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Archive for July, 2010

Other Things That Surprise Economists

With the recent dip in durable goods orders surprising economists I began to ponder what other things might surprise economists. Here are a few other things that surprise economists. If you have any other things that surprise economists, please feel free to add them in the comments section.

Other Things That Surprise Economists (other than the economy sucks):

  • Sunrise
  • Sunset
  • Lifetime Television has a lot of chick flicks
  • Milli Vanilli were lip syncing
  • Summer
  • Politicians lie
  • Gravity
  • Christmas
  • Their own shadows
  • Sneezing
  • Near beer isn't
  • Knock knock jokes
  • Fall
  • 4th of July
  • Clap on, clap off…the Clapper
  • Gilligan didn't get off the island, again
  • Samantha's mother on Bewitched suddenly appears out of nowhere
  • At the end of every episode of Scooby Doo when they rip the rubber mask off the "monster" or "ghost"
  • Easter
  • Shake an Etch A Sketch and the drawing disappears
  • Winter
  • The Governor of California and the guy in Terminator look surprisingly similar
  • New Years
  • Boxed wine not as good as bottled
  • Government statistics not always accurate
  • Your mileage may vary
  • Congress isn't always looking out for your best interests
  • Spring
  • Look, a puppy!
  • 4 left turns…hey there's my house again!
  • Almond Joy has nuts, Mounds Don't
  • Every time the infomercial announcer says, "But wait, there's more!"
  • Lassie always knows where Timmy is
  • Keebler Elves didn't really make their cookies
  • Ricky Ricardo says Lucy can't be in the show, but somehow she always ends up there
  • Throw a boomerang, it comes back
  • Magazines airbrush models
  • Jack in the box pops out every time song "Pop Goes the Weasel" finishes
  • There is life after high school
  • Every time John Belushi stuffs his face with mashed potatoes in "Animal House" and then smashes his cheeks and says, "Look, I'm a zit!"
  • Mistletoe
  • Memorial Day traffic
  • Reeses: Chocolate and Peanut Butter really do go great together
  • Rock and Roll is here to stay
  • Some assembly required
  • Ponzi was not that really cool dude from Happy Days
Categories: Uncategorized

Economic Split Personality: Personally Optimistic, Generally Pessmistic

Like many people, I have my own internal contradictions. With regards to the state of the economy I have a split personality, I'm personally optimistic, but pessimistic in general. Following is a look at my economic split personality.

The Case For Economic Pessimism

  • Unemployment: What goes up stays up. Gravity defying unemployment is holding steady, with little sign of going down.
  • U6 unemployment is defined as: Total unemployed, plus all marginally attached workers plus total employed part time for economic reasons, as a percent of all civilian labor force plus all marginally attached workers.
  • Calculated Risk blog has a good summary of causes for unemployment pessimism:
    • Unemployment-population ratio of 58.5% for June 2010.
    • Labor force participation rate of 64.7% in June 2010 – down from historical average of 67%.
    • Part time for economic reasons (U6 unemployment) 16.5%.
    • Unemployed over 26 weeks stands at a record 4.39%. This metric tracks back to 1948.
  • Decline in Manufacturing. The Congressional Budget Office has a good, albeit old, post outlining what accounts for the decline in manufacturing employment
  • Increasing debt-to-GDP ratio.
  • Failure of the political parties to face economic reality and support economic liberty. While there are important differences between the Republican and Democratic parties, they pale in comparison to the cataclysmic debt crisis that has exploded on the country. We can argue all day long about policy and the scandal of the day, but unless drastic action is taken, we're merely rearranging deck chairs on the Titanic. Karl Denninger states that "math doesn't care about politics". He is right.
    • We desperately need a party that stands for economic liberty because government debt isn't free
    • Measures such as the Constitutional Amendment to cap government spending at 20% of GDP, proposed by Representative Mike Pence, are not the answer. He says, "If God can get by on 10 percent, Uncle Sam ought to be able to keep getting by on 20." Government spending 20% of GDP is absurd. If God, Creator of the universe, asks for a voluntary 10% tithe, then government – creator of nothing – should be able to get by on much less.
  • Stupid government policies. From health care reform to cap and trade, the government sure can screw up an economy. The economic uncertainty is freezing small businesses and making them more reluctant to invest or hire new workers.
  • Sovereign debt default is a looming likelihood. The danger isn't so much that certain governments default on their debt so much as that waiting too long may bear a higher cost.
  • Jobs are being shipped overseas. Andrew Grove recently wrote about this for Bloomberg Businessweek.
  • Household Debt. As a percentage of GDP, household debt is still very high, and will make economic recovery very slow.
  • With all the reasons to be pessimistic about the economy, who could possibly be optimistic? Me. Here's a few reasons why I am personally optimistic about the economy.

    The Case for Economic Optimism

    • While the larger economy is largely outside my control, I do have the ability to exert influence on my immediate environment.
    • I can keep a careful eye on the household budget.
    • I can be a more conscientious employee.
  • I can keep up-to-date about the economy and anticipate future trends. What catches some by surprise may not surprise me.
  • Learn from the past. My father once got bit by some variable interest rate business loans. I learned a lesson from his mistake and when I purchased my home I chose a fixed interest rate loan. While several of my neighbors' homes ended up in foreclosure, mine has not.
  • Increase your knowledge about business. Knowing how business operates and what they must do to profit and prosper in any economy is important. The more you can do to help your employer (or own business), the more valuable you are to your company. Add to the bottom line and help secure your own economic future.
  • Family. Remember why you work so hard. On those days work seems tough and the grind gets me down, I remember I am here for my family. They are the reason I work hard. Whether it is your spouse, parents, children or someone else, you have plenty of good reasons to soldier on even in this tough economy.
  • A good employer. I am fortunate to have an employer that not only appreciates my efforts, but offers praise and support. That can be a rare quality today. If you have the good fortune of working for an employer who really supports you, that can make a huge difference.
  • There are plenty of reasons for economic pessimism. However, there are reasons why – on a personal level – I am an economic optimist. In tough times like these, having an economic split personality is how I have chosen to deal with the adversity around me.

    Categories: Uncategorized

    Cap Federal Spending at Twice God’s Tithe?

    July 24, 2010 2 comments

    Only a spending limit amendment to the Constitution will be strong enough to restrain the explosive growth of federal spending. If God can get by on 10 percent [a voluntary tithe], Uncle Sam ought to be able to keep getting by on 20 [mandatory confiscation].

    Representative Mike Pence at Southern Republican Leadership Conference (all comments in square brackets are mine).

    It seems that Representative Mike Pence created quite a stir by proposing a Constitutional Amendment to limit government spending to 20% of GDP. What surprises me is that people seem to be excited by the proposition of the national government consuming 20% of the gross domestic product.

    Dictionary.com defines gross domestic product as:

    The monetary value of all the goods and services produced by an economy over a specified period. It includes consumption,government purchases, investments, and exports minus imports.

    Read the above definition again. Take a deep breath.

    Now, read it again.

    The monetary value of all the goods and services produced by an economy over a specified period. It includes consumption,government purchases, investments, and exports minus imports. 

    Government purchases are included in GDP, even though government produces nothing. So, all of Wimpy Government's IOUs promising to pay later for a hamburger today, are included in GDP. Under the proposed Constitutional Amendment government gets to consume (confiscate) 20%  of everything – goods, services, consumption, investments, plus more based on its own IOUs. So, unless there is something I'm not seeing in the proposed amendment, I don't see how it will limit government spending in any significant respect.

    Plus, why in the world would we want to etch in Constitutional stone the government's ability to suck, vampire like, 20% of the country's productive capacity? What we should be doing is abolishing the 16th Amendment (Income Taxes) and the 17th Amendment (Direct Election of Senators). Unless we drastically reduce the size of government, kudzu government will continue to choke our economic liberty through ever increasing government debt. While I have often heard it proposed that the size of the national government be reduced by 50%, I'm in favor of a 90% reduction. The ambitions and designs of national government know no bounds. Unless citizens put their boot on the neck of Fedzilla and keep it there, it will come back with a vengeance.

    Mind you, Socialist Dems (aka Progressives, Liberals, Socialists or Democrats for you politically correct types), are whining that, heaven forbid, shrinking government to 20% of GDP would turn the clock back to the 1930's (actually 1941 – facts are stubborn things). 

    …we're now to the point where restoring fiscal balance across the credit system requires a roughly 60% contraction in both outstanding credit and the size of the Federal Government (in terms of dollars.)  That in turn will contract GDP by 40%.

    He continues…

    I understand this sort of prescription is considered politically unacceptable.

    But math doesn't care about politics.  It simply accumulates more damage, day by day, until we accept the math – and the truth.  The gap [debt-to-gdp spread] has reached a size that is mathematically impossible to grow out of through expansion of GDP.

    Once we accept the math – and the damage – we must demand that credit and monetary aggregates be strictly tied to GDP in the future to prevent this from happening again.  The Federal Reserve Act contains the necessary stricture, but no punishment for violations – and violate they have over the last sixty years.  We must add the missing "or else" and expose all credit, monetary and price aggregates in the economy so as to monitor The Fed's performance – and if necessary, jail them if they continue to offend.

    We either accept the math and the damage that must be taken through our economy or we will suffer a political and economic collapse.

    Those are the only options folks – we argue only "when", not "what."

    It's the math.

    If Denninger is correct, then GDP must contract by 40% which will force the government budget to shrink 60%. We don't need a Constitutional Amendment to shrink the size of the national government, we merely need to face economic reality. Government has been growing almost non-stop for decades. It produces nothing. It creates no wealth. Arguably redistribution consumes wealth through inefficiency, mis-allocation of resources, and by acting as a long-term drag on GDP growth.

    We are past the point of taking economic, political or Constitutional half-measures. The size of the national government mush be slashed. If it is not, we will suffer the long-term consequences up to and including: shrinking GDP (absolute or year over year growth), high unemployment, inability to finance our government debt, deflation, national decline, etc. There is nothing to get excited about regarding a Constitutional Amendment which would carve in stone the government's power to take 20% of GDP and toss it down a rat hole year after year. Now is the Time for Economic Liberty. If God, Creator of the universe only asks we return 10% of all we earn to support His Kingdom, then government – creator of nothing (not even Tang, Teflon or Velcro) can "manage" on far less.
    Categories: Uncategorized

    Who Possesses the Truth?

    I have been thinking lately about the idea of truth and who possesses it. I spend a good amount of time writing about political and economic issues on my personal blog, my Liberty Stop site, and my Twitter Account @tkinder. When I was younger, I saw the world as pretty black and white across the board – politics, religion, morality, economics, etc. I still believe, for instance, that freedom and liberty in the economic and spiritual arenas are far better than the alternative. However, as I get older, I am less prone to automatically assume that everyone who disagrees with me does so due to bad motives, poor character or sinister intentions. Perhaps some do. However, recently my approach has been to attempt to gain a deeper understanding of why others believe what they do. By no means does this mean I am going to change my mind. At forty plus years old I am not apt to change my mind every time I hear a new argument.

    On Twitter, there are often heated debates over the issues. Some of the debates are pretty interesting. Many of the debates quickly degenerate into name calling, finger pointing and accusations. Much of this is short hand and preaching to the choir. Don't get me wrong, someone has to preach to the choir. To me, the more interesting challenge is to talk to those who don't necessarily agree with me. I try to bring up points they might not have thought about, ask them questions, draw analogies, point out interesting sources of information, poke holes in their arguments, etc. Many people, I find, can't or won't offer supporting points for their beliefs for very long. This may be because they haven't really thought about what they believe, assume others believe as they do, think their point of view is obvious, and true, etc. Some attempt to distract, change the subject, point the finger or otherwise shift the focus. Others you can almost see the wheels turning in their mind, thinking about the pros and cons of the issue we are discussing.

    It's an interesting process. As the years pass I am more confident in the things I know, but also find there is much that I don't know. After years of living in a glass house, I am not so willing to throw stones. I like the story in the Bible where Jesus says, "Let he who is without sin cast the first stone". I'm far from perfect. I strive to be better. Stephen Covey in the 7 Habits of Highly Effective People wrote:

    Seek First to Understand, Then to be Understood

    That seems to be pretty good advice. Who possesses the truth. In my opinion, God possesses the truth. I possess an imperfect version of his perfect truth. I am seeking His truth. I am seeking to understand others. None of this changes the absolute truth. However, we live in an imperfect world. Our understanding is imperfect. I make mistakes. There are times I am wrong. I have changed my mind. If you read what I write, you'll likely see I'm not in the habit of changing my mind like a runway model changes clothes. But, it's hard to know what you believe unless you talk with others and attempt to explain what you believe. One of the best ways to learn is teaching. When you seek to teach others, you need to become extremely familiar with the subject matter. You must become an expert. Do teachers know everything? No. Neither do I.

    I am just one person, taking another step, grasping for the truth in a darkly lit world. I probably won't find it in this life, but I'll keep trying until I draw my last breath. Maybe you'll be the one who helps me take the next step?

    Categories: Uncategorized

    New Federal Reserve Governors Same as the Old Ones

    Every once in a while, someone who has taken the red pill – a la Matrix and does not swallow the main stream media's fawning government propaganda – gets on television and pokes holes in supposed reality.

    It's really quite precious how this poor deer in the headlights reporterette tries to redirect the conversation over and over again back to the MSM talking points, but Jim Grant of Grant's Interest Rate Observer is having none of it.

    He calls the US Dollar a "faith based currency" and makes it clear that the new Federal Reserve Governors will be exactly like the old ones.

    HTs to Bob Murphy and Thomas E Woods.

    Categories: Uncategorized

    I Liked Greenspan Better Before He Was a Statist

    With former Federal Reserve (FED) Chairman Alan Greenspan's recent support for letting the Bush tax cuts expire, I think it would be a good time to go back to the past and see what he had to say about the government and taxation in 1967 before he became a statist. HT to USAGOLD.

    "An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense-perhaps more clearly and subtly than many consistent defenders of laissez-faire — that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other."

    Comment: The issue of economic freedom, or economic liberty, is the most important issue of our day. Unfortunately, neither party has seriously addressed this issue. Why? Perhaps it is because both parties have been captured by special interests. Until, or unless, the issue of economic liberty is addressed our country is headed down the economic road to perdition. Government Debt Isn't Free. Deficits do matter. We are in desperate need of an economic liberty party that will slash the size of government and allow people to freely run their economic lives without the interference and intervention of the government's visible backhand.

    "In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society."

    "Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving."

    Comment: We live in a world where the government, from time to time, makes a show out of breaking up a business monopoly. However, the most dangerous economic cartel on the face of the earth isn't OPEC, it is the United States Federal Reserve Bank. Central Banks have a long list of "haters", including Thomas Jefferson and Andrew Jackson. That alone should be reason to consider that central banking may not be all that the statists make it out to be. The FED has a monopoly on legal tender currency. They have vast power to direct the economy, manipulate interest rates, stimulate the economy, purchase debt, prop up chosen financial firms, secretly bail out foreign banks and more. It is rare to hear a business accepting competing currencies in lieu of the almighty Federal Reserve Note. This monopoly on currency has allowed the government to manipulate its value, and our standard of living has suffered as a consequence. In addition, the FED's manipulation of interest rates has created enormous misallocation of economic resources by sending false signals to business to expand. Artificially low interest rates have encouraged citizens to spend rather than save. A lack of savings, in the long run, hurts economic growth, investment and expansion of the economy. This says nothing of how much damage our debt-based currency wreaks on our economy. Money is debt, created by a keystroke when credit is extended.

    http://video.google.com/googleplayer.swf?docid=-2550156453790090544&hl=en&fs=true

    "The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible."

    "What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible. More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term "luxury good" implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron."

    "In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value, will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale."

    "Whether the single medium is gold, silver, seashells, cattle, or tobacco is optional, depending on the context and development of a given economy. In fact, all have been employed, at various times, as media of exchange. Even in the present century, two major commodities, gold and silver, have been used as international media of exchange, with gold becoming the predominant one. Gold, having both artistic and functional uses and being relatively scarce, has significant advantages over all other media of exchange. Since the beginning of World War I, it has been virtually the sole international standard of exchange. If all goods and services were to be paid for in gold, large payments would be difficult to execute and this would tend to limit the extent of a society's divisions of labor and specialization. Thus a logical extension of the creation of a medium of exchange is the development of a banking system and credit instruments (bank notes and deposits) which act as a substitute for, but are convertible into, gold."

    "A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy. Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, the banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security of his deposits). But the amount of loans which he can afford to make is not arbitrary: he has to gauge it in relation to his reserves and to the status of his investments."

    "When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth."

    Comment: Today, we have the US Dollar, which is a fiat currency. It is supposedly backed by the "full faith and credit" of the United States Government. If you believe in the credit worthiness of the US Government, you have more faith than I do. You merely need to look at the rising debt to GDP ratios of the United States and other countries to realize the current course is an unsustainable Ponzi scheme, unless you believe in Bernie Madoff still.


    "When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one — so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the "easy money" country, inducing tighter credit standards and a return to competitively higher interest rates again."

    "A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World War I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion."

    "But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline-argued economic interventionists — why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely — it was claimed — there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks ("paper reserves") could serve as legal tender to pay depositors."

    Comment: Yes, did you catch that? The Federal Reserve was created, in essence, to beat the business cycle. There would never be a shortage of money, or any slumps in business. Also, credit extended by Federal Reserve banks was backed (not legally, of course) by the taxing power of the national government (I'd call it Federal, but we haven't had a Federal government since the 17th Amendment and the Direct Election of Senators).

    "When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates."

    "The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market — triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's."

    Comment: Hmm…sounds familiar. The FED tried to cure one economic ill, but created an excess of credit – it blew a big bubble, which popped and led to the Great Depression. As the famous economist Gomer Pyle once sagely said, "Surprise, surprise, surprise".

    "With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain's abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed "a mixed gold standard"; yet it is gold that took the blame.) But the opposition to the gold standard in any form — from a growing number of welfare-state advocates — was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale."

    Comment: A fiat currency, backed by nothing but an empty promise of government was necessary for the statists to grow the welfare state and, as Obama so clearly stated, "spread the wealth around". Deficit spending is the statists best friend, as it allows them to confiscate and transfer wealth from more productive means to welfare schemes. To maintain power, the statists finance the welfare state with deficit spending.

    "Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which — through a complex series of steps — the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion."

    Comment: So fiat currency and the welfare state rob us not once, but multiple times. First, we are robbed through increased taxation. Second, by the loss of value in the currency – it takes more dollars in the future to buy the same amount of goods as today. Third, expansion of government debt will slow economic growth, and will lead to the contraction of GDP.

    "In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves."

    Comment: Imagine that, the government wants you to be helpless, making it even easier to expand the welfare state.

    This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

    Comment: As they used to say in a cheesy commercial for a local furniture store, "Need I say more?"

    Categories: Uncategorized

    Government Debt Isn’t Free

    Below is a reply I sent to one of my Twitter Followers:

    Government Debt Isn't Free

    The Real Cost of Government Debt

    Yes, it is frightening what is happening to small business, corporations, etc. seeking to finance operations.

    Financing government debt through auctions isn't cost free. Each choice made is to the exclusion of some other choice. To use a cliche – there is no free lunch.

    I fear we are at, or past, the tipping point where our economy can no longer sustain the debt. Karl Denninger of the Market Ticker believes the following:

    "In this case we're now to the point where restoring fiscal balance across the credit system requires a roughly 60% contraction in both outstanding credit and the size of the Federal Government (in terms of dollars.)  That in turn will contract GDP by 40%."

    That's scary stuff. Meanwhile we argue about other issues that, while important, aren't of the first order. We have to restrain the federal government and cut its size dramatically.

    If we would, I think people would be shocked at the economic prosperity that would be unleashed.

    I also believe that some would be surprised how generous economically free individuals would be to those who are in need – especially if our pocket books weren't being picked by bloated government.

    We would be able to take care of our families, children, parents, and still have money to take care of others outside our immediate family circle. It would be wonderful.

    Will it happen? I don't know, but I'm the optimistic type who believes it is possible if we have the courage to act.

    We're past the finger pointing stage and the two-card Monty scam being played in Washington.

    Either we pull together and save the ship of state, or we argue while the ship goes down and those that ruined it get on life boats, leaving the rest of us to drown in the wake of the disaster they created and we were too timid to prevent.

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