training and most likely come from a select (elite) group of people. He envisioned a second class of people, ‘The Warriors’ who would enforce the vision of the ‘Philosopher-Kings’, these would be police, politicians and judges; and then there would be a third class, ‘The Workers’ who followed the rules and allowed themselves to be managed and receive the benefits of a better society. As today, it would be unconscionable to move from class to class for the most part, and there would always be a need for the philosopher (political) class to manage society.
To quote Popper, “Our knowledge can only be finite, while our ignorance must necessarily be infinite.” In Popper’s theory of Falsification, he says every theory and policy is prone to failure and must be assumed so until proven so. Theories ‘cooked’ in the lab, proven on a very small data sample, could have tremendous unintended downside consequences or at a minimum – distort values.
Elitists don’t like ‘old fashion’ ideas of limited government and constitutional principles that separate government powers between the individual, states, and the federal government. Which allows for currency, food and values to self-regulate through voluntary exchange and association. To them it is too much power in too many hands. The idea of everyone doing whatever they wanted, would destroy a society, the very thing that Plato, Hegel and Marx warned against.
A truly free society, where government merely intervenes to protect individual liberties and men and women are free to succeed or fail? No, no, society must be managed and even though we have times of crisis, the boys and the girls in the labs of Princeton and Harvard will have the next great public policy solution and with a little more government control in their hands (and less in yours), elitists will enable Plato’s vision to continue.
France has joined a growing chorus of G20 countries who have starting to go public with plans to transition off dollar denominated global reserves to Special Drawing Rights, which are several currencies that would be held in place of USD to stabilize the currency markets. “At the same time, international capital flows should be better regulated and the role of the Special Drawing Rights issued by the International Monetary Fund should be reinforced by the inclusion of China’s yuan in the system.” Says the French economics minister.
China currently the 2nd largest economy in the world to the US, is holding $2.5 trillion in mostly USD as a hedge under the current monetary structure, the real question is what will happen to China’s and other monetary reserve portfolio balances and the USD’s value as they move to the new system.
In domestic news, housing prices plunged over 5% in 2010 and some traditionally insulated markets like Seattle and Atlanta are showing erosion as many prepare for the next level of price decreases. “Seattle is down about 31 percent from its mid-2007 peak and, according to Zillow’s calculations, still has as much as 10 percent to fall. Stan Humphries, economist for website Zillow, estimates the rest of the country will drop a further 5 and 7 percent as last year’s tax credits for home buyers continue to wear off.
See more below
Arizona counter sues Feds over SB 1070 Immigration bill, adding to its already aggressive posture in joining almost 30 other states in suing over Obamacare. Arizona with its fiscal problems is turning out to be a state that is part of the solution rather than the problem in being a ‘check’ to encroaching federal powers to constitutional restraints.
While many states remain subservient to the Federal Government, beholding to federal grants and aid, many are rising up in defense of constitutional state and individual liberties. Battle lines are being drawn around issues such as immigration, health care and education as many states are challenging federal regulations and mandates in the courts. State electorates are holding the feet of state legislatures to the fire in not rolling over on federal legislation that encroaches upon state sovereignty.
Many from the Tea Party movment and other groups who feel that the federal government has become too large and overreaching in its authority, and has violated the limited powers as proscribed by the US Constitution, have found national elections only produced small incremental changes. Instead many are turning their focus to local and state elections and saying to their state governments and politicians, “You have a sworn duty to defend the US Constitution and our State Constitution against federal tyranny!”
Where does your state stand? According to a recent George Mason survey here is their ranking:
New Hampshire ranked as the freest state overall. The top 10 freest states were:
1. New Hampshire
3. South Dakota
10. North Dakota
George Mason’s Hall of Shame, 10 least free states started with the Big Apple:
50. New York
49. New Jersey
48. Rhode Island
There’s been an important update on the move away from the USD as a reserve currency that we’ve reported about over the past several months. The International Monetary Fund (IMF) issued a report yesterday outlining the process to move from a world reserve currency for central banks based on the USD to a fund of Special Drawing Rights (SDR) that would include a basket of different currencies.
The IMF said that the SDRs would create a more stable currency environment by spreading the risk among several currencies while pointing out the volatility of the USD during the recession and recovery process over the past several years. US Monetary policy of quantitative easing has contributed to rising oil and food prices which has indirectly put pressure on oil dependent nations and other poorer nations that live marginally.
In an article on Money.com they report that Dominique Strauss-Kahn, managing director of the IMF, “acknowledged there are some “technical hurdles” involved with SDRs, but he believes they could help correct global imbalances and shore up the global financial system. “Over time, there may also be a role for the SDR to contribute to a more stable international monetary system,” he said. The goal is to have a reserve asset for central banks that better reflects the global economy since the dollar is vulnerable to swings in the domestic economy and changes in U.S. policy.”
Kahn also says that he could see where the IMF through a new reserve currency structure could issue bonds and other financial instruments. This would create a new centralized level of banking structure that would potentially sit above all national central banks. While there have been rumors of centralizing world banking and a new global regulatory structure as recently as Davos last month, this step would be a leap into that direction. The creation of a global banking structure that had the ability to produce ‘treasury-type’ bonds would compete directly with US treasuries for safety and liquidity and cause further erosion of USD value.
Fred Bergsten, director of the Peterson Institute for International Economics, “said at a conference in Washington that IMF member nations should agree to create $2 trillion worth of SDRs over the next few years. SDRs, he said, “will further diversify the system.”
We can’t stress enough how much the impact will be to USD value, particularly if US domestic spending and the US debt is not addressed to make the USD more attractive as it becomes more exposed to a competitive global market.
As Egyptian banks reopened on Sunday the conditions have been relatively stable all things considered, as the US dollar has made a 2.3% gain on the Egyptian pound (EP) according to the BBC, since the crisis started. Rumors are that while the Egyptian government hasn’t intervened directly that state-owned banks have been selling USD to support the EP. The Egyptian stock market will remain closed until next Sunday.
When bank doors initially opened there were a significant amount of customers waiting. But withdrawals have been limited to 50,000 EP ($8,400) and $10,000 in foreign currencies.
The Egyptian government had to pull back on a treasury auction, looking for 15bn (Euro), they had to settle for 1bn as foreign investors are reluctant to buy and borrowing costs have risen for the government around 1.5% from the last auction.
The domino effect to Tunisia’s and Egypt’s political unrest that has been taking place in some respect to other neighboring countries like Jordan and Yemen, is now feared to also destabilize currencies and financial markets as well.
While the Middle East tries to rebound from unrest, Europe is still cautiously waiting for a turnaround in some of their country-states like Greece and Ireland who have undergone renovations and Portugal, Spain and Italy who are on watch lists for now. China has made overtures to purchase European bonds and help in reworking debt.
Meanwhile, the US struggles with mounting national debt, stalled talks on budget policy and cutting spending, and unemployment which remains stubbornly high at 9.0%.
In January, a Tunisian uprising over unemployment, food inflation and government corruption caused the overthrow of the government and for President Ben Ali to flee the country allegedly with 1.5 tons of gold in his possession. The end of last month Egyptians have taken to the street in protest of the Mubarak government. The protesters include the upper middle class to the lower class, decrying the high rate of unemployment and inflation; as of this writing, Mubarak has offered to step down in September after his current term ends. With growing unrest in his own country, Jordanian King Abdullah has sacked his own government as protests against high unemployment and rising prices are growing in the streets.
Other Arab states are concerned about a Domino Effect from the uprisings spreading to their nations and the possibility of the Muslim Brotherhood and other fundamentalist groups of gaining more traction by taking advantage of the social unrest.
While fundamentalists are driving some of the uprisings, the majority of the uprisings have a common thread: Unemployment, rising food and energy prices. Does US monetary policies play a role in the process?
The current world economies run off the US Dollar as a reserve currency. The Arab states trade in US Dollars for the most part through oil revenues, IMF funds and direct aid from the US. When the US decides to use quantitative easing measures to print its way out of economic malaise or to monetize its own debt, it not only destroys the buying power of its citizens but foreign governments and their citizens as well. Unemployment and rising prices are the result of currency and interest rate distortions, as governments, corporations and individuals react to changes in the supply, cost or perceived value of money in the marketplace. The poorest of nations and individuals in those nations seem to suffer the most as they live on the margins of society, meeting their food and shelter needs day by day. They lack the reserves and robustness to endure long periods of economic disruption. Meanwhile, China has been the whipping boy because of its perceived loose monetary policy as well, but from China’s point of view, the US leaves it no choice but to take a defensive posture, by print more Yuan/RMB in response to devaluation of the USD.
Many around the world are reacting to US foreign policies of intervention and involvement in other nation’s governments and of the proliferation of US military presence around the globe but there is a growing resentment to US monetary policy as well. The recent Basel Accord meetings late last year and the meetings most recently with the Chinese were about moving away from the USD as the sole reserve currency and a move toward a commodity structure (unlikely) or a basket of currencies – SDR (Special Drawing Rights). Since the Bretton Woods conference in 1944, the US has enjoyed a monopoly as the worlds reserve currency, which gave it the perception as a safe haven to hold currency and as the best means of exchange. The US has been able to take advantage of that position by making risky monetary and fiscal decisions to run up deficits in domestic and foreign policies and experiment in Keynesian monetary policy of stimulus injections when the economy slows down. This has been done for years through Congressional Budget busting programs and zealous monetary policy, all the while knowing that the world had little recourse as they needed the USD. The US has been making the bed of its own demise for years and yet there’s very little evidence that the political or monetary class is willing to change directions.
Ben Bernanke of the Federal Reserve, Tim Geithner of the US Treasury, the current President and most of Congress are not only not friends of the American people, they are also not friends of most people around the globe as their policy decisions are threats to government stability and individual freedoms and standards of living. If the US wants to have the greatest positive impact around the globe, she would do well to get her own house in order by using the Constitution as a plumb line to determine legitimate federal power by which to cut programs and departments and decentralize public policy decision making, in order to bring about Montesquieu’s Balance of Power (fed/states) as her nation’s founders had intended. They can start by rescinding the Federal Reserve Act of 1913.
A strong, stable US government built upon individual liberty and constitutional restraint would make for a better export to the world instead of the foreign policy bullying and economic policy time bombs we currently export. As the recent US elections show and the unfortunate unrest around the globe backup: both the American people and the world community as a whole is frustrated. The question is: Will the US find it’s historical moorings and once again step up to a leadership position among nations, or will the US continue down the road of self-inflicted destruction, as the world community looks for leadership elsewhere?
As GOP leaders flesh out Tea Party ideology and come to terms in Washington regarding the influence of the Tea Party movement, the majority of Americans according to a Gallup/USA poll say that Republicans in power should take into consideration Tea Party positions when making decisions. 71% of adults think it is very or somewhat important; that breaks down 88% of Republicans, 72% of independents and 63% of Democrats think so.
The article goes on to question why Democrats would be in favor of the GOP pursuing Tea Party ideas, positing that some may feel it is appropriate for the GOP to recognize its constituents wishes, while others might feel the Tea Party ideas are radical, which could play into the 2012 election.
The Overall Opinion/Favorability rating of the GOP is 47%, a recent improvement, the Tea Party rating is 39%, which hasn’t moved much in either direction.
Within the Tea Party movement there are factions between Conservative, Independent and Libertarian elements that disagree regarding the role of government in social issues like marriage, sexuality and drugs. There is general agreement overall regarding the need to limit federal government power, cut spending and balance the budget using the US Constitution as a backdrop. Many in the Tea Party are scrutinizing the GOP’s embracing of Paul Ryan’s Healthcare Alternative as having still too much federal involvement and are looking to the individual states for healthcare statecraft.
Last week world business, political and government leaders met in Davos Switzerland to discuss the next steps in globalization, the integration of national economic and social policies. World leaders have become more and more concerned with how to create a world class governing body to set up regulatory policies to manage national interests as they interconnect to and at times conflict with competing interests of other nations.
In a CNBC article reporting on the week long meeting a survey of the attendees concluded, “The world is no position to face major, new shocks. (World Economic Forum’s annual risk survey). “The financial crisis has reduced global economic resilience, while increasing Geo-political tension and heightened social concerns suggest that both governments and societies are less able than ever to cope with global challenges.”
WEF founder, Klaus Schwab stressed, “We should not look to old-world recipes, since unfettered capitalism and state-directed collectivism have both been bankrupted as guiding ideologies,” he said in a recent media briefing. “Our only way out is the stakeholder concept. The pursuit of our own interests can only be substantially realized by incorporating the interests of all those with whom we have a mutually dependent relationship.”
The article goes on to point out that leaders attending Davos believe that the failure of international governance to grow into the role of global regulator and market planner contributed to the financial failures in the US and EU economic crises and allow for growing world tensions in trade and currency conflicts.
But stepping back for a moment – What is the `Stakeholder Concept’ Schwab alludes to and should we so quickly attribute current world economic conditions to failure in (unfettered) Capitalism?
The Stakeholder concept, is a term used by corporate and more recently government management to broaden an organizations responsibilty and scope; where the term Shareholder is a legal and contractual term that narrowly defines the interests of an entity to those who have a direct financial investment. This terminology can be dangerous as it attempts to bring different investor, beneficiary and third party interests which are unequal and treat them `equally’ or to discount the differences when creating regulatory, economic and social policies. Through a global governing body, the idea is that disinterested policy planning experts can determine what is the greater good and weigh the competing interests of the `Stakeholders’.
Schwab and the world banking community in general didn’t like the rollercoaster ride of this past economic crisis. While most banking risk has been offloaded through centralized banking systems in each nation, the exposure created through complex Derivative products that link different markets and different countries and different regulatory bodies almost destroyed an already fragile system. The idea is to create a global governing body that would have enough power to dictate regulatory and financial policy to participating nations with the hope of offloading the risk from these more complex financial products.
Regarding Schwab’s comment that `unfettered’ Capitalism failed. Crony Capitalism, where the state chooses winners and losers has always produced adverse effects like higher prices, economic bubbles and misallocation of capital. It has been a long time however, since we’ve seen market driven economies with minimum disruption by government entities with prohibitive regulation that reduces competiton and interventionist monetary policy that distort supply and demand. Nassim Taleb, author of `The Black Swan’ recently wrote an article in The Economist that the world institutions are on a trajectory of decentralization. He equated it to how nature works against centralization, which causes fragility and system failures; nature he writes builds redundancy and robustness instead, which is sustainable.
Many years ago man’s cooperative effort to build a better sociey was the Tower of Babel and that did not end well. Let’s be vigilant to be aware of governments and other institutions who say, “Let us put our purses together” to make a better society; time and experience has shown that free and voluntary association and exchange (whether individuals or institutions) allows for best results as markets self correct and determine value and best practices.
As the ship called, `Modern American Capitalism’ lists off shore with engine failure, it still could teach the world a thing or two about the finessed use of government powers. With many centralized and totalitarian governments making the shift to forms of market driven economies, they are still left with pesky ownership issues of property and incentives. State Capitalism around the globe has become the modern rage in order to spur growth, employment and to drive individual incentives within centralized governments, however, most property ownership is maintained by the State. Cost of ownership, asset depletion and deterioration has always been an expensive venture for government or collective ownership. In the theory Tragedy of The Commons, where there is no clear ownship, property tends to be abused and misallocated.
Where Socialism and other centralized managed economies have failed through common ownership of production and resources, Modern American Capitalism has taken a different approach through regulations and taxes while leaving intact private ownership – or at least the appearance. Through regulations and taxes of industry, the government can be the `invisible hand’ rather than the outdated `invisible hand’ of the free market that Adam Smith alluded to, that steers resources and labor into `state favored endeavors’ for the greater good, and not have to worry about ownership issues for the most part. Modern American Capitalism could be nicknamed `Socialism on the Cheap’.
In a January 24th, 2011 column of Kaiser News `Just Call Me Liar Of The Year’, Michael Cannon, Director of Health Policy Studies at the Cato Institute, touches on the issue of regulation rather than `state run’ in regards to the Obama health care legislation. Cannon reveals the subtle nuances of using private health care carriers and facilities (in the short term) in the plan with the heavy hand (invisible?) of government behind the scenes steering the process through regulations, taxes and fines as salable and palatable to the American people versus a full frontal government takeover. Cannon says, “ObamaCare is not a government takeover, I learned from PolitiFact, because it “uses the private health insurance system to expand health care coverage.” But wait. In my research, I found that distinction between public and private to be illusory: what difference is there between a public system where the government taxes and spends your money, and a “private” system where the government forces you to spend your money in the same way? “It is irrelevant,” I wrote, “whether we describe medical resources (e.g., hospitals, employees) as ‘public’ or ‘private.’ What matters – what determines real as opposed to nominal ownership – is who controls the resources.” I detailedhow making private health insurance compulsory – as ObamaCare does – “would give government as much control over the nation’s health care sector as a compulsory government program.”
Columnist Michael Kingsley wrote, “”If the government requires insurers to accept all customers and charge all the same price, regulates all aspects of their marketing to make sure they aren’t discriminating, and then redistributes the profits to make sure that no company gets penalized unfairly, in what sense is the industry still ‘private’?”
The same has be applied to other industries in the US like, banking, housing, agriculture and the auto industry. Industries that were once decentralized and robust to failure/success and characteristically saw creativity, innovation, risk and deployment of capital to its greatest efficiencies as the pillars of market dynamics, now suffer `Jenga’ like connectivities and look to government to offload fragilities that are inherent in the system.
While laws and some regulation can be productive, those that are open-ended and arbitrary leave the door open for government control and abuse. Through understanding the proper roles of federal and state powers (Constitution), most regulation and positive laws are exposed to competitive models and experimentation through state and local governments where government is the most effective and responsive.
A year ago January 12th, 2010, a 7.0 magnitude earth quake hit Haiti at 4:53pm, the death toll according to the Haitian government today is at 316,000 and counting as bodies are still being pulled from the rubble. The death toll published by the Haitian government is being disputed as they give no accounting for their numbers, many believe it is much higher. In fact, much the Haitian Government has been doing for the past year is being brought into question as the global community has responded with money and resources but very little has found its way into bellies and infrastructure. Is there a teachable moment here?
“We wake up every morning in the dust … We need people who can understand the country, who can change the country,”Carla Fleuriven, a 19-year-old mother of three dressed in a white skirt and blouse, told Reuters outside the Cathedral.
“God made the earthquake, but it’s our leaders who are selling our misery,”said Sephonese Louis, 58, one of the protesters in the Champs de Mars, Port-au-Prince’s central plaza on the day of the 1 year anniversay.
“The Interim Haiti Recovery Commission — a Haitian and international partnership including Canada — is headed by former U.S. president Bill Clinton and Haitian Prime Minister Jean-Max Bellerive. It has provided food, water and basic accommodations to millions of survivors. But it has been criticized by Haitians and international organizations for lagging on restoring normality to hungry, jobless and deeply traumatized people”Olivia Ward writes in an article, `Haitian Support Stumbles’. Ward also sites that only 20%-30% of world aid has made it into the country. Later in her article Ward quotes an international Charity Oxfam Executive ”The international charity Oxfam says impressive efforts were nevertheless made in providing emergency relief that saved “countless lives.” But its recent report on reconstruction progress one year after the earthquake says there are vital elements missing from rebuilding plans, including strong leadership, co-ordination and an employment program to put Haitians to work in their own country. “We see projects approved that fit into the broad national framework,”says Robert Fox, executive director of Oxfam Canada. “But it’s at the level of detailed thinking about sequencing, and the relationship between (projects) that is needed. It’s not just a case of what can be done, but who can do it. That means, for instance, a job creation strategy. Reconstruction needs carpenters, plumbers and masons. It’s not rocket science that you can train those people in about six months.”
Is the teachable moment that Haiti needs a change in leadership and for government to be more responsive to the needs of their people? Possibly, and unfortunately with the return of ‘Baby Doc’ Duvalier, who knows if Haiti’s in for yet another round of political turmoil. But could the other teachable moment be that governments in general are not the best vehicle to deliver aid? Whether it’s rice rotting on the docks of Port-au-Prince or mobile homes decaying on the outskirts of New Orleans during Katrina: isn’t it time to assess the way we approach disasters? Even observing the recent oil spill on our east coast, it wasn’t until leadership became more localized and to a certain extend privatized, even with BP involvement (love them or hate them) that meaningful progress was made.
Government works best when it protects `Negative Liberties’, like life and property, but far worse when delivering services and making moral judgments. NGOs (Non-governmental Organizations) fare no better, as they link through government monies and political interests in determining policies and outcomes. Currently there are over 40,000 NGOs worldwide and in a 2008 report by Esra Guler voices frustration as lofty goals to eliminate poverty have fallen short. Guler says in her report `How To Improve NGO Effectiveness In Development?
“The lack of coherence between what an NGO envisions and what it does bring ineffectiveness since it creates confusion in the minds of the NGO staff, its supporters, and the outside world and weakens focus and energies.”Later in the article Guler highlights the NGOs that have focused on Poverty and criticizes the poor performance in relationship to huge amounts of funds and resources that have passed through their hands.
On the other hand private initiatives have been much more successful than government or NGO endeavors in part because they tend to be smaller in scope and the individuals, corporations or charitable organizations tend to attach more accountability to the donations.
The argument that some disasters are so big that they can only be covered by public funds is nonsense, in an article in the NY Times in July 2010 they projected that the final cost of the Haitian earthquake to be between $7-13 billion, while private donations at that point were estimated to be close to $4 billion. The estimates were based on projected government and NGO costs which are two to three times higher than private operations. The overcharges to the federal government from Katrina and mismanagement by FEMA has reached into the tens of trillion dollars to date.
Many actors and musicians like Bono and George Clooney have done a good job of putting the spotlight on special causes, but most of those money are funded through quasi-public endeavors and arguably resources are squandered. How much better for celebrities, government officials to use their high profile positions to continue to point to needs in our society but allow for private initiative to meet those needs. Not only could the monies and resources be used more effectively but society is enriched more when need and giver make a more direct encounter.
“It is said that the world is in a state of bankruptcy, that the world owes the world more than the world can pay.”
(Ralph Waldo Emerson)
Ironically in searching for a couple of quotes to lead this article off on Bankruptcy, I found more quotes on the subject by politicians who warned if we as a nation didn’t `invest’ more money through government for things like health care, education and wages that it would lead to bankruptcies of all types. ‘ In this most powerful nation in the world, lack of access to health care should not force local and state governments, companies and workers into bankruptcy, while causing unnecessary illness and hospitalization.” (John Conyers)
In a New York Times article this morning (January 21, 2011) Mary Williams Walsh talks about the quiet meetings happening in the House and Senate regarding the growing possibility of State bankruptcies. Currently there are constitutional issues that prevent states from seeking bankruptcy relief unlike local municipalities, but lawmakers having started to entertain a few inquiries by states such as California and Illinois and are rushing through the corridors of DC preparing a `Best Practices’ plan of approach.
Many are in denial that some States are in the kind of financial peril that warrants bankruptcy discussions (come on! We read it in the Times!) but another ironic quote is Bob Lutz the auto executive commenting on GM’s financial condition, “Imminent GM bankruptcy was always fiction, created by Wall Street and the media.” Here at ACD we brought up the possibility over a year ago and investment managers like Meredith Whitney as recently as December suggested that with 49 states that have mandatory balanced budgets in their charters will be forced to make dramatic spending cuts, pay increased debt finance costs or default on loans that are coming due later this year. Whitney and others are forecasting that unemployment will rise later this year due in part to spending cuts forced upon the States.
The two big questions that will affect the outcome are: How much will the Federal Government become involved (which can distort process) and what liabilities will the States renegotiate on? The NYTimes article mentions a type of Federal Board that could set standards and regulate the process, like with the Savings & Loan crisis of the late 1980s. Fortunately or unfortunately, when decisions come out of Washington they are politicized and decisions regarding viability and allocating resources which free markets would go one way, Washington could take a different root. This brings up the liabilities, some that might be on the table to negotiate or eliminate through a bankruptcy process are: Pensions (retirees), Bondholders and Union Contracts. Most financial analysts rate the priorities as Bondholders or Union Contracts first and retirees Pensions as last. In recent years Federal and State wages have far exceeded private wages and while most Bondholders tend to be retirees, there’s still an understanding of risk (albeit, low) in Bond ownership.
The good news is the discussions about where to cut state spending and how to work out their liabilities is starting to be done head on rather than temporarily refinanced and kicked down the road for another day, let’s hope it leads to market driven answers with a minimum amount of government intervention keeping with constitutional principles.
Thursday morning the New York Times put a positive spin on initial meetings with China, suggesting that China could make concessions on human rights, “More surprisingly, perhaps, Mr. Hu said at a White House news conference that China “recognizes and also respects the universality of human rights,” a palpable shift for a government that has staged a two-year crackdown on internal dissent and imprisoned a Nobel laureate. Until Wednesday, recognizing credos like democracy and human rights as “universal values” had been all but taboo in Chinese political discourse, although China has signed the United Nations convention that enshrines the principle of universal human rights.”
While Congress and pundits speak harshly about Chinese human rights, monetary and trade policies, the White House and business leaders met behind closed doors to secure whatever `crumbs’ President Hu and China were willing to drop. They are hoping for China to tighten up its monetary policy, something the US is unwilling to do, but it looks like both parties reached a bilateral agreement on a modest trade deal worth $45 billion for some US companies, like Boeing, Goldman Sachs, and GE.
Senator Charles Schumer (D-NY) chided China Monday, saying that “the US has put up with unfair trade advantages and currency manipulation for too long.” That would be fine and we love when Washington gets aggressive with our interests in mind, but unfortunately it isn’t fully true and we are not in a position of strength to negotiate or make threats.
President HU over the past few days has made comments, particularly written comments in answers to questions posed by media outlets including the Wall Street Journal, regarding potential conflicts between the US and China on trade and currency valuations. Mr. Hu said that the current world currency system which benchmarks the USD as a reserve currency is a `product of the past’. Hinting that the Yuan and Renminbi [RMB] could be a competitor in the not so distant future. He also pushed for more banking and financial reforms through global regulations and universal standards that could make USD less attractive to investors and make US companies less competitive in global markets.
Peter Schiff, Founder of Europac an investment fund, and one of the few economists to have seen the housing crisis, In his newsletter from January 19th 2011 comments on the real problem that China finds itself in regarding monetary policy, “The global economy has become so unbalanced that even government ministers who would normally have trouble explaining supply or demand clearly recognize that something has to give. To a very large extent the distortions are caused by China’s long-standing policy of pegging its currency, the yuan, to the U.S. dollar. But as China’s economy gains strength, and the American economy weakens, the cost and difficulty of maintaining the peg become ever greater, and eventually outweigh the benefits that the policy supposedly delivers to China. In the first few weeks of 2011 fresh evidence has arisen that shows just how difficult it has become for Beijing.
Twenty years ago, China’s leaders decided to ditch the disaster of economic communism in favor of privatized, export-focused, industry. The plan largely worked. Over that time, China has arguably moved more people out of poverty in the shortest amount of time in the history of the planet. But somewhere along the way, China’s leaders became addicted to a game plan that outlived its usefulness.
In order to maintain the peg, China must continually buy dollars on the open market. But the weaker the dollar gets, the more dollars China must buy. And with the U.S. Federal Reserve pulling out all the stops to create inflation and push down the dollar, Beijing’s task becomes nearly impossible. Last week, it was announced that China’s foreign exchange reserves, the amount of foreign currency held at its central bank (mostly in U.S. dollars), increased by a record $199 billion in 4th quarter 2010, to reach $2.85 trillion. These reserves currently account for a staggering 49% of China’s annual GDP (if the same proportional amount were held by the U.S., our measly $46 billion in reserves would have to increase 163 times to $7.5 trillion).
In order to buy these dollars, the Chinese central bank must print its own currency. In essence, China is adopting the Fed’s expansionary monetary policy. In the U.S. the inflationary impact of such a strategy is mitigated by our ability to export paper dollars in exchange for inexpensive Chinese imports. Although prices are rising here, they are not rising nearly as much as they would if we had to spend all this newly printed money on domestically produced goods. The big problem for China is that, unlike the U.S., the newly printed yuan are not exported, but remain in China bidding up consumer prices. As a result, inflation is becoming China’s dominant political issue.”
China’s economy has heated up, with a GDP of 10.3% in 2010 (while US GDP for third quater was 2.6%), but its CPI rose 5.1% with food prices rising more than 10%. China has to do something.
While many in the White House, Congress, Federal Reserve and the Treasury Department point fingers at China’s stubborness in addressing conflicts between the two nations, China and the rest of the world point back at the United States and say, “Get your fiscal house in order”. The US and the States’ budgets must be cut substantially and the Feds policy of quantitative easing must be discontinued if for no other reason than through the Basel Accords (3) held this past fall, there’s become a general consensus to move away from USD reserves and to a basket of currency reserves (Special Drawing Rights) which could reduce demand for USD and send the US economy into a downward tailspin. Meanwhile China, the Middle Kingdom marches forward to take what it believes and has started to disclose publically – its rightful position as world global leader. It has already taken small steps in that direction, as China and Russia have agreed to negotiate new trade and currency deals, cutting out the need of the USD as a reserve. They have secured trading deals in Africa and South America, the US’ backyard, and to the surprise of the global community, China has also stepped out boldly to offer guarantees and purchase agreements of Euro nation debts, a move that in the past would have been the role of the US.
Meanwhile, the news being peddled by the US media and government officials is that the decline that the US is seeing is temporary and that it will remain the world’s Superpower, yet to read the European and Asian news, the US’ decline has been anticipated for some time.
As China’s President Hu Jintao arrives in Washington to meet with President Obama, there are seismic shifts around the world as the plates of social and economic systems rub up against one another in the form of trade, currency and credit policies. As the sun sets on the US as the world’s Superpower, some look to China as the most likely to take its place.
While the US has suffered tremendous loss of leadership position around the world on social and economic fronts and has suffered an extended recession of late, it still ranks at the top regarding individual freedom and personal and small business wealth, and stands to lose a lot if these shifts happen.
Mr. Hu has already hinted at what he wants and is going to happen in his answers to the questions posed by media. There’s coming a new global initiative that involves economic and banking regulations which will include a new currency valuation methodology (Basel III has resulted in calls for a basket of reserve funds that could dilute USD power as it makes room for other reserve currencies), which will diminish the benefits that the US Dollar has enjoyed as the sole reserve currency since 1944 (albeit, a responsibility at times abused). The compromises and sacrifices that our politicians, bankers, mega-corporations and regulators are rushing to make will cause an osmotic event – the high density freedoms and wealth of the US will shift to accommodate the lower density freedoms and wealth of other countries around the world. Our leaders will say, `It’s for a greater good’, `China’s time has come and it will have little impact on the US long term’; but don’t be fooled, centralized and collective structures are inherently unstable and abusive to minority interests. For the past 70 years the US has suffered under the hands of its own government and the world power it enjoyed, but now there’s the potential to suffer at the hands of the worldwide community, of which the majority doesn’t share the same beliefs or lifestyles. How do you think that will end?
As an aside, please don’t draw from the analogy `the survival of the fittest’ or `strong advantages the weak’ scenarios to justify `managed society’ policies through centralized governments. While Government managed societies do only shift wealth and freedoms back and forth with little if any growth. Limited governments based on free market principles do not create zero sum scenarios and allow for real growth in wealth and freedom among nations willing to apply the same principles.
But don’t worry, our politicians, bankers, mega corporations and regulators have secured a place at the global governance and finance table for themselves, even if just for appearances, token influence and a lot of cash.
Also, in fairness to China and other nations regarding the call by the US Treasury, Federal Reserve and financial community to stop devaluing their currencies; the US is by far the greater abuser, as they are the biggest rock in the world currency pond, and the US dollar value since 1913 has dropped more than 95% and we are well on the path to price inflation as food and oil prices have increase significantly.
A positive outcome of the 2010 elections is that there’s more influence in congress for decentralized monetary policy and trade policies, and less government intervention. Ron Paul (R-TX) now yields the gavel as Chairman of the House Subcommittee for Domestic Monetary Policy and Technology, and holds great influence over Treasury and Federal Reserve activities.
As we ring in 2011, we look back at a year that was in some ways a culmination of the three previous years that saw banking, housing and debt crisis’ and an unpopular bailout that resulted in a Democratic 2008 landslide and a federal government on steriods that in 2010 lead to a reversal of fortunes for the Dems as the GOP won big. In 2010 the GOP took the majority in the House and narrowed their deficit in the Senate, in addition they enjoyed big wins at the state level in gubernatorials and state houses around the country.
As we ease into 2011, a skeptical voting population weighs the prospects of more government to solve dire economic and social problems that lie on the horizon or considers a different direction of less federal government intervention, and more state oversight, allowing freer markets and private capital to determine price and value.
Around the world, the news of China’s decision to actively use its overseas investment fund to buy EU assets and bonds, and of new trading and currency pacts that China has made with Russia as well as South American countries hint at political and economic realignments to come. The recent Basel III meetings also suggest a move away from the USD as the world’s reserve currency.
In 2010, Americans watched as a man jumps from a balcony in the Romanian Parliament, protesting 25% cuts in wages and prophecying that government policies would lead to the ruin of his children’s future as he falls to the floor. In Rome bomb packages are delivered to embassies to protest budget cuts. All around Europe in places like England, France and even Germany there’s growing unrest and distrust of government policies as governments are forced to renege on generational promises. Americans ponder in their heart, could this hit our shores too.
In 2011, there’s a growing likelihood that the PIGS crisis of the EU will hit US shores in the form of Municipal Bond defaults and State budget crisis’ that will put pressure on the Federal Government to guarantee State and Local debt. State governments are looking at increasing finance costs of budget shortfalls in 2011 as many have bonds coming due, and are facing the stark reality of cutting budgets as much as 30% and laying off hundreds of thousands of state employees. Regional banks with no quantitative easing or stimulus options from the Treasury or Federal Reserve, have seen a significant increase in bank failures and mergers this past year and will likely continue into 2011. According to a recent Case-Shiller Report and forecasts by Meredith Whitney a economist specializing in the banking sector, suggest that housing prices still need to fall as much as 25%.
While there are dark clouds gathering and many have already suffered from job losses, home foreclosures and business failures, there may be good news on the horizon. As mentioned in the second sentence above, “A skeptical voting population weighs…more federal government..or…less federal government..”. The economic and social ills we’ve suffered over the past few years might just be the very initiative that the US population needs to reexamine the role of government and what the US Constitution has to say about separation of powers between the Federal, State, Local and Individual governments.
Let’s raise a glass to the rollback of an overly centralized federal government that is out of step and out of bounds with the US Constitution. Let’s play a part of getting our States to challenge federal powers that violate constitutional boundaries by state ‘civil disobedience’ or as its better known as, Nullification. Let’s take personal responsibility in what our part is in bringing about change in the direction of Liberty. Become proactive and get involved this year and be a part of the solution.
On Chris Matthew’s Hardball show on December 21, 2010 Matthews commented on what he believes is a growing phenomena across the country, the concept that each of the 50 States have a fundamental right of protection to exercise ‘Nullification’ against unconstitutional federal power. In his closing comments he muses about Jefferson’s agrarian society and “healthcare decided in the town square”, as if to say, the people are too ignorant to make basic decisions on their own without elitists from the federal government as caretakers.
Here’s Matthews closing comments, “Why on god’s earth, why here in these united states to which we all pledge allegiance are men talking loosely of nullification and cessation? Have they no feeling to our country, how it grew, the pain it suffered to grow to this great republic that it is today? There must be something malicious. Don’t people know the power of the words — nullification, cessation? Request a state nullify, overrule an act of congress? Can a group of states nullify an act of congress? Not according to the constitution. Why are we hearing voices raised against the federal government as if this were 1860? I ask this as a question for the basic reason that people around me don’t talk like this. Is that the way people talking this way want us to go — a confederacy? Is that their dream? A country of little farms and loosely allied states, decisions like healthcare are made at the town square? Let’s go back to the old days when we thought of ourselves as citizens of separate colonies and not the united states. Before we complicate life by thinking of americans pledged to certain fundamental values under a strong constitution that protects the rights of individuals. Now, wait a minute. Is that what the states’ rights is about – substituting states’ rights for individual rights? Now it makes sense, doesn’t it?” (You can see full transcripts below)
Matthews’ response is not uncharacteristic of many on both the left and right who view federal powers as an agent for good and the Constitution as securing that power in order to regulate individual behavior in society. Unfortunately for them, that was never the intent of the framers and as Thomas Woods put it, “In a free society people do not require Constitutional Authority to act, the government does”. Matthews and the Washington elites view the federal government as the best protector of individual freedoms, while history has shown the opposite.
It was Massachussetts that stood up to the federal government against the Slave Act in 1850s, which required free states to give up slaves who took refuge in those states. It was the federal government who came up with discriminatory immigration legislation like the ‘Wetback Act’ of 1952. It has been the federal government in conjunction with the federal reserve that has devalued our currency by more than 95% since the Federal Reserve Act of 1913.
While States can make wrong decisions just as well as the Federal Government, the difference that the framers saw was that the States could never become a monopoly and pure sovereign in the same sense as the potential for the Federal Government. Because of the benefit of decentralization and redundancy in there being many states, competition would spur creativity and best practices; while a single monolithic entity like the Federal Government would be more prone to monopolisitc aspects and insulate failure and be resistive to change. A centralized federal system, resistive to change and protected from competition, would more likely use public policy to alter the behavior of its citizens to produce a government-favored outcome. We’ve seen this recently in healthcare and the new FDA bill that regulates food, but also in tax and welfare policies and through regulation of industry.
Both Jefferson and Madison toward the end of the 18th Century wrote about the states’ power of nullification through the Kentucky and Viriginia Resolutions of 1798,99. Jefferson, strongly believed in the right of each state to validate federal powers and could exercise negation of federal law if it didn’t fall under a constitutional power. Madison, on the other hand, while fully believing as Jefferson did in nullification and the need for states to hold the federal government to constitutional standards; he was more cautious in his approach and saw the benefit in enlisting the cooperation of his ‘fellow states’ in either an appeal if not outright nullification of federal law.
Wisconsin Supreme Court Ruling 1859, “Resolved, That the government formed by the Constitution of the United States was not the exclusive or final judge of the extent of the powers delegated to itself; but that, as in all other cases of compact among parties having no common judge, each party has an equal right to judge for itself, as well of infractions as of the mode and measure of redress. Resolved, that the principle and construction contended for by the party which now rules in the councils of the nation, that the general government is the exclusive judge of the extent of the powers delegated to it, stop nothing short of despotism, since the discretion of those who administer the government, and not the Constitution, would be the measure of their powers; that the several states which formed that instrument, being sovereign and independent, have the unquestionable right to judge of its infractions; and that a positive defiance of those sovereignties, of all unauthorized acts done or attempted to be done under color of that instrument, is the rightful remedy.”
As we move into 2011, it will become more apparent that the election of 2010 while a positive result was not the answer to our nation’s ill. To reduce the size and more importantly the sphere of power of the Federal Government, can only come from an outside force – the individual through the States. Power has rarely been relinguished voluntarily. Nullification is one of the tools that must be exercised. I believe you’ll start to hear more and more criticism and villification of the concept as its idea starts to spread and gain traction.
Tools like nullification of unconstitutional federal powers by the States, and decentralization of our banking system in order to bring back value and stability to our currency, are two goals that we should plan for through the Tea Party movement and other grass roots movements that want to see real structural change with the protection of individual liberties as its goal.
After leaving college in the early 1980s I worked for my father in the insurance business through his independent insurance agency that sold property & casualty insurance. I remember him telling me that one of the soundest institutions was the insurance industry because it was regulated through 50 independent states and had made it through wars and financial crisis’ for centuries and in fact had been a stabilizing factor during the bank panics of the 19th and early 20th centuries and both World Wars. Many of us have borrowed on our life and annuity policies to pay bills, send kids to colleges or when between jobs.
I experienced first hand the insurance industry’s handling of a crisis through the financial turmoil of the late 1980s into the 1990s working for a life insurer. My father eventually sold his insurance agency and I had left to go into sales management with Monarch Life out of Springfield, MA. Monarch like many insurers started purchasing commercial real estate and High Yield (Junk) bonds to make their investment portfolios more competitive as money started to pour out of insurers’ annuities and life insurance products for bank CDs that provided higher interest rates. At the time there was a split in investment strategy between those conservative insurers who didn’t jump into RE and Junk and others that did. The conservative insurers emphasized the stability and financial strength of their companies while pointing out that people bought policies for protection and not speculation.
The Savings & Loan and Junk bond crisis of the early 1990s hit and many of the insurers who decided to take on more investment risk started to experience captial erosion; but it wasn’t until Wall Street Journal columnists Susan Pulliam’s and Mitchell Pacelle’s article, ”Loans May Burn Builders and Insurers” hit the news stand on February 26th, 1991 that the news of the extent of exposure many insurers had became apparent. Almost immediately, policyholders started surrendering policies and withdrawing cash values from those company they perceived in trouble. Those were dark days if you worked in the business or had policies with companies that were insolvent. But after the smoke had cleared and over a relatively short period of time when compared to recent banking crisis’ the insurance industry was able to adjust quite well. There were failures, with companies going out of business, but most was orderly with mergers, purchases and in worst cases, state intervention. Because the insurance industry was relatively free to respond to market forces with little federal and even state intervention (except where necessary) there was little distortion and markets where able to clear assets from failing companies to successful ones. Unfortunately the same can’t be said on the banking side as we will look at below. I personally moved from the ‘fire into the frying pan’ as I went from Monarch which later filed bankruptcy and the State of MA putting its assets into receivership for policyholders, to Mutual of NY which suffered a similar fate, being bought by Equitable which was acquired by AXA a french insurer.
In my experience with my policyholders (many of which are still on the books – even Monarch policies) not one of them lost a penny and not one was denied a legitimate claim; and just as important, there was no bailout of insurers or policyholders who either knowingly or not took on additional risk to get better returns or ‘fatter’ policy benefits. This was true of our banking industry also when our banking system was run by the states and relatively decentralized. Unfortunately, to quote the former Chief of Staff, Rohm Emmanuel, “Never waste a good crisis’; the federal government through progressive and conservative policy wonks, has always been more than willing to jump the fence of constitutional limits to come to the aid of industry during economic struggles and gobble up ’rights’ and individual liberties.
The Bank Panic of 1819 involved risky loans, experimentation by certain states with fiat currency and aggressive westward expansion. Even large banks back in NY and MA were acting as clearing houses for smaller banks in OH and IL, many of which were heavily invested in these hapless ventures. Eventually the bubble burst, homesteaders started to default on loans, many licking their wounds and heading back east. Banks that had the most exposure (particularly those in states who could go off gold) started to lose depositors and capital. In an 18 month period many small banks and a few large ones went under , but the crisis was over and the banking industry survived and was the stronger for it. During the height of the crisis depositors sought out banks with strong capital structures, particularly in gold and other hard assets. They traded their non-gold backed currencies and notes (even at a significant discount 70%+) for bank notes and currencies that were with well capitalized banks that (coincidentally) were backed by gold and silver.
The ’takeaway’ here is that centralization through federal powers creates fragility and the potential for large scale collapses that gives opportunity for government mischief; while decentralized systems don’t necessarily prevent failures, but rather reduce the size and influences of them and create a laboratory for risk experimentation which when successful replicates through the system and when it fails it dies at initiation. Also, local regulations are more effective than federal as the dynamics and resources in one area of our country could be significantly different than in other areas. Even in systems that are successful, the application in one state and locale could be tweaked differently than in others. I’ve linked Murray Rothbard’s excellent analysis of the banking crisis of 1819, it gives the reader a better understanding of the solutions we need today.
“Network neutrality (also net neutrality, Internet neutrality) is a principle proposed for user access networks participating in the Internet that advocates no restrictions by Internet service providers and governments on content, sites, platforms, the kinds of equipment that may be attached, and the modes of communication. The principle states that if a given user pays for a certain level of Internet access, and another user pays for the same level of access, then the two users should be able to connect to each other at the subscribed level of access. (Wikipedia)
Ah, the old equal access argument. Where have I heard that before (only all outcome based programs managed by government to produce equality). The threat to access is not from the private sector but the public and the allowance of the collection of power in the hands of FCC Chairman Julius Genachowski. Recently Mr. Genachowski has changed his rhetoric from harsher control of the airwaves to setting moderate goals (for now) as listed in an article by Erik Sherman called, ‘Net Neutrality Faces a Political Gauntlet, and the Fall-Out Will Hit Tech Firms’ in the article he gives this list of Genachowski’s ‘wish list’:
“Broadband providers would have to tell consumers and businesses how they manage their networks. Consumers and businesses have a right to send and receive lawful traffic, so broadband providers could not block content, apps, services, or the connection of devices. No public or private entity could unreasonably discriminate in transmitting traffic so as not to effectively decide which businesses would win or lose. Broadband providers would have flexibility to manage their networks and to implement usage-based pricing, something that they’ve wanted for years. For now, it would be hands off wireless broadband other than requirements for transparency and a no-traffic-blocking rule.”
In an article/video from Reason Magazine, “Net Neutrality For Dummies’ raises some suspicion regarding the pro-NN people and put up the ‘caution lights’ when finding out that Al Gore is a major supporter. Peter Suderman, Associate Editor, Reason, also points out from data, that there is no current suppression of content and that this is more about potentiality rather than current reality:
“Al Gore says that legislation ensuring “net neutrality” is “needed for the revitalization of American democracy.” Techno-vegan Moby says without it, the “egalitarian” Internet would disappear. Even Mallory from Family Ties, Justine Bateman, thinks “the freedom to access the site of any organization from Planned Parenthood to the Christian Coalition is going to end.”
“But just what the hell is net neutrality—and is all that is good and holy about the Internet really imperiled if legislation guaranteeing it isn’t passed? Network neutrality is necessary, say its supporters, to make certain that all data on the Internet is treated equally and to protect users from information discrimination on the part of Internet service providers who will slow down or even block access to certain sites.”
The flag being waved in the Net Neutrality debate is the same one that has been waved around all social issues: Equality, Justice, Opportunity and Fairness. Progressives and those who favor government solutions believe that the government through regulation and arbitrary laws can manage toward equality, justice, etc; while those who oppose big government solutions believe that freer markets with less government regulation provide a vibrant market for both consumers and businesses.
What progressives and those who look for government solutions don’t like is that resources (private capital) moves toward successful ventures, and through market dynamics it picks true ‘winners and losers’. They would rather do it themselves.
Let’s see, limit the Federal Reserve from ‘double mandate’ of controlling prices and employment, to just focusing on prices and possibly returning USD to a gold valuation peg. Rescind Obamacare. Substantially reduce the burden of taxation by introducing ‘flat tax’ and being able to complete and file taxes on your blackberry or even ‘tweet’ them. Repeal section 404 of Sarbanes-Oxley, which discourages companies domiciling in the US. Limit federal budget to maximum of 20% of US GDP. Is that music to your ears?
Rep. Mike Pence (R-In) has been spreading that ‘fairy dust’ in a speech before the Detroit Economic Club this past week and conservatives are finding it exciting as witnessed by a Wall Street Journal article, Rep Pence: Tweet Your Tax Return
“This means that at least until a former mayor of Wasilla decides whether to run, the door is wide open for conservatives to woo GOP primary voters. Making a particularly strong case this week in a speech to the Detroit Economic Club was Rep. Mike Pence of Indiana. The outgoing chairman of the House Republican Conference, Mr. Pence has not yet announced whether he will run. But on Monday, he stoked conservative interest by sketching out a Reagan-style economic program: sound money, limited government and tax policy that encourages growth.
After criticizing the excessive money creation under Federal Reserve Chairman Ben Bernanke, Mr. Pence called for eliminating the Fed’s dual mandate to pursue both price stability and full employment. He wants the Fed to focus exclusively on price stability and thinks the U.S. should consider returning to gold in setting the value of the dollar. President Reagan understood that inflation is the thief of the middle class and that investor confidence is destroyed when governments debase the value of their currencies. Mr. Pence apparently understands this, too.”
As EU countries fall like dominoes, the choices for each country is narrowing to only a few options. “The choices are still between default, deliberate devaluation and divorce from the euro,” Kit Juckes, head of foreign-exchange research at Societe Generale SA in London, wrote in a report. “The weekend bailout offers a delay in making these choices rather than providing the answers markets were looking for. The bottom line is that the crisis is far from over.”
The yield on Spain’s 10-year bond added 24 basis points and Portugal’s climbed nine points as the cost of insuring the countries’ debt against default jumped to records; while lenders in the corporate markets are willing to take less collateral for bigger yields.
While Germany ‘saber rattles’ economically in its threat to unwind the Euro and EU relationships as debts mount and dominoes tumble in the form of Greece, Ireland and soon to come Portugal, and the potential for Spain and even Italy on the horizon; Daniel Hannan, MEP shares an interview with an ‘unnamed savvy financial expert’ who gives an interesting counter view. He suggests that unfortunately in his view the Euro won’t die off but be propped up by Germany and other large EU economies that need the devalued currency to give them a competitive advantage in world trade.
“He is confident that the euro will endure its present travails, for one reason above all: its survival suits Germany. The cost of bailing out the peripheral members is more than outweighed, he believes, by the benefits to German industry of an artificially low exchange rate. The ideal outcome for Germany is for the euro to limp on, battered and cheapened, and for the European Central Bank to be pushed into quantitative easing. Never mind the German public’s atavistic attachment to a strong currency, he says; German exporters know a good thing when they see one.”
Whispers in Washington and around the country have been increasing regarding a similar bank and debt crisis in Europe hitting US shores. Sheila Bair, FDIC Chairman, is saying what many are thinking. Bair writes in a Washington Post article,
“With more than 70 percent of U.S. Treasury obligations held by private investors scheduled to mature in the next five years, an erosion of investor confidence would lead to sharp increases in government and private borrowing costs. And while we enjoy a uniquely favored status today – investors still view U.S. Treasury securities as a haven during crises – events in Greece and Ireland should serve as a warning. The yields on their long-term government securities have risen from rough parity with U.S. Treasury obligations in early 2007 to levels that are hundreds of basis points higher. If investors were to similarly lose confidence in U.S. public debt, we could expect high and volatile interest rates to impose losses on financial institutions that hold Treasury instruments, and to raise the funding costs of depository institutions, which can be highly vulnerable to interest-rate shocks. All of us would pay more for consumer and business credit, and our economy would suffer.” (Sheila Bair, FDIC Chairman)
Bair goes on to say that while confidence in the USD and economy have stayed relatively high considering the 2008 financial crisis, she warned that we must not take it for granted and to get our financial house in order. She mentioned the two proposals on the table now, “Recent proposals by the co-chairs of the National Commission on Fiscal Responsibility and the Bipartisan Policy Center represent credible first steps toward recognizing and addressing the nation’s fiscal problem. Both propose to reduce and cap discretionary spending, enact comprehensive tax reform, reduce mandatory spending on health care and other programs, and ensure the long-term solvency of Social Security.”
The two proposals mentioned by Bair include spending cuts and tax increases, but don’t address monetary policy and the finance policy of Treasury department. US States are also approaching critical mass, as they look to finance deficits and maturing bonds. They are vulnerable to increases in interest rates.
“Chinese Vice Premier Wang Qishan and Russian Deputy Prime Minister Alexander Zhukov, the two chairmen from each side of the Joint Commission for China-Russia Regular Meetings of Heads of Government, attended the signing ceremony held at the fifth China-Russia economic and trade summit forum.
“Among the deals were two financial agreements worth 236 million dollars, 10 cooperative agreements on economy and technology totalling 5.3 billion dollars, and one trade agreement worth around 320 million dollars.” (xinhuanet.com)
“The yuan has now started trading against the Russian rouble in the Chinese interbank market, while the renminbi will soon be allowed to trade against the rouble in Russia, Putin said.” (China Daily)
The US and European Union has struggled with sovereign debt and fragile currencies, in the wake of the Greece and Irish bailouts and US monetary policy of quantitative easing. The EU risks further exposures in Portugal and Spain, while a move away from the USD could increase interest rates in the US which could hinder US States from refinancing large budget deficits.
Writing in The Economist, Nassim Taleb looks into his crystal ball that foresaw the financial crisis of 2008 unlike many prognosticators, “The great top-down nation-state will be only cosmetically alive, weakened by deficits, politicians’ misalignment of interests and the magnification of errors by centralised systems. The pre-modernist robust model of city-states and statelings will prevail, with obsessive fiscal prudence. Currencies might still exist, but, after the disastrous experience of America’s Federal Reserve, they will peg to some currency without a government, such as gold.”
Taleb believes it is more likely that technology that is more than 25 years old will survive rather than recent tech that will be absorbed by the new or become obsolete.
In the brief article he hints that companies (and other systems like govt, political, charitable, etc) that are ‘debt laden’ won’t survive. Are the financial crisis in Europe and around the world, and political changes like the Tea Party movment signs of that? Taleb has a new book January 2011, Procrustes Bed based on the mythological story of ‘one size fits’ all and the macbre results – keep an eye out for it.
Seven billion pounds happens to be the total saving that would be made by all the welfare cuts put together. You know: the cuts that the BBC, the Guardian and the Labour Party insist will destroy social security. The cuts that Tristram Hunt says will mean a return to the Victorian workhouse. The cuts that John Cruddas says will drive a million people from their homes. The cuts that Polly Toynbee calls a final solution to the poor.
So now we know: every penny saved by these cuts will go to prop up the euro. To put it another way, at a time when Britain’s public sector debt stands at £850 billion, we are borrowing a further £7 billion to send to Ireland.
Ought we to help the Irish? Yes: they are our neighbours and our allies, our suppliers and our customers, our friends and, in many cases, our relatives. But we don’t help them by keeping them in the euro. Ireland is in this mess because of the single currency, and will stay in this mess until it leaves. If we wanted to offer Ireland practical assistance, we would help them out of the euro, by allowing their debts to be denominated in sterling.”
Hannan brings up a crossroads decision for Ireland as EU deal is still being ironed out. Does Ireland go deeper into EU control, hanging their hat on the EURO and harsher captital requirements and still new currency and bond fluctuations as the EU still has Portugal and Spain to consider or does it look for an exit plan that Hannan suggests as it takes a harder look at spending policies internally and to the UK and its potential to rollover its current debt from EUROs to Pounds.
I printed out and scored the 37 ‘cost’ accounts in the 2009 GAO ‘United States Government Financial Statement’. I’ve included the link for the full financial report at bottom of this blog. If you read the section ‘Management’s Discussions and Analysis’, it paints a dire future of a government out of control and unsustainable. Minor adjustments on growth and the political bickering doesn’t help. A major structural change has to happen. Here we go…..
The bottom line is, of the 37 cost accounts on page 45 only 15 can be justified as legitmate Federal powers under the original intent of the US Constitution. Which means of the $3.7 trillion in Gross Costs, only $1.5 trillion is legitimate. The Revenues for 2009 were roughly $2.4 trillion which means the federal operating loss for 2009 was $1.3 trillion which is added to the national debt each year – $14.7 trillion at this writing.
Now I did this quickly on a napkin, but if we cut 37% of federal spending we would have a balanced budget and not add to our national debt. If we also tagged the unconstitutional spending accounts (department of education, medicare, energy, housing, etc) and put a timer on them for phase out (5-10 years), it would leave time for the states to decide individually which, if any they’d want to take on. The remaining 15 accounts (department of defense, justice, etc) are engorged and while the initial across the board cuts will go a long way, we also could look at privatizing some of the remaining departments or outsourcing some of their services.
While 37% is a severe cut in one year we could phase it in over a short period of time as well. Calvin Coolidge cut over 20% coming out of a depression in the early 1920s. The risk though, is not getting meaningful cuts through so I’d start at 37%. Also, the federal employees who are laid off would receive a severance package of wages and benefits for a period of time ranging 6 months to a year based on years of service.
Social Security, because it’s unconstitutional, should also be treated as the programs tagged above and phased out. The states can decide whether they want to institute a retirement program, if their charters allow. The phase out approach we would take would be similar to the approach private industry took in the late 1980s-1990s as they transitioned from Defined Benefit plans over to Defined Contribution plans. Those already in retirement would see no change, and we’d choose private managers and actuaries to keep the plan fully funded each year. We’d decide on a cut off age (50, 55?) and those below that age could receive a choice of a rollover into an IRA or cash payout of the actuarial value of their contributions and establish their own retirement accounts, or find a state that wishes to take on a retirement plan. Those over the cutoff would have same choices as those below cutoff age and in addition, they’d have the option to join those in retirement where the funds would be managed privately and would behave similarly to the existing social security system which is a Defined Benefit plan. Overtime, the federal obligation would diminish and be phased out.
The surplus from the cuts in spending and elimination of more than 50% of federal programs would leave enough room for substantial cuts in taxes and enough tax revenue to cover much lower spending commitments (that are constitutional) and a debt retirement schedule. The effects in substantial cuts in federal taxes on individuals, corporations, estates and trusts, would have a stimulative effect on the economy. Consumer Confidences Indexes would boom. Markets would rally.
Also we would reinstate legislation that required any new debt issuance to originate in Congress, which would hamper willy-nilly debt expansion.
Sounds like a ‘pipe dream’? Maybe- but we have to start somewhere and we need dramatic structural and financial changes to our Federal Government. If you have a cursory understanding of basic accounting and you review this report, you can see the magnitude of the problem we are in. Substantial cuts, retiring debt and shifting of power out of DC and back to the States is the answer. It will invigorate our economy because it tells the markets we’re serious, and in the hands of individuals is where capital is created and best utilized.
“With Irish banks bleeding deposits and an anticipated wave of mortgage-related losses in the coming months, officials were having difficulty determining how much money Ireland needs, according to people familiar with the matter.
Ireland has pushed for the aid to be presented as a “contingency fund” for its banks. The government’s hope is that the existence of the fund will comfort those who lend to Ireland’s banks, and stop the drain on deposits. Yet the banks’ situation has already deteriorated to such a degree that they are expected to draw on some of the money as soon as it becomes available, according to one person close to the discussions.”
Behind the scenes the EU negotiates new monetary policy and how much of a liquidity infusion Ireland needs, while Ireland and PM Brian Cowen fear going down the road of losing sovereignty and control of their future.
“Allied Irish’s report Friday confirmed the urgency of the banking situation. The bank disclosed that the government will have to kick in extra taxpayer funds to help it refill coffers that have been depleted by Allied Irish’s swelling losses on bad real-estate loans, which continued to climb in the third quarter. Before the announcement, the government was already poised to own more than 90% of Allied Irish once it helps the bank raise more capital in coming months; that figure will now rise.”
Bank of Ireland and Irish Life show similar scenarios of ‘mini’ runs on deposits as Ireland’s financial community waits for word of a deal to be done sooner than later. Portugal and Spain, watch to see how Ireland’s fate turns out as they sit like patients awaiting their turn in the physician’s lounge.
In an article by Patrick Buchanan in WorldNetDaily, Buchanan ask’s the question “Who fed the tiger?” Many have seen and anticipated the rise of China as first a military force and now coming into its own as an economic super power and not without its problems like other super powers, particularly the US.
Buchanan in his article tries to connect the dots in saying that like the UK that tried free and open trade as it built its empire, which lead to its demise, so has the US in opening trade with China through Nixon and subsequently Carter, Reagan and GWB with ‘Most Favored Nation’ status that later become permanent as China has staked out its position in the World Trade Organization.
Buchanan goes on to say, “Now, with U.S. political, military, industrial and strategic decline vis a vis China manifest to the world, we hear the wails of American businessmen that they are not being treated fairly by the Chinese. And the politicians responsible for building up China are now talking tough about confronting and containing China. Sorry, but that cat cannot be walked back.”
“One knows not whether to laugh or cry. The policy the Chinese are pursuing, economic nationalism, was virtually invented by the Republican Party. Protectionism was the declared policy of the GOP from the day its first president took office in 1861 to the day Calvin Coolidge left in 1929.”
Buchanan concludes, “The day of the Globalist has come and gone.”
Pat Buchanan suggests we pull out of many of our Asian military entanglements and that we shore up our trading policies to favor a US advantage. Which to most sounds very appealing, but the ‘how’ is the important question. As Ron Paul and even some mainline politicians are starting to realize we don’t have the financial resources to continue with the large military footprint we currently have and need to look at where we can allow local foreign governments to take on more responsibility – we currently have over 150 bases around the world.
Regarding economics and trade, if he’s referring to monetary policy where the US tries to get a competitive advantage through currency devaluation its wrong headed. When the Fed Reserve prints money it might make our export prices abroad look attractive temporarily but it will wreak havoc for US citizens as the dollars in their pockets are worth less. Tariff wars have proven in the past to be counterproductive and have generally played a part in extended economic downturns like recessions in the 19th century and Smoot-Hawley in 1930. Unfortunately we can’t easily ‘walk back’ our financial problems but must confront meaningful spending cuts in both federal and state government, and we need to get back to market lead economic principles and sound money.
In addition to survive as a nation that is a world leader, we’ll need to take a look at the role of government; specifically what is the role of federal government, where is its limits and the role of individual state governments, while holding up the US Constitution as a plumbline.
The Tea Party movement has brought tremendous energy and a lost voice for limited government to the ballot boxes in November, will that translate into meaningful change. While the federal government has a legitimate Constitutional role in the flow of trade between our nation and the world, its purpose should not be as a negotiator of favored companies or industries but to clear the way for open trade opportunities in general. Part of that comes by being a good neighbor and the other part comes by having something to offer as a strong nation both in the character of our people and the products our people produce.
Buchanan makes the point that the UK was where we are today at the end of the ninteenth century. If you follow the world news, they are betting against the US surviving. To them the old eagle is in decline. Are “The rumors of a USA death greatly exaggerated”.
“It’s not a matter of ‘if’ but ‘when’ the housing market takes next leg down (substantially).” Ominous words from Meredith Whitney, of Whitney Advisory Group, formerly of Oppenheimer and one of few financial analysts that called the housing and banking crisis.
Whitney also spoke of the next shoe that is starting to fall which is second in severity to the housing market, the Municipal Bond market collapse. She says that of the 2.8 trillion dollar muni bond market, roughly 50% is owned privately and that we’re already seeing an unloading of these bonds and lukewarm reception of new issuances. As a result the city and localities will look to the states for support of which 49 of the 50 states have mandatory balanced budget requirements and looking at substantial layoffs and program cuts. States like CA, IL and NJ are in bad shape and have made overtures to federal government for help. In addition, many of these states are living on part of the last fed stimulus monies which will run out over the next several months.
Whitney’s outlook for year end and 2011 is sobering. She sees unemployment rising in part to state layoffs of in the neighborhood of 80,000. Housing prices making a significant move down (although she didn’t give a percentage), some have suggested 25-30%. Because of the new financial regulatory bill passed this year, she sees Local banking institutions suffering increased cost and less availability of services and funds, resulting in a consolidation of branches. States financial structures and abilities to borrow will become constrained. She sees the QE2 (Quantitative Easing) policy recently announced by fed chairman Ben Bernanke as ‘dangerous’ and not helping ‘middle America’ as advertised because it will produce inflationary pressure in the commodities market and make food and basic need items more expensive.
Whitney also commented on the mortgage moratorium and ‘Affordability Mod’ workout in the federal mortgage program saying, “the program delayed by about one year plus, the downward price adjustments ” and disruption in supply.
The first being, there are divided interests on the economic and political front when it comes to inflation and deflation. For the ‘renter’ who sat on the sidelines for years as housing prices grew wings and flew away, this was a moment to celebrate, but for the homeowner who saw his equity position in his home evaporate it was a solemn day indeed.
I remember overhearing my parents speak about buying their home in Pearl River, NY in the early 1960s. My dad reminiscing about the financial decision at the time said, “Peg, remember how afraid we were when we were signing the mortgage papers on that house and taking on a $26,000 mortgage? But I knew over time with my income growing it would become easier and easier.” Now that’s not an unusual conversation to hear, probably most of us have heard a similar conversation or said (thought) it ouselves, and that conversation infers a lot of assumptions regarding markets and money supply.
Simply put – in inflationary times debtors make out, while in deflationary times creditors do better. The Weimar Republic (Germany) and its financial problems is an example of divided interests. Germany had built up substantial war debts during the Great War (WW1) and with a punitive treaty of Versaille requiring reparations with the UK and France and pressure to pay back loans (mostly owed to US banks); Germany owning less and less assets decided to print more and more marks to pay back their debt in worthless currency. By devaluing their currency it was easier to pay back. This is sometimes referred to as ‘Monetization’ or ‘Quantitative Easing’.
Depending upon the vulnerability of a financial portfolio, inflation or deflation could wreak havoc. Many have heard the term QE2 (Quantitative Easing 2) as the US Federal Govt with the help of the Federal Reserve is looking to devalue the US Dollar in an effort to monetize its public debt or as my dad would advise, “In a few years the debt won’t seem so big”. So the US Government has a vested interest in devaluing the USD and allowing for inflationary conditions in the economy.
This is how I illustrated devaluing currency with my children a few years back. There were four children seated, 4 cans of soda (you can use other items in your illustration) that they could each exchange for four strips of paper that each one of them had in their hand. I explained to them I was the federal reserve that regulated the making of the sheets of paper and that I meet every week to review how much paper exists. I then went around the corner and tore four more sheets of paper and gave one piece to each. Now instead of one piece of paper to buy a soda, now it requires two sheets of paper. I then asked them what happened? Finally, after much deliberation, one spoke up and said, “you just devalued the paper in my hand by 50%. Before I could get 1 can of soda with 1 sheet but now (theoretically) I could get only 1/2 a can with 1 sheet of paper, I need 2 sheets to get a full can.” Of course, he was right.
Now because there’s so much more paper money circulating around than in my example with the kids it isn’t as drastic as 50% in a day, but it is dramatic nonetheless. Since its inception in 1913 the Federal Reserve along with the Federal Government has devalued the USD by more than 90%. Think about it what can you buy for a penny today? For a nickel? Quarter? Most people don’t even pick up coins anymore on the street.
In our Federal Laws their are Counterfeiting Statutes, which means that you and I by federal law are not allowed to print our currency, only the feds can do that. Now why would that be? Because our currency has no value. but does the paper dollars the government print have any real ‘intrinsic’ (value inherent in the material) value? Except for whatever the paper its printed on – No. So for example, let’s say we had a printing press in our basement and we print off a ‘perfect’ $20 bill. We go to the local Circle K gas station and buy milk, eggs, soda and bread and get $10 back in change. What just happened? When we created the phony $20 did we create any value? No. Did we receive any value in our exchange at the Circle K? Yes, we received $10 in goods and $10 in change. So we ‘robbed’ value from the Circle K by exchanging valueless counterfeit paper. So we benefitted in the exchange because we received value, the Circle K lost value in the exchange.
Now what happens as our counterfeit $20 circulates through the economy and is not caught? It means everyone who uses the bill in a transaction after me losses value in that transaction. The fed is figuratively doing the same thing aren’t they? They are coming up from the basement of the Fed in DC or NY blowing on a fresh printed bill to dry it and what happens is that because its a joint-venture with the Federal Government, the Federal Government is the counterfeiter as it spends the money first and receives the benefit. While those billions of dollars flow throughout the world economy devaluing the worth of the USD or quantitative easing. The Federal Reserve Bank owned by Federally Charter Banks as shareholders makes money on interest to the banks and those banks then turn around and lend to other banks and businesses making money on the spread. What a racket!
The same phenomena of QE is being done by centralized banking systems all over the world and with the growing debt crisis it should be interesting to see how it plays out. Europe is planning for Irish, Portugese and possibly Spanish defaults, while the US Federal Govt struggles under mounting debt and interest service as well as a handful of US States.
In a new report by the Congressional Oversight Panel (COP) that assesses additional losses in the housing foreclosure market, says that ‘best case’ scenario is that the ’flawed’ documentation through bank ‘robo-signer’ processes could be eventually replaced and bank foreclosures could resume but ‘worst case’ scenario is that many of the 33 million mortgage loans could be challenged in court and the potential losses to banks could be in the billions. This coming after the billions already given to the banks by the taxpayers and the banking industry still struggling with underperforming loans and high percentage of bad assets on their balance sheets.
In an article in CNBC this morning,
“In the worst-case scenario, the panel said banks may be unable to prove that they own the mortgage loans they claim to own, legal challenges could call into question the validity of 33 million mortgage loans — many of which were then securitized and sold to investors — and banks could face billions of dollars in unexpected losses.
“If such problems were to arise on a large scale, the housing market could experience even greater disruptions than have already occurred, resulting in significant harm to major financial institutions,” the 125-page report said. “At present, the reach of these irregularities is unknown.”
This coming on the heels of a brittle debt market for the public sector in Europe and growing exposure in the US with several states facing looming financial challenges.
The European debt crisis continues to grow, as healthy states bit the bullet and bailed Greece out earlier in the year, as they hoped for an economic recovery. Now with economic conditions around the world still sluggish, individual European states find themselves at odds with their own interests and saving the Euro and maintaining the union.
In the NY Times today: “European officials, increasingly concerned that the Continent’s debt crisis will spread, are warning that any new rescue plans may need to cover Portugal as well as Ireland to contain the problem they tried to resolve six months ago.”
“Stronger countries and weaker countries using the common currency of the euro are being pulled in different directions. Some economists wonder if unity will hold or if some new system that allows countries to move on one of two parallel financial tracks is needed.”
“The bureaucratic machinations in Brussels highlight one of the main concerns that grew out of the establishment earlier this year of a rescue fund of 500 billion euros (about $680 billion at today’s exchange rate) by the European Union after the Greek budget crisis: What happens if, in the next crisis, multiple countries need aid at the same time?”
There was also this sobering note regarding Ireland, “In Ireland, banking troubles lie at the root of what many in Europe are now calling a solvency crisis, reflecting long-term concern over Ireland’s ability to repay its debts, as opposed to the lack of short-term funds that forced the Greek rescue last spring.
“This policy of saving banks at the cost of breaking the back of entire countries is a disaster,” said Daniel Gros, director for the Center for European Policy Studies in Brussels. “Ireland is beyond fiscal plans as long as one cannot see the bottom of the losses in the banking sector,” he said. The only way to “stop the rot,” he added, “would be to let the Irish banks go under” and then use the European funds to “tide over the government until markets and the economy recover.”
“Ireland is unlikely to let its banks fail, but it has been unable to accurately forecast its banking losses — or say whether bondholders will pay part of the bill.”
“Irish banking losses are estimated at up to 80 billion euros ($109 billion), depending on the forecast used, or 50 percent of the economy. As long as housing prices continue to fall, these losses cannot be capped.” Read the full NY Times article below.
When the President went early Christmas shopping to Mumbai and Seoul, he wasn’t shopping for everyone, only his favorites.
GE, Boeing, GM (Chrysler and the unions), Harley Davidson to name a few, were taken on a trip to pick out there presents this year. Big trading deals worth upwards of $10 billion was negotiated in the Mumbai trip and a multi-billion dollar deal while not signed in Seoul is ‘still on the table’.
So where’s the deal for you and I and the mainstreet businessowners we know? Isn’t both political parties’ philosophy, “if ‘big business’ is taken care of by ‘big government’ then everyone is better off”, right? It’s kind of that ‘tricke down’ theory that many progressives use to rail against during the Reagan years. The government targets tax cuts, spending stimulus or negotiates ‘juicy’ trade deals with other nations and everyone is happy. Or are we?
When trading partnerships are negotiated with other countries, each government represents ‘interests’ within their own countries. Specifically in the US, groups that benefit tend to enjoy it at the exclusion or detriment of others. Our Civil War, while partly fought over slavery, was also over conflicting interests within industries in the north and manufacturers in the south over tariffs and import/export trade.
US trade deals tend to favor large corporate interests in general and the special interests of the party in power. President Obama favors union dominated industries, while the GOP favors Defense deals for contractors and weapons manufacturers, but the economic dynamics of government intervention affects us all.
When companies and industries are subsidized through `favored’ economic policies, it allows for less competitive market forces and unresponsive corporate management to domestic markets indirectly as well. In addition, where competitive markets force companies to change or fail, these same companies insulated through artificial demand can forestall those changes until we have a national crisis as in banking, auto and even housing, which through FannieMae and FreddieMac and overseas investments, distorted demand and changed cost structures.
Unlike other federal policies like Education, Welfare and Retirement, the federal government has a constitutional role in foreign trade but it is not in cutting trade deals that favor corporations or industries over others or subsidizing markets with taxpayer money but rather in regulating the transfer of goods (commerce) between our businesses and other foreign entities – which is the feds only role regarding inter-state commerce as well. There are two competing philosophies of government: Negative vs Positive Liberty which is important that our nation gets a handle on. In our series ‘Constitutional Liberty’ we address that.
Walmart, which keeps an annual review of its pricing has noticed an uptrend of about 4% annually, Bank of England just announced that it is expecting their inflation projections for 2010 to be higher too, around 3.5% and that their downward projection of inflation estimate for 2011 of 2% would be taken off the table for now. As world gold prices and commodities prices in general start to move up, what can we expect going forward regarding prices in general and exchange rates between nations? Also, while lawmakers seem to think they can control inflation movements with monetary policy manipulation, history has shown a different result. There are variables (consumer/business behavior and new international currency dynamics) that aren’t represented in monetary models.
As seen in the G20 meetings this past week, and nations in general around the world, we are starting to see upward pressure on prices, partly as a result of spotty increases in demand but mostly due to currency devaluation. Governments have incentives to keep currency values low in order to be competitive in export markets and for Governments carrying debt they are able to monetarize it. Unfortunately, with the interconnected world economy we live in this creates friction and retaliation by competing currencies.
As the G20 met this past week in Seoul, expectations have been high to address some key issues regarding trade barriers and monetary policy between nations, as Europe and China accuse the US of devaluing the US dollar at their expense.
A US-South Korean trade deal also was a failure as the two after months of negotiation couldn’t come to an agreement on beef and automobiles. Lulu of Brazil described the current economic climate as, “the world is on verge of bankruptcy”. In addition there continues to be serious discussions regarding moving away from the USD as a world reserve currency benchmark and to use a basket of currencies through SDRs (Special Drawing Rights). A move away from the USD as foreign exchange reserve could have a negative impact on the currency and US economy.
“The most concrete trophy expected to emerge from the trip eluded his grasp: a long-delayed free trade agreement with South Korea, first negotiated by the Bush administration and then reopened by Obama, to have greater protections for US workers.
And as officials frenetically tried to paper over differences among the Group of 20 members with a vaguely worded communiqué to be issued today, there was no way to avoid discussion of the fundamental differences of economic strategy. After five largely harmonious meetings in the past two years to deal with the most severe downturn since the Depression, major disputes broke out between Washington and China, Britain, Germany, and Brazil.
Each rejected core elements of Obama’s strategy of stimulating growth before focusing on deficit reduction. Several major nations continued to accuse the Federal Reserve of deliberately devaluing the dollar last week in an effort to put the costs of America’s competitive troubles on trading partners, rather than taking politically tough measures to rein in spending at home.”
There’s evidence that the PIGS contagion is growing into the Eurozone credit markets as a whole. Borrowing costs by PIGS (Portugal, Ireland, Greece and Spain) and other financially strapped countries has reached levels not seen since the conversion to the Euro in 1999.
What is best about ‘Progressive’ and ‘Conservative’ ideologies is where they focus on individual liberties; what is worst is where they focus on ‘managed’ outcomes of economic and social values. Unfortunately in ‘mixed’ government, instead of getting the best of, we get the worst of.
The passion of the Democratic party through the ideology of Progressivism is to redistribute wealth through ‘managing’ the economy. So taxes, regulation of business, transfer of property all come into play such as in the beliefs of Jeremy Bentham (exported Socialism to the US in early 19th century), Karl Marx and Friedrich Engels (founders of Communism). Their philosophy is that while a man can be freed from physical restraints, he isn’t really free unless he is free economically.
The passion of the GOP through the ideology of Conservatism is to manage tradition values. So Right to Life, Don’t Ask Don’t Tell, Constitutional Amendments on Marriage are passionate issues to conservative GOP members.
Unfortunately, what is not passionately represented in the dynamics of the two is INDIVIDUAL LIBERTY which is sacrificed on the ‘ALTAR’ of ‘GREATER GOOD’.
The result has been ‘Gradualism’ of more government power encroaching upon the freedoms of all. As in the movie ‘Fountainhead’ and the book by Ayn Rand, collectivism is wrong, ““But the mind is an attribute of the individual. There is no such thing as a collective brain. There is no such thing as a collective thought. An agreement reached by a group of men is only a compromise or an average drawn upon many individual thoughts. It is a secondary consequence. The primary act—the process of reason—must be performed by each man alone. We can divide a meal among many men. We cannot digest it in a collective stomach. No man can use his lungs to breathe for another man. No man can use his brain to think for another. All the functions of body and spirit are private. They cannot be shared or transferred.”
The reality is men are not equal. Not in their physicality, not in their intellect, not in their desires and temperament. What collectivism in the form of some Conservative and Progressive ideology attempts to do is homogenize men into common denominators and minimize the differences or perceived inequalities (economic and social). Ludwig Von Mises put it this way, “It is because of man’s differences and inequalities that bring about cooperation and social harmony.” In other words, one man’s strength and one man’s intellect separately cannot accomplish what together through voluntary exchange and association they are able to produce.
The Constitution protected against these interferences on a federal level by both interests that would look to ‘manage’ man’s economy and social behavior through the concept of ‘Negative Liberty’ and the separation of powers of the Federal and State governments. In general, the further away the power is, the more general and less invasive it should be, if for no other reason that it doesn’t possess enough specific information and it’s economic and social models are prone to fail at greater levels of impact.
For more information on the concepts of Negative vs Positive Liberty and how they affect our understanding of the Constitution and in creating law, please go to my article in a series: Constitutional Liberty Series: Into, I have the second in the series coming out tomorrow.
Ian Duncan Smith, British Secretary of State for Work and Pensions, is set to announce a sweeping overhaul of their welfare program, that’s as big as when the Beveridge Report in 1942 introduced the current welfare system. The program while securing worker pay and benefits, creates much harsher standards for those who refuse to look and find work.
In a time where ‘big’ has always seemed better, particularly regarding power and economies of scale, we see the results today in fewer but larger banks, giant retail stores like Wal-Mart and manufacturers like in the automobile industry which are ‘too big to fail’. We have also seen the progressive consolidation of ‘big government’ power as the States incrementally over the years have forfeited their rights to encroaching federal power. Since the founding of our nation, we’ve grappled with the ‘separation of powers’ between and among States and the newly empowered Federal Government. In the Federalist Papers and letters among the framers, you’ll find discussions back and forth regarding their experiences and observations on totalitarian states and the opposite – anarchism, and the kind of republic they should form. After the war of 1812 there was a growing interest in a central banking system (partly to pay war debts) similar to Europe and by the 1850s under the influence of European Socialism (particularly Jeremy Bentham, Hegel and those of the Enlightenment) there was interest in centralizing government into the hands of those who were better able to rule and administrate over the citizenry. These ideas were and are today embodied in Platonic Philosophy and the concept of ‘classes’. Plato divided society into three classes: The Ruler-Philosophers, who envisioned and managed the ‘ideal’ state, The Warrior, who implemented the vision and enforced its law and the Workers, who were the ‘managed’ and who’s efforts and production was for the greater good of the State and society.
The mid nineteenth century in the US saw an even greater interest by industrialists, bankers and the social reform movement, for a powerful centralized federal government to regulate industry, to take care of the needs of its people and to rid the government of corruption. The 1850s saw the decline of the Whig party and the rise of the Republican Party as a challenge to the Democratic Party particularly on the key issues of the day, slavery and the conflicting interests of the Northern and Southern States. At the close of the nineteenth century there was a growing social movement through the University Settlements in major cities like Chicago, New York and Boston, to care for the growing immigration population in the inner city and the recently liberated slavery population that came to work in the mills and industrial base of the major cities. While initially this was done locally and mostly with private money, ironically donated through the financial resources and volunteerism of the children of the industrialists – like the DuPont’s and Carnegies (Jane Addams, co-founder of Hull House in Chicago, father was President of a large bank and co-founder of the Republican Party); after the turn of the century, the movement and momentum was toward federal solutions through legislation and financial intervention. This was in part due to union interests who saw the benefits of preventing child labor which competed against the labor movement’s goal of higher wages and recruiting the black population as dues paying members. In addition, the Progressive Movement had tied its interests to the Federal Government looking for a larger audience to make their case and to take their local solutions from the cities and state, and scale them to what they perceived as national problems that commanded more money and federal power.
After the 1907 bank panic, banking interests saw the benefit of a centralized banking system similar to what Europe enjoyed, where instead of states regulating banks and currency, through legislation (Federal Reserve Act of 1913) this power would be entrusted to the federal government through a quasi private/public institution whose interests were controlled by shareholders who were the largest banks. So most bank risk would be divested to the federal government and the banks could enjoy returns without risk. Before 1913, banks and the banking system survived based on prudent financial management of risk, like during the crisis of 1819, where banks were allowed to fail, as they voluntarily took on risk in moving away from currency which had ‘intrinsic value’ in the form of gold or other assets and leveraged their portfolios. Because the financial system was decentralized and regulated at the state level (particularly prior to 1860s and Lincoln’s National Banking Acts), bank losses and failures though occurring, were much less devastating to the overall economy and the financial system was much less fragile and more robust than it is today. As Nassim Taleb, author of ‘The Black Swan’ says, “Globalization creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a global collapse we have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another. True, we now have fewer failures, but when they occur I shiver at the thought.” Prior to 1913 and the consolidation of the banking industry under regulation by the Federal Reserve, banks and businesses failed, but the failures were easily absorbed and reallocated to productive means because the system was ‘Self Correcting’ instead of ‘Managed’. Because States regulated banking at the local level, they were more able to be successful and even when their policies failed, they could look to other States for redundancy, examples and guidance. (See Murray Rothbard’s book: Panic of 1819, for the dynamics of the States’ regulatory policies and effects)
This brings me to the 17th Amendment. As more and more political, banking and business interests were looking for a more powerful Federal Government to manage the States’ interests by provide ‘uniformity’ in regulations, more control of markets and competition, there were proposals in Washington to allow a popular vote for Senators instead of Senators being elected by each State’s elected representatives. The proposal was unsuccessful in being passed by Congress, but was eventually passed by State legislatures and adopted in 1913 instead. The reason given at the time, was because of long periods of a few unseated Senators, particularly during the Civil War period and leading up to it, the argument was made that the popular vote would result in less fractions. Unfortunately, it has resulted in an ‘unconstitutional’ amendment that appears to give democratic representation to citizens, but instead has consolidated power into the hands of a few through Marginalizations of majorities and catering to interest groups that the founders warned would happen. Money, lobbyists and political interests converge on Washington to petition for votes in exchange for money and power. The period around 1913, just before the outbreak of the World’s first ‘Great War’ was a time of adopting legislation that had bad unintended consequences and opened the floodgate for profound changes in the way America thinks and wants from its government.
See Below for the new language and the original language in the Constitution and a short video by Judge Anthony Napolitano, on some of the reasons why the 17th Amendment is unconstitutional and needs to be repealed. In addition, I’ve referenced some great articles and books regarding concepts like: Fragility, Liberty (Two Concepts), Monetary Policy
17th Amendment amended language: “The Senate of the United States shall be composed of two Senators from each State, elected by the people thereof, for six years; and each Senator shall have one vote. The electors in each State shall have the qualifications requisite for electors of the most numerous branch of the State legislatures.
When vacancies happen in the representation of any State in the Senate, the executive authority of such State shall issue writs of election to fill such vacancies: Provided, That the legislature of any State may empower the executive thereof to make temporary appointments until the people fill the vacancies by election as the legislature may direct.
This amendment shall not be so construed as to affect the election or term of any Senator chosen before it becomes valid as part of the Constitution.” (Text of 17th Amendment)
Original Text: “The Senate of the United States shall be composed of two Senators from each State, chosen by the Legislature thereof for six Years; and each Senator shall have one Vote.”
As Irish government bond yields have spiked to new records, and riots breaking out in different parts of Europe in response to austerity measures as governments see few solutions in addressing mounting debts and diminishing revenue streams, except cutting pensioner and worker benefits and compensation; it is looking more likely of the possibility of government bond insolvencies. In particular, the exposure is greatest for the PIGS (Portugal, Ireland, Greece and Spain) but the UK is faced with similar threats as it considers Classical Economic models, in reviewing spending, tax and banking policies to address its fiscal house. Recent elections have seen a shift to the right politically in the UK and other countries, and criticism from some in the political class, like Daniel Hannan, MEP from South East-UK, in his now viral address before Parliament to the UK Prime Minister as,“A devalued Prime Minister in a devalued nation”. (see bottom of post)
In The Economist on November 8th 2010, Ireland’s Dr. Doom, Morgan Kelly is quoted, “As a taxpayer, what does a bailout bill of €70 billion mean? It means that every cent of income tax that you pay for the next two to three years will go to repay Anglo’s losses; every cent for the following two years will go on AIB, and every cent for the next year and a half on the others. In other words, the Irish State is insolvent: its liabilities far exceed any realistic means of repaying them.”
‘Across the pond’ the ‘Piglets’ in this scenario are the States in the US which are amassing unsustainable debts and suffering the highest levels of unemployment among the 50 States, like California, Illinois and New Jersey. Growing state government pension and health care obligations and interest on the debt service are squeezing budgets and challenging lawmakers for solutions. Layoffs, cutbacks in benefits and wages are in the offing, but will US workers march and riot in the streets as we’ve witnessed in Europe? Promises made by governments in the past, met by worker cooperation, have an unforgiving ability to cast strong judgments in the ballot box and in public reactions when those promises go unfulfilled.
There are really only two possible directions: Government downsizing by privatizing services and cutting governmental departments and jobs, while disengaging from quantitative easing monetary policies. This does come with dislocation and individual suffering as history has shown – around 18 months: US 1819, 1920. The other direction is by consolidating more power in government, taking more freedom and resources from its people and through quantitative easing, trying to stimulate short term economic activity. This has also come with dislocation and individual suffering as history has shown as well – Great Depression (several years) and tyrannical regimes like in Russia, Italy and Germany.
China has curtly dismissed a US proposal to address global economic imbalances, setting the stage for a potential showdown at next week’s G20 meeting in Seoul. Cui Tiankai, a deputy foreign minister and one of China’s lead negotiators at the G20, said on Friday that the US plan for limiting current account surpluses and deficits to 4 per cent of gross domestic product harked back “to the days of planned economies”.
“We believe a discussion about a current account target misses the whole point,” he added, in the first official comment by a senior Chinese official on the subject. “If you look at the global economy, there are many issues that merit more attention – for example, the question of quantitative easing.”
China’s opposition to the proposal, which had made some progress at a G20 finance ministers’ meeting last month, came amid a continuing rumble of protest from around the world at the US Federal Reserve’s plan to pump an extra $600bn into financial markets.
“Mathematics is to knowledge what an artificial hand is to a real one. It is only worth it when you have nothing else. Do not amputate to replace.” (Nassim Taleb) Here Taleb jokes about the inability for the scientific method and quantitative analysis to be used to build ‘general theories’ particularly in the area of economics when dealing with ‘Free Will’ and the inconsistencies of human behavior. Do Taleb’s points contradict what today’s public policy experts are trying to achieve, in the area of health care, banking and in addressing environmental issues?
Remember the ad back in the 80s, ‘This is not your father’s Oldsmobile’? Well as you follow the financial unraveling of the automakers you’ll find these are not your father’s ‘Oldsmobile’ style bankruptcies either. President Obama shamed or vilified the secured lenders yesterday in the media for holding out to secure their positions (rights) in the assets of Chrysler for the ‘common good’ of the rest of us. Even as I write this lawyers for all interested parties are in US Bankruptcy Court in NY to push a reorganization plan through that would hand over ownership to the US and Canadian Government, Fiat and UAW. This ‘Common Good’, ‘Greater Good’, ‘ utilitarian nonsense will revisit us all again in the areas of health care, global warming (or is it freezing? Hard to keep track).
Here’s some Capital ideas:
· Stop Printing Money!!! (I screamed that, and feel a lot better), replace our fiat currency with representative currency (which we’ve had for majority of the history of our nation)
· Shift powers and programs back to the States (initially funded by federal government whose powers and responsibility would phase out over time, each state could then decide which programs to keep and get rid of), some previous administrations had the right idea but either shifted responsibility without authority or didn’t recognize the dysfunction that would initially occur without a phase in period
· Overhaul US legal system (in particular Precedent Theory (Common Law), which is where government has been able to encroach on our rights and many of our landmark decisions (some good results, mostly bad) come from and also revamp corporate liability laws)
· Redefine the limits of Federal Government (in fact setup a citizens regulatory board to protect the encroachment of government)
Power resides in the people and how they choose to govern themselves locally (state/local government), the federal government operating from the frame work of constitutional powers steps in to protect rights of people (life, liberty and the pursuit (freedom) of happiness). What Federal Government doesn’t do: It doesn’t establish or retain any powers outside of what is specifically defined in constitution, which means health care, retirement, welfare or anything else that favors classes of people and redistributes income or property. In other words, the government doesn’t steal from one group of people (regardless of perceived income or wealth level) and give it to another. If you think of the balance of Government and Individuals Rights like a teeter tooter or pendulum in that with more Government it means less Individual Rights. The genius of our Constitution is that it defines the boundaries between the state and the individual and it protects freedoms while allowing each individual to pursue their unalienable rights of life, liberty and happiness (Declaration) and that’s why it starts ‘We the people’. It is interesting how great documents in history always start with the most profound and controversial sentences. ‘In the beginning God.. (Genesis 1.1), ‘We the people of the United States’ (Constitution),
Thanks, I feel a little better. Now, if I can just stay away from the news…..
If you have any other suggestions please send them in. It’s important for us to dialogue and get involved.