The Big Knob

To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.  -- Paul Krugman, "Dubya's Double Dip?", The New York Times, 2 August 2002

If you only have a hammer, you tend to see every problem as a nail. -- Abraham Maslow


For nearly all my adult years, I have advocated against the size of government on the simple basis that government and freedom are inverses of each other. This is 100% true, and reason enough all by itself for patriots to act. Large governments are overly restrictive and a burden and a brake on productivity. It's a fine line between economic freedom and personal freedom. If a person's wealth derives from his or her work, then the two are certainly one and the same. A person's output is also his impact on an economy. The economy naturally produces savers and those who need access to someone's savings to accomplish their goals. Think of the farmers that share a tractor. It is borrowed and loaned regardless of who owns it. The local economy works.

Back when your Wizer was an average citizen, I was also a small investor. I would get an extra hundred bucks, and would buy a few shares of a well managed company.  In this way, money was loaned into a capital market. Then, the government sponsored terrorism known as the global financial meltdown happened, and that money was inexplicably lost. What went wrong? It occurred to me that the CEO of the well managed company was no match for the financial big-wigs that were creating this crisis. So, instead of suing Bernanke, I sought to watch and learn whatever I could about macro-economics. My studies have been continuous since about 2007, and I've read up on the crisis and other writings from many economists, including those who seek to influence public opinion (like Paul Krugman and Thomas Woods).

The basics are pretty simple. The Federal Reserve is this politically appointed, though independently run organization that is paid for by a tax on the bankers. In return the bankers get first dibs on freshly printed money. When unemployment goes up, the Fed increases the money supply (by initiating bond purchases), thereby lowering interest rates. In turn, a flurry of credit activity from the banks to the businesses quickly puts people back to work. That's the way it's designed and supposed to work. As soon as full employment is reached, the Fed can then sell off all the bonds it bought with printed money, and let the money supply fall back to it's normal trajectory (some rational trajectory, I imagine, mirroring the natural growth of the economy). It's supposed to be the only knob the Fed can turn, but it's a big one. If they overturn this knob, you get runaway inflation.

Since this unemployment cycle was itself a big one, the Fed found it necessary to turn this knob all the way up. That's where it is set now. However, the expected result (increased "velocity of money", full employment, and highly active credit market) has not materialized. There are many reasons for this:

The excess reserves that the banks are holding are at historic highs. The risk of lending outweighs the benefits (after all market rates are too low to take on a lot of risk). People are deleveraging now, it is said, because their home equity took an enormous hit; they are therefore not seeking to borrow more money at any rate.

Large companies have stockpiled capital to prepare for a very serious backlash that may occur when the costs of Obamacare and other new regulations are fully known. As a group, they are not willing to add to employment. Small companies are concerned because large companies are concerned, and they are not taking on the risk of a large payroll either.

From this, we can consider a hypothetical scenario. Let's say this concern about new government regulations turns out to be not as bad as thought, and the Russell 2000 small companies resume their pre-2008 hiring plans. Then, employment more or less unexpectedly spikes up. If it does, then the outstanding capital, 800 Billion in excess reserves, a like number in reserve corporate capital, and finally, the borrowing and spending at the consumer level will heats up.  All this will happen at the same time. Because the money supply is enormous compared to the size of the economy, this will create an inflationary tsunami that will make 1979 look like a kiddie pool.

The other scenario is worse, so I'll stay with this one for now. In the best case scenario for Obamacare (which is a blow for freedom, but may have short term economic firepower), employment returns to normal. Then the result is inflation which feeds the next bubble (probably the bond market). The incredibly large money reservoir will burst. All these dollars will be chasing anything of value, and inflation could reach 10% per month. Think Zimbabwe. If there's any doubt that this could happen, consider the difference between 2007 and 2008 in terms of economic activity. Everything happens faster in the future.

So, is there a way to keep that from happening? Yes, but no political animal is likely to attempt this. The bigger bolder thing to do is to mop up all the excess liquidity, and allow a deflationary period to ensue. Eliminate wage floors, so that full employment can be reached in the private sector, and despite a strong dollar, exports will grow due to better cost and price on the global market. Reduce government spending so that it does not crowd out private investment. Oh, and roll back the debt on a very aggressive schedule. This is the right way get out of a depression.

Instead, the Fed seems intent on replaying 1932, and this time with new multipliers: The incredibly high debt (which we will cover in some detail later), and the large percentage of government spending as a percent of GDP (also to be covered later). Both are choking off any semblance of a recovery.

See also:
http://www.washingtontimes.com/news/2011/dec/19/government-spending-jobs-myth/

Asking the Wrong Question, 2012

Most voters continue to believe the government bailouts were a bad idea, but at the same time concern that the government won’t do enough in response to the bad economy has reached its highest level in over three years of regular surveying.


Just 39% of Likely U.S. Voters worry more that the federal government will do too much in reacting to current economic problems. A new Rasmussen Reports national telephone survey shows that 50% now are more worried that the government will not do enough, up three points from last month. Eleven percent (11%) are not sure.  Rasmussen Reports, December 19th, 2011

Pollsters really can influence the accounting of public opinion by how they phrase a question. For example, a poll on "do you approve of Herman Cain's harassment and womanizing ways" is designed to slice and dice Herman Cain, by linking him to behavior that people certainly do not like. It's the old unanswerable question: "Have you stopped beating your wife?". Pollsters can certainly anticipate the impact of public opinion questions, and the better outfits are careful to ask neutral questions.
 
Normally I find Rasmussen's polls to be reasonably well formed, and they usually do ask the right questions. In the case of the most recent poll, where 50% of the people "don't believe that government will do enough" to fix the bad economy, I think Rasmussen missed the mark. What the results don't parse very well is: of the 50% who answer this way, how many would prefer that the government act differently. Perhaps the message is for the government to undo much of what they have done to cause the problem: e.g.,  by eliminating regulations like wage controls, unemployment extensions, and other productivity dis-incentives. It's certainly the only useful tool under the government's control, and I think, perhaps a large number of people are thinking that that is the thing that government could and should do.
 
The Rasmussen stats can be mis-read by politicians that the people want government to do something. Of the two somethings government can do, one is right and one is wrong, and the politicians will doubtless  use this kind of data to justify their wrong action.
 
I'd like to see the pollster ask a more relavent multiple choice question.
 
Should government:
a)  Improve the economy by reducing disincentives to work, and barriers to hiring.
b)  do Nothing
c)  do More of what they are doing now.
 
The results would be far more revealing about the will of the people, and not give politicians more tools for our continued destruction.

Chart of the Day #1

Although some of the goods and services provided by government are essential, it is not essential that they be provided by government. On the contrary, the private market place, operating on the principle of voluntary cooperation and exchange, is not only able to provide these goods and services, but can provide them more efficiently and for less money. – Sy Leon,  None of the Above: Why Non-Voters Are America's Political Majority

Today's Chart shows the money supply vs the housing price index over the last ten years:

 
If I get this right, the money supply needs to grow with the population so that the free flow of capital can be efficiently enabled. Loosely translated,  the banks should have enough money to loan to meet the demand, so that consumers and businesses can reach their maximum potential.
 
Okay, so now, there appears to be enough money out there to buy every house on the market. Can we stop the printing press now?
 

Chart of the Day #2

The whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. The art of economics consists in looking not merely at the immediate but the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups. -- Henry Hazlitt;  Economics in One Lesson

Not to worry. The Rich will cover it.

Okay, so what IS a terrorist then?

Last night I saw an item on cable news relating the story of a gunman/grenadist in Belgium that killed five and wounded 125 people. The reporter was quick to interject that the guy was "not a terrorist".

That got me thinking.

Just because a fellow hasn't pledged allegiance to Hamas, Al Quaeda or SEIU; it doesn't mean he's not a terrorist. Clearly anyone who practices mayhem on large groups of people is a terrorist; regardless of his motives or affiliations.  Do we need the government to classify terrorists for us now?

This guy may be too optimistic.

Our Decade from Hell will Get Worse

The case for any republican

Dear Wize-guys,

I apologize for being remiss in my blogging duties. All my wize time for the last three months had been tied up in money school. You'll probably hear more about those adventures as the paper chase continues. Suffice to say for now that I am an expert in matters regarding the Fed (which is to say that I know more than President Obama about how it should work) and I can also read between the lines of a financial statement for any publicly traded company like Enron, etc. I am a danger only to myself, however, if I spot something interesting I will also let you know about it. Hopefully the added dimension of my econ training will make me a better blogger too.

While I was gone, I did manage to see a few segments of the big government preservation debates. On the plus side, I think some good topics have gotten some air. Unfortunately, I don't see that anyone other than Ron Paul gets a vote.

Here are the tiebreaker scenarios (to cop an NFL analogy):

1. Ron Paul: Gets a bye all the way to Super Tuesday. Sentimental favorite.
2. Newt. Vulnerable but a high scorer.Very creative.
3. Mitt: Best defense but no firepower.
4. Pick 'em

If Ron Paul is still in the race when he gets to my state's primary: Hands down. It's not even close. A pro-life libertarian can not be topped in this ranking.

If for some reason he's out of the race, then it gets difficult.  You then apparently have to choose among three remaining options. Stay home. Newt. Mitt.

Maybe it's better to work from the bottom up:

Herman's out. Tim Pawlenty is out. Who else? Gary Johnson? His ideas are mostly right, but he can't even get on the debate stage, and when he does, he scares people.

I can't make a case for Michele B. or for Rick S. I know they mean well. I know they would want to do the right thing, but neither one has advanced any thoughts beyond framing their own bona fides. We get it. You are both wonderful people. The problem is, you can't fix this. This economy, this climate of stagnation and non-productivity. What would you do to fix it? I'm not hearing ideas.

Perry? I can get past his mental lapses, and his heart also seems to be in the right place. However, his solution to America's problems is to treat everybody like a Texan. Suck it up, big boy. It's a free world, get out there and get to work. You know. Texas works because Texas works, not because Rick made it work; and unfortunately, Rick thinks he can export Texas to Minnesota, Oregon, and Delaware. I'm not seeing it.

Stay home is a pretty decent option.

Romney. Romney. What to do about Romney. Seems to have a good grasp of what's wrong. Doesn't seem to be too driven to change things though. He totally represents the right wing of the big government party (which is establishment republicans and all democrats). Would I get out of bed to vote for Romney? I think I'll have to do more research.

Which leaves us with Newt. Could I vote for Newt? Maybe. I think his ideas are bigger than anyone else on the planet. I like having him around. He would be highly entertaining, especially if he wields his veto pen. My positive recollections of Newt were when he shut down the government. It was the only week in the last 23 years that I felt the oppression of big government start to lift. He pushed Bill Clinton to drop health care, and revamp welfare, and balance the budget. Sounds just like the kind of stuff we need now.

Yeah sure. I've heard the bad stuff. He accepted an advance on a book. He worked for Fannie Mae. Sounds like a free market guy so far. Left two wives. That's actually better than keeping one while cheating on her (hello again Bill). He's a loose cannon. Okay, but at least he fires in the right direction.

Am I ready to vote for Newt? Maybe. Watch this space. He may be an acceptable backup, in case people aren't ready for Dr. Paul.

So, fellow Wize-guys. Let me have it.

Wizer One-Liner #27

When you take into consideration that most of the establishment republicans - and all the democrats - are against Newt Gingrich, it's pretty easy to see why he's winning this particular beauty pageant.