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Saturday, January 10, 2009

Stimulus not a solution

Obama is not yet President, but he's learned well from his predecessor the political expediency of peddling fear. Yesterday, in Fairfax, VIrginia, Obama spelled out catastrophe if his stimulus bill weren't passed. We were told we could expect double digit unemployment, that things would get worse economically. Bigger government is the cure.

Scarily, last night I found myself agreeing with Fox's Sean Hannity on the absence of any fiscal restraint in Obama's package. As a fiscal conservative, I just can't believe the stimulus funds will be spent in a way that will prevent a crisis--it can only alleviate, or defer the crisis until some later point.

Before long, though, Hannity's call for lower taxes helped me come to my senses. Republicans constantly blather about the economic benefits of lower taxation; in my opinion, taxes that aren't paid simply mean someone else must pay for them, a highly selfish proposition. If Bush's tax cuts were so great, why do we now find ourselves hurting so badly?

Whenever you hear the call for lower taxes, substitute the phrase "deferred taxes" and you'll get much nearer the truth that every bit of taxes we don't pay becomes debt. As long as we spend recklessly--a condition that Republican rule for years has only worsened, tax reductions deprive future Americans of the fruits of their labor. They will never receive the benefits of the spending, but will inherit the cost, in the form of federal debt they must pay off.

Every dollar borrowed now incurs a stream of revenue to service the debt, one which can only be paid by 1) taxes or 2) inflation, which in fact punishes savers by cheapening the burden of debt. Inflation has particularly nasty effect on those of us who work, and must rely on a salary, which rarely keeps up with inflation.

Obama's stimulus package would put us on track to run trillion dollar-plus deficits for years, a fact that many liberals have no issue with. Mark Weisbrot, writing for McClatchy, compares the size of Obama's proposed stimulus package, comparing it to Reagan's: "A trillion-dollar deficit would be about 6.7 percent of GDP. In 1983, coming out of our last deep recession, President Reagan ran a deficit of 6 percent of GDP."

One difference Weisbrot doesn't mention: our deficit was under a trillion dollars or so when Reagan, the much vaunted fiscal conservative, launched a federal spending plan that would make a liberal blush. Since Reagan, the deficit has zoomed ten fold, now to over $11 trillion, not including all the future liabilities incurred by raiding Social Security trust fund, future bailouts of Freddie and Fannie, unfunded pensions, health care costs, etc.. The $11 trillion doesn't include the recent bailout for the banks, nor any of the Federal Reserve new programs at its lending windows, where it swapped bad debt for our good Treasuries, nor any of the Freddie/Fannie bailout.

Contrary to his reputation, Reagan got the US out of a severe recessionary period at the beginning of his administration by spending borrowed federal money. Deficits grew huge, although as a percentage of GDP higher deficits had come during the Fifties. Deficit spending gets underplayed by conservatives in the media when our government spends on things that conservatives believed in: defeating the Communists and our war machine. I didn't hear much of a whimper about the costs of Bush's War on Terror while the Republicans were in charge; it's only now with Obama's stimulus package that excessive borrowing is a problem.

Weisbrot does mention the impact of the wars in Iraq and Afghanistan on the current budget. One comparison to the past does hold similar in past and present--spending does heavily revolve around the American military machine. Reagan did pump money into the defense establishment as has Bush.

If total expenditures were broken down, and the costs of administrating veteran's health benefits, retirement, and all the associated costs of staffing, supplying, and sustaining our military assessed, they would consume over ONE-HALF the budget.
Now if our government were spending less money on wars of indeterminate length, questionable winnability, and unclear cause, I guess I'd be a little more convinced that our collective defense were really at risk lest, God forbid, the Russians or some Arab heathen come and kill us all. These scare tactics that predate Obama's push for his stimulus.

The reappearance of scare tactics gives me one reason to be skeptical when I hear about how we must act now, to deal with this "unprecedented" crisis. Like the boy who called wolf, I've simply grown numb to the constant fear-casting. Jaded now to the post 9/11 fear trigger, the population might take the economy more seriously as a direct threat, though the technique is old.

It might not be so bad if government spending was being spent on something valuable. I gain nothing from an extra gun sold to the Afghan regime, though I guess someone somewhere is grateful for the job making that gun. Nor do sugar subsidies, or much of what the government spends their money on, benefit me. I've been unemployed and never got nothin' from them, nor do I suspect that I ever will, until Medicare kicks in (which it may not be, judging by the cost of health care and dwindling resources of our government.)

Despite the questionable effectiveness and deficit busting cost, support for a massive, immediate stimulus package is strong among leading economists on the Left. I guess this is their opportunity to practice some Keynesian-style spending.
Dean Baker's article blasts the Republicans for obstructing passage of the stimulus, as if the deficits weren't an issue at all. Baker lumps all critics of the bailout together with the Republicans: "we should realize that the main concern of some of those opposed to stimulus may not be that it will fail, but rather that it will succeed." I for one don't have to support the plan and my reasons have nothing to do with politics.

More calls to action echo through the blogosphere. Here a blog post by Robert Reich, Secretary of Labor under Clinton:
"Overall, the federal government's responsibility for restoring aggregate demand is at least as great - arguably, far greater - than its responsibility for rescuing the financial system and helping U.S. automakers restructure. Without adequate demand, credit markets will continue to be frozen and major American industries will languish. Yet there is no ready formula for how the federal government should proceed because we have not been here before."

Maybe all Reich's appearances on CNBC's "Kudlow and Company" have started to get to his head. At the end of his show, Kudlow makes all his guests recite a "capitalism is great" mantra-- a spell which may have caused Reich to abandon all reason and join in with them.

Still, Reich is a smart guy and must know the situation out there. That's why his opinion counts. But he's also had enough time out of government to worry about his next job, and how much his foundation can pull in. Reich's personal success is intimately linked to the status quo. Reich--like everyone else--probably has no desire to see the value of his 401(k) tank as it likely will. Containing the damage to corporate profitability is more likely more of a motive than any altruistic reason for all the Keynesianism.
Back to Reich's statement: When government stimulates demand, it's basically spending. Money is either offered directly to corporations or to consumers. Increased demand provides benefits, but there are some serious issues. First, the government is not returning our money to us. Because we've entered an age of chronic deficit financing, the money government spends is actually debt.

Another problem in our money system is that debt is money, so the more debt you accumulate, the richer you are. Shouldn't it be the other way? The wealthier you are, the less of someone's debt you should own. But our system is backwards, Federal Reserve Notes are IOUs, and therefore our entire monetary system depends on the Fed issuing MORE debt in order to keep from collapsing (or is it to keep profits from slowing?).

The Federal Reserve Note presents what's known as a systemic risk. We can't avoid the consequences of a blowup in our money supply. Every dollar of debt issued by our Treasury increases the supply of money out there. Because the Treasury doesn't distribute money directly--instead relying on the Fed--it must incur debt through the issuance of Treasury bonds and bills. Issuing money, the Federal Reserve gets the bonds in return, which it can sell or hold, at which point it receives the interest.

In exchange for giving this extremely nice, tax-free (yes, that's right the Federal Reserve is actually a PRIVATE company, the only for-profit company that is free of any taxation) perk to the nice bankers--who directly contributed to the crisis and are hesitant to lend, slowing the recovery--we give our taxes to the Fed. That's right, not only does the Fed exchange Treasuries (our public IOUs) for its Federal Reserve Notes--IOUs from the Fed costing the Bureau of Engraving a cent a bill--it also receives all your taxes. That's right, the taxes you pay to the Treasury actually are routed through and received by the various district branches Federal Reserve Banks (which in fact aren't federal at all, or at least no more Federal than Federal Express.)

It shouldn't surprise you that the Internal Revenue Service was created the same time as the Federal Reserve. Taxation props up the system. Taxation is a power of government, so tranferring tax revenue shows there is a special relationship between our government and the Federal Reserve.

Without real money flowing in (money for which time and effort was exchanged as opposed to simple interest and investing), the Federal Reserve Notes would be nothing more than pretty pieces of paper. Government trades its power to tax, alongside its bonds and Treasuries, to the private, for-profit Fed in exchange for the tax revenue it produces, including the right of future taxation. In essence this is saying that the Fed will be able to receive future taxes granted the government. The federal government's exclusive right to tax therefore becomes a marketable commodity, and backs up any borrowing our government does.

Taxes can be sold ("monetized") and borrowed against. In some ways this is no different from selling a mortgage: except government debt carries a presumption that it will always be able to tax the people to cover the interest and repayment of principal. Unlike a mortgage, where the debt may never be repaid or foreclosure happen, the federal government offers a "full faith guarantee" which is in fact a pledge to tax to pay off creditors. This promise makes repayment of all its debt as certain as possible, at least compared to other borrowers who lack that privilege.

Any investor knows that US-government issued debt is considered the safest. The reason is that government can typically just print up the money, or raise taxes, to cover the cost of interest.

Precedents for insolvency

Looking back at historical periods, like the Wiemar Republic in Germany after World War I, governments have in the recent past found themselves unable to pay back what they owe. During crises, governments may find themselves unable to attract foreign creditors and unable to pay off large debts. Potential investors in their bonds--from abroad and within the country--feared for the loss of principal as the size of the debts were so high.

As the Wiemar Republic couldn't repay is debts with new capital or foreign exchange reserves--sound familiar?--it was forced to issue more debt at higher rates of interest. Government bonds ended up having to pay more and more interest to entice investors.

Eventually, when investment from the private sector dried up, the German government resorted to devaluing its currency--issuing huge-denomination bank notes and bonds--a situation called hyper-inflation, where interest rates spiral up so fast that the money loses its value almost as fast as it's printed. The net result is that the old debts become easily to repay (with the the just-printed currency notes replacing older, rapidly devaluating ones.) Unfortunately, under the Treaty of Versailles the Germans had been forced to pay reparations in gold, which meant they couldn't print themselves out of the problem.
Many nations have had to choose between inflation and preserving the power of their currency. Typically, the worse the crisis, the less concerned with the preserving the purchasing power of the currency--by not overissuing it--the government becomes.

Now I wouldn't have said massive borrowing were a crisis if we were facing a major war or Depression. But the numbers simply don't back that assumption--yet. I have heard that one reason the Depression didn't end more quickly was that the Federal government was too slow to act. OK, so lesson learned, if we're in a Depression, we'll do more. But we aren't in a Depression.
Can government spending stop a Depression? Could throwing huge sums of borrowed money head off a Depression? I don't know. Maybe things will get worse. But I remain wholly unimpressed by the ravings of economists who claim that we should do more of what we are doing now.

The lead-in to the Depression which they all studied in depth was a different time. Certainly we're not quite there yet. I don't want to see a Depression, but I don't know if throwing more money around will prevent the economic issues we will supposedly face, or merely delay its inevitable appearance.

Must government level out any unemployment? Employment is not the province of the State. A government job will decrease unemployment, but it doesn't create an increase in economic activity like a private sector job. Worse, the government job drains tax revenue, which represents the removal of wealth from taxpayers to the government (or worse, in the present deficit financing environment, a future debt to be paid off, with interest, by future Americans, many unborn.)

Technically, any job created buy the bailout is temporary, and created not by the market but rather an artificial source. Now of course we need government jobs, government fulfills numerous functions that people need, although many federal jobs (including virtually all those tied to "defense" if you're a dove like me) aren't really needed.

The act of job creation through federal spending doesn't contribute to real direct economic growth, but the added income does generate demand. The act of creating that government job represents deferred taxation, which means all the benefits of that job will go to people alive, here, now whereas the responsibility for paying for that job will go to taxpayers of the future. This is obviously a heckuva lot better deal for people here and now than it is for our children, born and unborn. Perfect for the Baby Boomers but hardly a good deal for their grandkids.

Whatever good the stimulus does becomes a net liability for our long-term future. Every dollar borrowed now also represents a dollar that might not be there in the future. The delay between when we issue debt and the price of paying off that debt seem to be closing every day.

Eventually, the interest payment on the debt will make even higher taxation a necessity. Again, this is because the fiat money system we have treats debt as money--in order to have more money, we must lend more. To lend more, someone must borrow, whether it is the government itself through sales of its Treasuries, or companies that get loans--the ailing private sector.

Basing our government and our monetary system on lending makes a perfect system for the banks, who actually created the Federal Reserve Banking system, but not so great for everyone who has to borrow. Fractional reserve banking is the equivalent of over-leveraging, like the investment banks did, that triggered this crisis. Banks need only keep on deposit one-tenth of what they lend out.

Granting control over our monetary system to the Federal Reserve has allowed this crisis to occur (alongside a whole lot of deregulation.) It's a wholly preventable tragedy. Our government had to see this crisis coming, with too-low interest rates allowing a huge bubble to grow in the housing market.

Eventually so much lending--money--entering the system means that more and more interest will be paid, which slows economic activity. Also, we have the serious emergence of monetary inflation, which is too many dollars in circulation. Now price inflation is measured in the changes to a set basket of goods over time; it's been falling as aggregate demand has fallen.

Of the two, far more ominous is monetary inflation because while dollars have been issued, most have yet to hit circulation. They end up in Saudi vaults, exchanged perhaps for billions in military hardware languishing in the desert, or squandered by bankers (which actually helps reduce inflation), or simply goes to the Chinese, who use it to own more and more of our public debt through sovereign wealth funds. As long as all those trillions stay outside the country, we'll get the benefits of selling what are essentially worthless pieces of paper abroad without seeing prices rise much at home. Eventually, through global trade a correction will be forced, although with the dollar still retaining a place as the world's reserve currency, dollars will continue to be used abroad, a nice perk which has yet to be unseated by the Euro.

International trade isn't my focus here, but I am starting to pay attention to how the dollar is valued, largely as a part of my interest in commodities speculation. Rising commodity prices are a sign that the dollar is weakening, that perhaps too many American IOUs have been issued, and that they can buy less real things: like coal, gold, or oil. So the commodities bubble may be less of a bubble and more a warning that the dollar's purchasing power has eroded. Rising oil prices could be the product not of more expensive oil--although Bush's tenure and wars in the Middle East have helped generate geopolitical instability contributing to costlier oil--but rather a declining dollar.

Whatever happens as the result of economic issues could be tame compared to the impact of a dollar worth less--or potentially worthless.

The current crisis could be far worse if private capital dries up. If lenders won't lend, economic activity slows. If government can't borrow--as one day it will be unable to do--it will simply have to print and issue money directly, which would break the Federal Reserve's control over our financial system. Hyperinflation will be the likely outcome.


The first round of Paulson's bailout tried to buy toxic debt securities, then it resorted to just giving the banks money. To whom we don't know, nor exactly how much, though we do see 5 billion here and 6 billion there for all the treasured icons of American business who've been suffering. Barney Frank is demanding more transparency in how the TARP funds are spent, but I'm guessing we'll be well into Obama's term of office when the books get brought out and all the facts get revealed.

The price of not releasing enough money has been made clear in the crisis of immediacy that economic gurus, even on the Left, have been telling us that we must resolve now. We hear that the crisis is unprecedented. In the perception management business, it's impossible to know just who is telling us the truth, and how much is marketing spin meant to sell a stimulus package which benefits specific corporate interests.

The current crisis has taken on all the dimensions of a crisis, yet the economy has just begun to slow. [Editor's note: BlueTigress of smirkingchimp disagreed--it has been going on for a while.] Corporate profits have slowed because consumer activity has slowed. Government could be doing a lot more to stimulate lending by the private sector, but has instead chosen to funnel huge sums to distressed corporations.

We shouldn't keep obsolete industries afloat. And if the destruction of those industries is due to foreign competition, we should reevaluate just how fair our free trade agreements are, particularly if losing those industries is politically untenable.
Wasn't a burst of that bubble not only inevitable but, dare I say it, necessary? Isn't slowing economic growth the only reasonable way to end a period of excess growth? The economy will change, and cause a great deal of pain for middle class Americans--this is a pre-requisite condition for change.

Now if a consumer (yes that's an apt description of what citizens have become in our society of hyper-consumerism) looks back and says, "oh, this is horrible, we're not making as much money as we used to," that's a bad situation. But do we really have a crisis when a corporate citizen says, "ewww, our profits are down by half..."?

Judging by the reaction to the plight of the corporate citizen, our government has prioritized assistance to corporations over assistance to the needy public. This should come as no surprise considering the political climate in Washington has for years favored the corporate interest over the public. The tentacles of the Right-wing thought machine have reached down to affect the minds of millions, who are convinced whatever hardship people face is a product of their own laziness or inadequacies.

Nestled in the seat of power, this Ayn Randian perspective has colored all that our government does. Spearheaded by the GOP, but not exclusively theirs, the acquiescence of government and the media to corporate control encourages careless indifference to the needs of the already poor. Social spending programs have been mocked, and Katrina showed just how little those at the top care, at least when the cameras aren't rolling.

With talk of a massive stimulus bill, highly paid media consultants and lobbyists are drooling at the chance to market their corporate sponsors as the neediest recipient, the most desperate of the desperate.

It's all just a question of priorities, or issues, of interests, which never seem to change no matter which party takes over. How far do you think your Congressman will go to protect you, if it comes down to the last dollar left in the public treasury? He'll protect himself first, which means reelection, which means attracting the most money for his reelection campaign.
Obama's campaign did show that millions of people giving--predominantly through the internet--can make a huge difference. But it also showed that money is still king of our political process because Obama's $700 million war chest contributed to his victory.

The system will change little unless the incumbents in Washington--who make up the rules--happen to one day get so confused as to pass a law which actually decreases the chance of incumbents losing their election. Incumbents tend to have large war chests than their challengers, so any serious effort to de-monetize the political system, with its patronage, perks, lobbying, etc., is doomed to fail.

The people will suffer from economic changes more than corporations, which lack both heart and soul. The health of the corporate citizen apparently has more worth than the public citizen, despite the fact that corporate citizens provide very little social capital. It exists to accumulate monetary capital, has no purpose other than to enrich its owners.

Corporations are not created to help society, only to make more money with each passing year. In the constant lust for more
profit comes much of the wrongdoing in the world, everything from mountaintop removal, the mass marketing of submission and comply weapons like the Tazer and Active Denial System (now in rifle form!) to the distribution of military hardware in hotspots through the world.

It's no coincidence that Iraq and Afghanistan are now among the largest purchaser of Americans weapons. We've created a market there by destabilizing the countries: a process that began with regime change and has only blossomed as the wars-of-choice drag on year after year. The additional weapon sales only generate more misery, encouraging an ongoing cycle of murder and revenge. Look no farther than the situation in Gaza.


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