Big government is self-perpetuating.

America is about to turn the page on Barack Obama’s four-year experiment in big government.

Mitch McConnell (Boy, was he ever wrong -RF)

The future is not Big Government. Self-serving politicians. Powerful bureaucrats. This has been tried, tested throughout history. The result has always been disaster. President Obama, your agenda is not new. It’s not change, and it’s not hope.

Rush Limbaugh (From his lips to God’s ear, but alas, I fear God isn’t listening – RF)

Conservatism is a hard choice for a society that has become accustomed to big government and big entitlements promoted by liberals.

Jesse Helms (He wasn’t always wrong – RF)

The above conservatives, some would call them hard-line conservatives, are “against” big government. In post after post I rail against “big government” and with good reason. But can we ever change it now that we have allowed it to engulf our nation? Is it actually possible to go backwards? It appears that Jesse Helms had the correct nostrum. (I can’t believe I just wrote that!) If the way “big government” treats the agricultural sector is an example, then the answer is a firm, “NO!” Witness the two pieces of legislation recently put forth by the Senate and the House that they euphemistically call the “Farm Bill.” According to our stalwart politicos they are “reforming” the way the US government treats this sector. Yea, right!

According to our Senators and Representatives their respective bills promote cheaper, more sensible policy than what would occur if the current programs were simply extended. American “farm policy” over several decades has been set by these so-called “farm bills.” The last such bill was passed in 2008. Many Americans, like myself, wonder why the “farm bill” needs to subsidize a sector of our economy and a group of individuals (farmers) who are doing quite well.

Farmers have benefited from an historic run-up in grain prices driven by surging demand in nations such as China and India, poor weather in some important producing nations and the increasing use of corn and other crops to make biofuels such as ethanol. To say that farmland values are skyrocketing is an understatement.

Does that look like a graph of your “land value?” But you are subsidizing them!

[From: Why (sigh) farm subsidies survive, by Robert J. Samuelson] “The explanation is force of habit. Since the Great Depression of the 1930s, when there were plausible reasons to aid farmers, government has consistently accorded agriculture special treatment. The politics of doing so long ago became self-perpetuating. Without the massive subsidies, the Agriculture Department would be far less important. So would the congressional agriculture committees and the crowd of farm groups (sometimes, it seems, one for almost every crop) that lobby for benefits. And certainly the farmers who receive payments and protections feel entitled to them.” If Mr. Samuelson is correct (and I greatly admire his opinion) we are doomed to perpetual “big government.”

Wait! Stop, bellow you! Why do you insist on putting quotes around the term? Because, answer I, if one wishes to give it an accurate name it should be called the “food stamp bill.” The scope of the farm bill has expanded over time, to the point where farm subsidies, as typically understood, now make up a relatively small share of the total spending on the farm bill (about 15%) – but not “so small a share” that they shouldn’t be eradicated. Nutrition programs, including what used to be known as “food stamps,” make up the lion’s share of the budget (see below) — about $80 billion per year — and the bill now includes energy and environmental programs, too. What’s up with that? Don’t we already have huge bureaucracies to deal with “energy” and “the environment?”

“Nutrition assistance” is the politically correct term for food stamps. Of course, there are no “stamps” anymore. The recipient is given a credit card. Audits have shown that vast amounts of this money are not spent on food – large withdrawals in Las Vegas, for example.

[From: Why (sigh) farm subsidies survive, by Robert J. Samuelson] “All this creates a powerful and shared vested interest in safeguarding the status quo, even as different interest groups and their congressional champions fight ferociously over the structure and distribution of benefits. The cost has been considerable. From 1995 to 2012, the various subsidies totaled $293 billion — more than $16 billion annually — according to the Environmental Working Group (EWG), a critic of present programs. This understates the true costs, because it includes only the on-budget costs of explicit subsidies. Excluded are higher consumer prices paid on some products (sugar, for instance) that are partially shielded from market competition.“

The Senate (controlled by the Democrat Party) says its bill will save $24 billion. That seems a lot, but it is spread out over 10 years. Farm subsidies alone, only 15% of the budget, will total $190 billion over the same time period. As well, the “savings” may never be realized as any number of “provisions” can subvert the “cuts.” Therefore, if “x” or “y” happens, no cuts and potentially more spending! Here is an example. Savings come from a reduction in “direct payments” (i.e., they don’t just hand the farmer a check). The payments are substituted, for example, with “drought insurance.” Well, say you, that seems reasonable. Indeed it does, respond I, unless there is a drought in which case the insurance covers 40% and you and I, as taxpayers, pick up the other 60%. Lucky us!

[From: Why (sigh) farm subsidies survive, by Robert J. Samuelson] “The survival of farm subsidies is emblematic of a larger problem: Government is biased toward the past. Old programs, tax breaks and regulatory practices develop strong constituencies and mindsets that frustrate change, even when earlier justifications for their existence have been overtaken by events (see footnote). It’s no longer possible to argue that agricultural subsidies will prevent the loss of small family farms, because millions have already disappeared. It’s no longer possible to argue that subsidies are needed for food production, because one major agricultural sector — meat production — lacks subsidies and meat is still produced.

“The larger lesson must be discouraging. Among other qualities, good government requires the capacity to adapt to change. It needs to discard what doesn’t work or is no longer necessary. It needs to devote its limited resources — in time, skill and money — to the problems where it might do some good. In the best of circumstances, this is difficult. But routine politics compounds the difficulty, as the immortal farm subsidies and endless debates over budget deficits attest.”

My friends, big government isn’t just “big.” It is immense, enormous, colossal, mammoth, monumental, gargantuan, elephantine, titanic, Brobdingnagian, humongous, astronomical… But sadly, those that run our big government believe it is commodious. Big government does not want to change.

Roy Filly

Footnote:

Federal Helium Program: How temporary becomes forever

By David A. Fahrenthold

President Ronald Reagan tried to get rid of it. So did President Bill Clinton. The Federal Helium Program — left over from the age of zeppelins (the government stepped in to guarantee a supply of helium for Zeppelins in 1925. Eighty eight years later the “Zeppelin threat” is long over, but the big government program survives – RF). It is an infamous symbol of Washington’s inability to cut what it no longer needs. The House voted 394 to 1 to keep it alive (yes, the House, controlled by the Republican party – RF).

“Many people don’t believe that the federal government should be in the helium business. And I would agree,” Rep. Doc Hastings (R-Wash.) said on the House floor before the vote. But at that very moment, Hastings was urging his colleagues to keep the government in the helium business. “We must recognize the realities of our current situation,” he said.

The problem is that the private sector has not stepped into the role that government was giving up. The federal helium program sells vast amounts of the gas to U.S. companies that use it in everything from party balloons to MRI machines at cheap (subsidized) prices. If the government stops, no one else is ready. Thus, government interference has subverted capitalism yet again. The free market couldn’t compete with the government. SO IT DIDN’T!

Today, the program is another reminder that, in the world of the federal budget, the dead are never really gone. Even when programs are cut, their constituencies remain, pushing for a revival.

Two other programs axed in Clinton’s “Reinventing Government” effort — aid to beekeepers and federal payments for wool — returned, zombielike, a few years later. Now the helium program may skip the middle step and be revived without dying first.

More on the death of Keynesian stimulus voodoo.

Dear Readers,

Although I dislike reproducing articles by other authors in their entirety, the article below by Dan Mitchell is too good to tamper with. In my recent post I addressed the current economic plan of the new Japanese government. It is Keynesian economics on steroids. This Japanese experiment will hopefully put the final nail in the coffin of “Keynesian stimulus.” The studies outlined and referenced in the Mitchell article show why the Japanese experiment will fail. Of course, we already know that the Obama Keynesian experiment failed. The “Stimulus” was a bust. Let us not ever forget that this was the single largest expenditure in the history of the wealthiest nation ever. As large as the Obama stimulus was, the Japanese are committed to more (proportionally). Japan is the second, third, or fourth wealthiest nation on Earth depending on who is doing the calculating. They have clearly lost ground to China and India, currently ranked above them in most lists. “Enjoy” the article below. I say that with tongue in cheek because it is ever so sad. And never forgot, big government is bad government. Thanks to President Obama the statement is now axiomatic.

Roy Filly

Other than Obama and Krugman, Is there Anybody Who Still Thinks Bigger Government Is Good for Growth?

Daniel J. Mitchell | Jun 16, 2013

I’ve repeatedly explained that Keynesian economics doesn’t work because any money the government spends must first be diverted from the productive sector of the economy, which means either higher taxes or more red ink.

So unless one actually thinks that politicians spend money with high levels of effectiveness and efficiency, this certainly suggests that growth will be stronger when the burden of government spending is modest (and if spending is concentrated on “public goods,” which do have a positive “rate of return” for the economy).

I’ve also complained (to the point of being a nuisance!) that there are too many government bureaucrats and they cost too much.

But I never would have thought that there were people at the IMF who would be publicly willing to express the same beliefs. Yet that’s exactly what two economist found in a new study.

Here are some key passages from the abstract.

We quantify the extent to which public-sector employment crowds out private-sector employment using specially assembled datasets for a large cross-section of developing and advanced countries… Regressions of either private-sector employment rates or unemployment rates on two measures of public-sector employment point to full crowding out. This means that high rates of public employment, which incur substantial fiscal costs, have a large negative impact on private employment rates and do not reduce overall unemployment rates.

So even an international bureaucracy now acknowledges that bureaucrats “incur substantial fiscal costs” and “have a large negative impact on private employment.”

Well knock me over with a feather.

Next thing you know, one of these bureaucracies will tell us that government spending, in general, undermines prosperity. Hold on, the European Central Bank and World Bank already have produced such research. And the Organization for Economic Cooperation and Development has even explained how welfare spending hurts growth by reducing work incentives.

To be sure, these are the results of research by staff economists, which the political appointees at these bureaucracies routinely ignore.

Nonetheless, it’s good to know that there’s powerful evidence for smaller government, just in case we ever find some politicians who actually want to do the right thing.

Laws, laws, and more laws.

Those of you who have been reading my posts for a while will remember Abner Shoenwetter. Poor Abner was a victim of the immense number of federal laws and the “rules” pertaining to and expanding said laws. If one were to ask the simple question, “How many laws are there in the United States?” it would literally be impossible to answer that question. In fact there are so many criminal laws, the odds of a citizen not breaking one in a lifetime are so astronomical, it would make DNA odds look like simple arithmetic.

The question for today, however, is how many FEDERAL CRIMES are there? The U.S. Constitution mentions three federal crimes by citizens: treason, piracy and counterfeiting. However, Congress, in its great wisdom, has seen fit to expand that number dramatically. By the turn of the 20th century, the tally of criminal statutes numbered in the dozens. Today, the number is… well, incalculable. It turns out that counting them appears to be impossible. One would assume that the Department of Justice (DOJ) could tell you, but alas, no. The DOJ spent two years trying to count the number of federal statutes with criminal penalties in the 1980s, but produced only an estimate: 3,000 federal criminal offenses.

Certainly the vast number of lawyers in this country ought to be able to figure it out. The American Bar Association (ABA) tried in the late 1990s, but concluded only that the number was likely much higher than 3,000. The ABA’s report said “the amount of individual citizen behavior now potentially subject to federal criminal control has increased in astonishing proportions in the last few decades.”

Today, there are an estimated 4,500 crimes in federal statutes, according to a 2008 study by retired Louisiana State University law professor John Baker. There are also thousands of regulations that carry criminal penalties. Some laws are so complex, scholars debate whether they represent one offense, or scores of offenses. Just looking at the years from 2000 to 2007, Congress created at least 452 new crimes. Ninety-one of the 452 were contained in new laws that created 279 new crimes, and the remaining were contained in amendments to existing laws. The total of 452 new crimes breaks down by year as follows: 65 for 2000; 28 for 2001; 82 for 2002; 51 for 2003; 48 for 2004; 13 for 2005; 145 for 2006 (a bumper year!); 20 for 2007.

So let’s see what happens to normal, law-abiding citizens, like you and me, when we step on the wrong side of these statutes. For my environmental friends, beware. Unauthorized use of the Smokey Bear image could land an offender in prison. So can unauthorized use of the slogan “Give a Hoot, Don’t Pollute.” Ouch.

“Most people think criminal law is for bad people,” says Timothy Lynch of the Cato Institute. People don’t realize “they’re one misstep away from the nightmare of a federal indictment.”

Eddie Leroy Anderson of Craigmont, Idaho, is a retired logger, a former science teacher and now a federal criminal thanks to his arrowhead-collecting hobby. In 2009, Mr. Anderson loaned his son some tools to dig for arrowheads near a favorite campground of theirs. Unfortunately, they were on federal land. Authorities “notified me to get a lawyer and a damn good one,” Mr. Anderson recalls.

There is no evidence the Andersons intended to break the law, or even knew the law existed (see promulgation of the law below), according to court records and interviews. But the law, the Archaeological Resources Protection Act of 1979, doesn’t require criminal intent and makes it a felony punishable by up to two years in prison to attempt to take artifacts off federal land without a permit. Faced with that reality, the two men, who didn’t find arrowheads that day, pleaded guilty to a misdemeanor and got a year’s probation and a $1,500 penalty each. “We kind of wonder why it got took to the level that it did,” says Mr. Anderson, 68 years old.

I remember being taught in my civics class in high school that “all laws must be properly promulgated.” Apparently that is no longer the case. How many of those federal laws can you name? Proper promulgation, as set forth, by Jeremy Bentham below, seems to have gone far to the wayside.

Promulgation of the Laws, by Jeremy Bentham.

“Let us suppose the general code completed, and that the seal of the sovereign has been set to it. What remains to be done? That a law may be obeyed, it is necessary that it should be known: that it may be known, it is necessary that it be promulgated. But to promulgate a law, it is not only necessary that it should be published with the sound of trumpet in the streets; not only that it should be read to the people; not only even that it should be printed: all these means may be good, but they may be all employed without accomplishing the essential object. They may possess more of the appearance than the reality of promulgation. To promulgate a law, is to present it to the minds of those who are to be governed by it in such manner as that they may have it habitually in their memories, and may possess every facility for consulting it, if they have any doubts respecting what it prescribes.”

Let us return to Abner Schoenwetter: You have already read about Mr. Schoenwetter in my previous post. This vicious criminal illegally wrapped frozen lobsters in plastic bags instead of cardboard boxes as is required by Honduran law! Wait! What? Is he supposed to follow Honduran law (and a stupid one at that)? Yes. Watch the video.

http://blog.heritage.org/2013/02/08/morning-bell-getting-a-meddling-government-out-of-our-lives/?roi=echo3-15965980690-13199616-8cdd3f675cbb9d58700cf347614b1022&utm_source=Newsletter&utm_medium=Email&utm_campaign=Morning%2BBell

Don’t help that woodpecker! Eleven-year-old Skylar came upon a baby woodpecker just before a cat was about to make the bird his next meal. The aspiring veterinarian told the TV station, “I couldn’t stand to watch it be eaten.” So Skylar asked her mother if she could care for the bird and then release it. Mom agreed, and the family went on its way, stopping at a home improvement store in Fredericksburg, Virginia. Rather than keeping the bird in the hot car, they brought the woodpecker inside the cool store. It was there that one of the U.S. Fish and Wildlife Service’s undercover (!) agents spotted the mom–daughter crime duo. The undercover wildlife woman held up her badge and proceeded to reprimand Alison and Skylar for illegally taking and transporting the bird.

Under the Migratory Bird Treaty Act (16 U.S.C. § 703 et seq.), the woodpecker is a protected species. The problem is that the act provides only convoluted definitions of which birds are protected. Identifying a protected species is a difficult task for an ornithologist. And unfortunately for the Capos, there isn’t an “eleven-year-old girl who cares about animals” exception.

When the Capos got home, they released the woodpecker and notified the Fish and Wildlife Service. Two weeks later that same agent, accompanied by the Virginia state trooper, showed up at the Capo residence and, according to Alison, delivered a citation stating that she violated federal law, owed the federal government a $535 fine, and could be imprisoned.

My friends, this is not a joke. When our Federal Government tries to “fix” every problem that causes a media frenzy, we end up with enough laws that THEY CAN’T BE ACCURATELY COUNTED!

Big government is bad government!

Roy Filly

Manipulating your vote.

The American population is beginning to learn that our government gathers a lot more information about our lives than we ever imagined. You may favor snooping to catch terrorists before they strike (I favor this). However, if they are gathering information that sways elections you might have a different view. The Democrats are hip deep into this type of data gathering and they effectively use it. Of equal importance, as a Republican, they are miles ahead of us. The short video below is a report from Fox News about the Democrat use of this data. It’s a bit scary when one thinks about how uniformed the voting public actually is. Sorry about the short advertisement.

Roy Filly

http://video.foxnews.com/v/2477877518001/campaigns-using-your-data-to-capture-your-vote/

The mystery of non-inflation.

Inflation is like sin; every government denounces it and every government practices it.

Frederick Leith-Ross

Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.

Ronald Reagan

Inflation is taxation without legislation.

Milton Friedman

Inflation: Everyone’s illusion of wealth.

Anonymous

By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.

John Maynard Keynes (Yes! Even Keynes recognized this snake in the grass! – RF)

As you are aware if you have been reading my posts, I am very concerned about the prospect of inflation. Actually I am worried about hyperinflation! The Federal Reserve is “printing” money (actually they are buying US Treasuries) to the tune of $85 billion per month. Yet we have inflation at a 50-year low.

When Paul Volcker was tasked with taming inflation in the early 1980s he began a “draconian” increase in interest rates that resulted in home loan interest rates at 16%. Paul Volcker was hated during this period and didn’t become a hero until his plan actually worked and ushered in the longest period of prosperity in history. Wells Fargo is offering 30-year home loans at just over 4%. So what’s up with that? Why isn’t inflation at least creeping up and up? Rudolf Haverstein, President of the Reichsbank during the Weimar Republic hyperinflation, must not only be rolling over in his grave, he must be doing backflips!

[Source: The biggest economic mystery of 2013: What’s up with inflation? By Matthew Obrien] Milton Friedman was wont to say that inflation is a monetary phenomenon. That is to say, when the supply of money goes up, so do prices. It appears we are looking at a new (and possibly one-time) phenomenon. Increasing money supply and near zero interest rates are not causing galloping inflation.

From the central bankers perspective they lowered interest rates to historic lows. It should have started a boom if not a bubble in the economy. But, it didn’t. The central banker cannot go “negative” on interest rates. If they did everyone would take their money out of banks. Who would leave their money in a bank to watch it shrink every month. Japan is the modern example of zero interest rates/zero growth.

The alternative to “negative” interest rates is inflation (if inflation is higher than deposit/treasury interest rates then the effective interest rate is NEGATIVE). The Federal Reserve has said (promised) it will keep interest rates low for quite some time to come. Actually what they explicitly said is that they won’t raise rates before unemployment falls below 6.5 percent or inflation rises above 2.5 percent. They also say they will continue to buy bonds (Qualitative Easing or QE 3.0). The “promise” part is easy – sort of like a campaign promise – keep it, don’t keep it, who will remember. The “quantitative easing” part is the tricky one.

The QE part constitutes bond buying, as noted above, which is not exactly printing money – although, yes, the money for the “bond buying” appears out of thin air, sort of like “I Dream of Jeannie.” Ben Bernanke blinks – like Jeannie in the old TX series – and viola the money to buy bonds appears. Here’s the good part. The money sits on bank and security house ledgers. It doesn’t go into circulation where it would stimulate inflation. As long as the invented money is simply a number on a ledger at one or another banking firm the Fed is safe. When do people start cashing in their “ledger dollars” for “real dollars?” They do it when they buy homes or retire. Both of these things are starting to happen more rapidly. Also, banks will get rid of their bonds (a huge amount of money that has been sitting on the sidelines following the technical end of the Great Recession) when interest rates rise. Why is that, ask you? Because banks don’t like “negative” interest rates (that’s what happens when you hold a bond that pays 1.5% and everyone is selling bonds that pay 4.5%) any more than you do, answer I. So, the thinking person would expect inflation to rise. But no, it is currently falling and is, in fact, below the level that caused Bernanke to institute QE 2.0 – a move meant to avert DEflation. So, again, what is going on?

Mr. Obrien explains it in two possible scenarios in his article:

Is this just a Jedi Mind Trick? The Fed has gone out of its way to let everyone know that quantitative easing will not — repeat, will not! — be inflationary. For one, Ben Bernanke has explained that the Fed can and will raise interest on reserves to prevent banks from flooding the economy with an inflationary surge of new loans; for another, the Fed has explained that it probably won’t lose much money on the bonds it owns, and that even if it does, that wouldn’t stop it from raising short-term interest rates. In other words, the Fed has done its best to (let) markets know it’s not promising to be irresponsible. Still, I’m not sure how much markets have noticed. Indeed, stocks swoon every time the Fed hints that it might “taper” its bond buying — not what you would expect if people thought quantitative easing was just a confidence game.

Is it the austerity, stupid? That giant sucking sound you hear is the government taking demand out of the economy. As you can see on the left axis above, total government spending — that is, federal plus state and local — as a percent of potential GDP has been on a steady downward trend since 2010. It’s a three-act story of bad policy. First, the stimulus peaked, and then reversed prematurely; then, state and local governments began slashing budgets to balance them as they are required; and now, the federal government is cutting spending in the dumbest way Congress could come up with — the sequester. Now, QE2 did manage to increase inflation despite some austerity, but there’s more of it this time around. The chart above only shows total spending through January 2013; it doesn’t include the sequester, or, for that matter, the tax side of austerity. Between the spending cuts and the expiring payroll tax cut, the fiscal contraction of the past six months has probably overwhelmed any “money-printing.”

I’m surprised Mr. Obrien didn’t mention the elephant in the room! Why are federal, state, and local governments invoking “austerity?” The answer is they are drowning in DEBT. But so is the “entitled” population of America – you can interpret the word “entitled” however it pleases you. People and central planners are working at cross-purposes. I am unloading debt! So are most of my 3.16 million countrymen. I believe this is also why there are no “compromises” any longer between big government democrats and small government republicans. The republicans can’t compromise anymore in the manner demanded by nanny state democrats because we are BROKE!

It appears that the geniuses of central planning and the benevolent progressive nannies are at a loss. Is it possible that they do not know enough to guide the largest economy in the history of the world like it was a miniature pet terrier? That seems impossible. Progressive/statist/altruists ALWAYS know the “right” thing and us peons simply need to let them run the whole show! It might surprise you that I actually think Ben Bernanke is a very smart guy. But I don’t think he is a smart as he thinks he is. I fear that soon he will have an “I’ll be damned” moment, and then he will “be damned” and drag us all down with him.

You may believe that I do not know of what I speak. You may be right and surprised to learn that I actually hope you are right.

Roy Filly

Japan. Keynes. They’re all nuts!

People (actually my #2 son) complained that I didn’t make an effective argument about Japan’s experiment in Ultra-Keynesian stimulus. What are the Japanese doing? What could be the downstream repercussions? Is this just a fun experiment to watch or will it affect the USA? Is Paul Krugman laughing or sweating bullets?

So here is the detail (edited slightly) from Central Bankers Gone Wild, By John Mauldin.

In bullet-point fashion, let’s summarize the dilemma that faces Abe-san (Prime Minister), Kuroda-san (Central Banker), and the other leaders of Japan.

Japan is saddled with a yawning fiscal deficit that, if it were closed too quickly, would plunge the country into immediate and deep recession. The yen would strengthen, and Japan’s exports would once again be damaged. Such is the paradoxical outcome if you suddenly decide to live within your means when you have been on a spending binge (Sadly, the US has also been on a spending binge – RF). The Japanese deficit is close to 10% of GDP. For my US readers, think about what would happen next year if the government cut $1.6 trillion from our budget.



Japan has a GDP that is now close to 500 trillion yen (give or take a few tens of trillions). Their most recent budget calls for Y92.6 trillion in spending, almost evenly divided between Y43.1 trillion financed from tax revenues and Y42.9 trillion from the issuance of new bonds, adding to Japan’s massive public-sector debt that already totals nearly Y1 quadrillion. Say that with a straight face: 1 quadrillion. And this massive debt is not a recent phenomenon: it has been accumulating for many years.

Tax revenues have been going down for decades, as the country has been mired in no-growth deflation for 24 years. Revenues are now down to where they were in 1985. By way of comparison, US tax revenues in 1985 were $734 billion (or $1,174 billion in constant 2005 dollars). Last year, US revenues were $2,450 – that is, more than double the 1985 total. (taxpolicycenter.org)

 The following chart is courtesy of my friend and Japan expert Kyle Bass at Hayman Capital Management. If this were a stock, would you be a buyer?



Japanese ten-year interest rates exploded from just above 30 basis points to over 1% at one point in the past month. The Bank of Japan (BOJ) intervened, but rates closed today at 0.85%. Note that they are still down from the 1.3% where they stood two years ago.

 

It costs the Japanese government 24% of its revenues just to pay the interest on its debt at current rates. According to my friend Grant Williams (author of Things That Make You Go Hmmm…), if rates rise to just 2.2%, then it will take 80% of revenues to pay the interest. Even at the low current rates, the explosion in Japanese debt has meant that interest rate expense has risen from Y7 trillion to over Y10 trillion. Note in the chart below (also from Kyle) that the Japanese government is now issuing more in bonds than it pays in interest. Somewhere, Charles Ponzi is smiling.

Just for fun, here is a picture of Mr. Ponzi (another good looking Italian – RF) writing a check (courtesy of Geert Noels).

For 20-plus years, Japanese nominal GDP has barely risen. If your nominal GDP stagnates and you are running large deficits every year, then your debt-to-GDP ratio rises. For Japan, the ration will be a staggering, never-before-seen 245% this year.

The only way you can lower the rate of debt-to-GDP expansion – and perhaps convince investors to continue to buy your bonds – is to increase your nominal GDP while slowly lowering your deficit over time until the increase in your debt is less than the nominal growth of your economy.

After years of running trade surpluses, Japan is now running a trade deficit (the US has a similar story, but has been telling it for a longer period of time – RF). Basic economic accounting tells us that for Japan to get to its goal of sustainability, it absolutely must have a trade surplus. And as deep a hole as Japan is in, it needs seriously large trade surpluses. Like back in the good old days of only a few years ago. Not to mention that the country’s current account surplus is down by over half from its peak in 2007 and back to where it was 20 years ago. The trend is ugly.

There are only two ways to get nominal growth. You can get real growth or you can create inflation (perhaps you should re-read my posts on inflation – scary, scary, scary – RF). There are not many things that you can get Hayek and Keynes and every other economist to agree on, but this one thing is the universal answer to your fiscal problems: Growth, with a capital G. That is the remedy put forth by every economist and every politician : “We need to grow our way out of the crisis.” But there are two problems as Japan tries to get to growth.

Problem #1: Your nation is aging (sound familiar – this is the demographic that will unstoppably end the “nanny” state – RF), and internal consumer spending is not going to be a source of real growth. You have to talk like that can happen, but you know it is just not all that realistic. You have been trying for 20 years to get your country to spend, and people are just not up to it. What you really need is for your export base to get with the program and massively increase its sales to the rest of the world. In fact, that is your only real option. And one of the easiest ways to do that is to drive down the value of your currency, especially against the currencies of competitor nations. That boost in exports can help relieve your chronic excess productive capacity and maybe, possibly, hopefully, engender a labor shortage and drive up the cost of labor, which will help stimulate inflation.

Problem #2: You are mired in deflation and have been for 20 years. Since there is no natural source of inflation in Japan – a nation of savers and an increasingly elderly population –you have to create inflation by increasing the prices of your imports. And the way to increase those prices is to drive down the value of your currency, especially against the dollar and the euro.

Hmmm, we see a possible strategy emerging here.

But if you set out to decrease the value of your currency, you violate all sorts of central banker and G7 codes and rules. Given the scale at which you need to operate, you would start a currency war (see my post on the Currency War – RF), and no major central bank could possibly be associated with something so distasteful. That is a touchy problem, but fortunately for you there is a solution: you can engage in quantitative easing in order to stimulate your economy (Oh, Boy! Do da’ name “Ben Bernanke” ring a familiar note – RF). That is certainly within the rules, as the central banks of every other major member of the club (the Fed, ECB, and Bank of England) have been doing it for years.

How can anyone object to a policy that simply targets inflation? The fact that such a pursuit happens to drive down the value of your currency is merely a by-product of the necessary pursuit of mild, 2% inflation, which is the only way for your country to get out of its slump. The other big players all have 2% inflation targets; you are just aligning Japan’s course with their own stated policies. And besides, even with the huge size of your announced quantitative easing, you can point out that you are way behind the growth of the monetary base of the Fed, the ECB, and the BoE.

That brings us to a major dilemma, which Kyle Bass calls the Rational Investor Paradox. If you are an investor or fiduciary in Japan and you now believe the Bank of Japan is quite serious about creating inflation, do you continue to hold Japanese government bonds (JGBs)? Any serious analyst would assume that interest rates will climb to at least the rate of inflation, assuming you believe that Japan can create inflation. And especially if they pursue a policy that is going to lower the purchasing power of the yen, why would you, a rational investor, want to hold long-term Japanese bonds? Why wouldn’t you sell as soon as Kuroda announced the “shock and awe” policy? (It certainly left me in shock and awe! And intellectually, I knew it had to be coming!) And that is exactly what happened the day after Kuroda announced his policy. The BoJ had to step in a few days later and start buying bonds in significant quantities to hold the rate down.

Your problem is compounded by the fact that the natural buyers of your bonds for the last 20 years have been the retirement plans of your workers (most of the US national debt is held by Americans, older Americans – ouch- RF). But your country is rapidly getting older, and now those pension plans and individual savers are starting to cash in those bonds in order to meet pension obligations and to live in retirement. Your major pension plans are now sellers (on net) of JGBs. Mrs. Watanabe is not going to be a buyer of bonds in retirement. She will want to sell in order to buy rice and help out her grandkids. She will need to pay for rising energy and healthcare expenses and other basic needs. In short, you are rapidly running out of buyers “at the margin,” which is where markets are made.

Now, to the crux of the problem. You cannot allow interest rates to rise much more than they already have. That way lies fiscal disaster. Yet the buyers of Japanese bonds are starting to get nervous and to leave the market, which is a rational consequence of your drive for inflation, which you absolutely must have if Abenomics is to have a snowball’s chance in Hades of working. That means there is only one real source of bond buying power left: The Bank of Japan (Uncle Ben is buying $80 billion of US treasuries every month – RF).

The Bank of Japan is on its way to becoming the market for Japanese bonds. It is eventually going to have to “hit the bid” on every bond that is issued by the government, because if the current policy is maintained it will drive all buyers from the market, leaving just sellers. The pension systems will not necessarily exit their JGBs, but they will let them roll off as they need to raise cash to meet their pension obligations. International buying of your bonds will also slow to a trickle.



The Bank of Japan is going to have to print – sorry, Kuroda-san, I mean pursue quantitative easing – to a far greater extent than it has announced in order to keep up with the demands that will be heaped upon it. We are talking about numbers that will stagger the imagination. This will be bigger than Carl Sagan’s “billions and billions.” It will not be long before the word quadrillion starts to be used more frequently… if you started counting and called out one number every second, it would take 33 million years to get to a quadrillion. A quadrillion is a thousand trillion, or a million billion or a billion million. We humans simply have no way to grasp the enormity of such a number. Nor can we understand the implications when such fantastic numbers must be applied to the world’s money supply.

Exporting Deflation

In summary, along with increasing your exports of cars, flat-panel screens, robots, and machine tools, you are going to try and export the one thing you have in abundance that the world does not want: deflation.

This is a nightmare scenario for central bankers worldwide. If there is a mandate, a central theme in the Handbook for Central Bankers, it is that deflation must always and everywhere be fought tooth and nail. Deflation must be given no quarter. Who wants to become the next Japan (actually, progressive/statist economists have floated the idea that the Japanese economy “isn’t so bad” because that is where their Keynesian has brought the US – RF)?

If deflation shows up on your watch, you have to fight it. And if your interest rates are already low, then the only tool you have in your deflation-fighting toolbox is quantitative easing.

Let me be very clear. Japan is about to unleash the most significant currency war since the 1930s, when the world was still on the gold standard. The problem today is that politicians, labor unions, and businesses everywhere want to use exchange rates as the tool to manage their balance of trade, rather than focusing on improving their own competitiveness and manufacturing skills, not to mention controlling their own spending and fiscal budgets. The problem as they see it is the competition from abroad, which is always seen as doing something unfair.

The pressure on central banks to respond to Japanese QE is going to be immense… Japan is going to need to depreciate the yen by 15%-plus a year to get (to) 2% inflation, and within two years that means a yen at 130. And then 150 the next year, with 200 the extrapolated destination in five years. Can that happen in a vacuum?

… I think we may be entering a most dangerous period where politicians and central bankers feel the need to “do something,” and that something will include quantitative easing, exchange-rate actions, and protectionism. 

Thanks to Mr. Mauldin for this well developed expose on the nature of Central Banking in the era of Keynesian stimulus, massive federal debt, continuing deficits, and a still stumbling economy. We can only hope Mr. Mauldin is completely wrong. Unfortunately, he sounds spot on to me.

Roy Filly

On the lighter side.

Never let it be said that the Rugged Individualist fails to see the humorous side of government. A reader put me onto this (thanks JM). I suppose if I thought about it long enough I would likely have come up with the answer to the question, “Who is the highest paid employee of the State of California?” Well, at least I might have gotten close. But, as it turns out, you could have asked the same question of citizens of nearly every state in the union and you would almost always get the same answer – at least the same answer if it were correct. Is it the Governor, ask you? Is it the Chief Justice of the State Supreme Court? The States’s top health official? The answer to all of those is “no,” respond I.

Far and away, the highest paid state employee is almost always the coach of  a major sports team employed by the largest state university. [Source: Is Your State's Highest-Paid Employee A Coach? (Probably), by Reuben Fisher-Baum] The graph below shows that the highest-paid public employees include 27 football coaches, 13 basketball coaches, and one hockey coach (really, hockey?? I guess New Hampshire has no chance of producing anything that resembles a winning football, baseball, or basketball team).

Then you have a smattering of medical school deans, chancellors, university presidents, department chairmen and one plastic surgeon (I knew I should have gone into plastic surgery). Yours truly is not in the running, I assure you.

I am a capitalist. So I will not be complaining about anyone who can negotiate a high salary. However, what I find distasteful is the whole notion of “amateur” sports when it comes to these major powerhouse college teams. Because the student players must hold amateur status they cannot be “paid” – wink, wink. Aren’t the athletes the ones who actually win the game, break their legs, and have their testicles shrink due to the steroids they must take to get a starting position on the team? (No sexism is intended here. None of these top-earning coaches is in charge of the women’s field hockey team. Indeed, a federal court case settled the fact that large differences in pay between male coaches of men’s teams and female coaches of women’s teams was not discriminatory.)

The other thing that grates on me is that one doesn’t need to be a particularly successful coach to garner these mammoth salaries. In 2011-2012, Mack Brown was paid $5 million to lead a mediocre 8-5 Texas team to the Holiday Bowl. However, the team still generated $104 million in revenue, the most in college football. So, in the infamous words of Danny DeVito – in Twins – “money talks and bullish*t walks.”

Finally, and in fairness, the state coffers put up a relatively small amount of these huge salaries. The state is only on the hook for the cash if the team doesn’t make enough to cover the coach’s salary. Ah! Capitalism!

Roy Filly

The Obama “Green Job” initiative.

Well, I’ll tell you one thing, Mary Poppins, you don’t fool me a bit!

From, Mary Poppins.

It’s Not Easy Being Green

Kermit the Frog

How’s that “green job” investment going for America, Mr. President? The following is from Bloomberg Business Week.

In 2008 candidate Barack Obama promised to create 5 million green jobs. He laid out a plan to invest $150 billion over 10 years that would advance a clean-energy economy built around biofuels, hybrid cars, low-emission coal plants, and renewable sources such as solar and wind. How many has he actually created?

The Bureau of Labor Statistics began tracking green jobs two years ago, but it counts only how many existed as of the end of 2010. It doesn’t keep a running total of newly created jobs, so there’s no way to tell how many existed before Obama’s election. The Brookings Institution also has a tally, but it too goes only through 2010, and of the nearly 2.7 million green jobs it identifies, most were bus drivers, sewage workers, and other types of work that don’t fit the “green jobs of the future” that President Obama promised. However, Brookings does count “clean green jobs Such as those found in the wind, solar, fuel-cell, and smart-grid industries. In 2010, Brookings shows, there were 184,699 such jobs nationwide—up 2,642 since the Mr. Obama took office in 2009. The Brookings Institute is prestigious and bills itself as “nonpartisan,” but everyone knows it is clearly left of center. So if they are not singing Mr. Obama’s praises, they see a significant problem.

The American Recovery and Reinvestment Act of 2009 (i.e., the Stimulus) set aside $90 billion in renewable energy grants and loans that funded a grab bag of thousands of projects—wind farms, solar installations, natural gas fueling stations, biofuel research, and a $5 billion weatherization project for low-income homes. Digging into the public records of the $21 billion spent so far through 19 U.S. Department of Energy programs reveals 3,960 projects that employ 28,854 people (that’s only three-quarters of a million dollars per job).

So, we are slightly short of the promised 5 million “green” jobs. In November 2010, the President’s Council of Economic Advisers said federal recovery spending had “saved or created” 225,000 clean-energy jobs, including “both the direct jobs of people involved in the construction of a particular project and also the jobs generated by the additional economic activity sparked by these projects.”

Because the Rugged Individualist is nothing if not completely fair and unbiased, I will give the President the full benefit of the doubt. One cannot claim to know whether the “multiplier effect” claimed by the Obama administration is real or not. But let us assume it is accurate and generously grant that similar growth occurred in 2011 and 2012 then the “green jobs initiative” created 675,000 jobs. OK, Mr. President, you have only 4,325,000 to go.

Most states did not buy into the Presidential hype about new “green collar” jobs. Therefore, one could argue that had the entire nation embraced Mr. Obama’s plan, the number of new green jobs would have flourished. I would not make that argument because I live in California where they bought the concept hook, line, and sinker. California has embraced them one and all. Unfortunately, it hasn’t turned out well, says Conn Carroll in the Washington Examiner.

• California embraced the cap-and-trade, renewable electricity mandates and high-speed rail proposals that the rest of the country rejected.
• Since adopting these policies, California now has the highest gas prices in the country.

California’s electricity prices are also 39 percent higher than the national average and expected to rise when the state’s renewable energy mandate kicks in, which requires 30 percent of electricity be derived from renewable sources. The renewable mandate is estimated to raise prices another 13 percent. One industry official estimates that 59 percent of all renewable energy contracts signed by utility companies paid above-market prices for their renewable energy.

• While Obama’s cap-and-trade proposal failed, California’s cap-and-trade punishes businesses and manufacturers, costing them an estimated $1 billion a year.
• Despite these energy reforms, the Wall Street Journal reports that starting in 2015, Californians will face rolling blackouts due to the loss of conventional power plants and the variable nature of wind and solar energy.
• And the jobs? According to the Bureau of Labor Statistics, fewer than 2,500 green jobs have been created in California since 2010.
• To put that in perspective, California has added more than 556,000 total jobs since the end of the recession in 2009.

So, there you have it. In the world where one must deal with reality and not altruistic platitudes and promises that “Washington knows best” we see that a President cannot create an economy by fiat. This has been worked out over the ages and the answer to building an economy has been discovered and tested. It is called free market Capitalism.

Big government is bad government.

Roy Filly

Sources: BLS, Brookings Institution, Council of Economic Advisers, Conn Carroll, “California in Crisis: Golden State’s Green Jobs Bust,” Washington Examiner

 

Keynesian economics on steroids

We are witnessing the largest experiment in Keynesian economics ever undertaken. Yes, it is bigger than the Obama “stimulus” and the the Federal Reserve’s “quantitative easing,” a friendly yet indecipherable phrase that means we are printing tons of money but not actually circulating the dollars.

OK, ask you, what in the h*ll are you talking about? Japan, answer I. John  Mauldin says it like this: “Japan has painted itself into the mother all corners. There will be no clean or easy exit (as Mauldin puts it, Japan is a bug in search of a windshield – RF). There is going to be massive economic pain as they, the Japanese, try to find a way out of their problems, and sadly, the pain will not be confined to Japan. This will be the true test of the theories of neo-Keynesianism writ large. Japan is going to print and monetize and spend more than almost any observer can currently imagine. You like what Paul Krugman prescribes? You think he makes sense? You (we all!) are going to be participants in a real-world experiment on how that works out.” 

The following information is largely gleaned from Mr. Mauldin. A nation has two ways to grow its economy. The nation can increase their working population. Alternatively, they can increase productivity. I am assured that these are the only two methods. The Japanese are already productive. Increasing productivity significantly is unlikely. Worse still, their population is shrinking (see graph). The shrinking will accelerate. For productivity to overtake this trend is nearly impossible.

If we look at what has been happening in Japan economically we see that they have been in the economic doldrums.

Japan is the world’s third largest economy, but it is going nowhere fast. Their plan is to STIMULATE with a capital everything. The Keynesian policies of Prime Minister Abe will be tested. If they fail, can we finally bury John Maynard Keynes and stop the policies that have given us our massive federal government and massive debt and deficits? To my way of thinking the outcome of this experiment is patently obvious (and I am in my 45th year of doing experiments). Keynesian economics leads to debt, not prosperity. Capitalism is the path to take and the closer to laissez faire the better.

Roy Filly

The coming (or is it, the current) currency war: Race to the bottom.

The future’s uncertain and the end is always near.

Jim Morrison

The truth is incontrovertible, malice may attack it, ignorance may deride it, but in the end; there it is.

Winston Churchill

I have written about our “fiat money system” and the fact that the US owns the World Reserve Currency. Owning the World Reserve Currency certainly has its advantages. Just ask any nation not so blessed. Many believe that “fiat money” is also a “good thing.” Many others wish we had never left the “gold standard.” I number myself among those that prefer the gold standard. The gold standard limits a central government’s ability to do stupid things – in this instance to stupidly manipulate currency value. Anything that limits the central government’s ability to “do stupid things” I rank as favorable.

The ability of a central government to manipulate its currency is far easier with a “fiat” currency. Unfortunately, such manipulations can lead to a currency war. A currency war, also known as competitive devaluation, is a condition in international affairs where countries compete against each other to achieve a relatively low exchange rate for their own currency. As a nation’s currency value falls so too does the price of exported goods from that country. This enables them to develop a “trade surplus.” Trade surpluses raise that countries stockpile of the World Reserve Currency – i.e., US dollars. Additionally, domestic industries, and thus employment, receive a boost from these foreign market purchases. The problem is that one country’s export surplus necessarily must signify another country’s export deficit. These imbalances can trigger retaliatory action by other countries that in turn can lead to a general decline in international trade, harming all countries. Thus, we potentially face a currency war where nation after nation is attempting to devalue its currency – the race to the bottom.

Devaluing a nation’s currency improves exports but also means that imports become more expensive. The price increase for imports harms each citizen’s purchasing power (that means you if I was being too subtle). The last major currency war occurred in the 1930s with the Great Depression and the abandonment of the gold standard. Historians agree that there were no winners in the global currency war of the 1930s and the currency manipulation probably significantly abetted the onset of World War II. For those that know little of World War II, there were 72 million dead – mostly on the allied side. These included 23 million Russians and 20 million Chinese. God help us if the same occurs again with the impending (or current) currency war. We can easily increase the number of dead by 10-fold with the weapons available to us today.

Many, including me, believe this war has already begun with Japan leading the war in terms of major economies. [From, The curse of the dollar, by Robert J. Samuelson}  ”Government central banks hold about 60 percent of their foreign exchange reserves in dollars. About half of international debt securities are contracted in dollars. Oil, wheat and many commodities are denominated in dollars. South Korea and Thailand invoice about 80 percent of their exports in dollars, though only 20 percent go to the United States. They’re not alone. A global currency needs two qualities: trust and usefulness. People — government officials, money managers, business executives, consumers — have to believe the money will hold its value and that other people will routinely accept it.” The question then is whether or not the US is devaluing its currency. Many nations think that we are despite denials by the Federal Reserve and federal government.

And therein lies the rub, my friends. The United States is the only country that can print the World Reserve Currency. As our Federal Reserve does so to combat the “Great Recession” – its been over for a while, but that hasn’t deterred our central bankers – other nations fear for their export surpluses. Why does our Federal Reserve continue to buy US debt to the tune of $80 billion per month? Well, answer I, we’re “fragile.” The President and his minions say that word over and over and over and.. well, you get it. They are reducing the value of our currency (se graph) and foreign governments, particularly Asian governments, are reducing the value of their currencies in response. This leads inexorably to country after country following suit – The Race to the Bottom!

Americans believe that other countries are already manipulating currency to enshrine their export advantage. They’re right. “In a recent lecture, economist Fred Bergsten of the Peterson Institute, relying on the work of his colleague Joe Gagnon, argued that at least 20 countries have regularly intervened in foreign exchange markets by buying dollars and euros “to keep those currencies overly strong and their own currencies weak, mainly to boost their international competitiveness and trade surpluses.”

In 1944, when I was born, a house would cost about $8,649. In 2010, before the housing recovery started, the average cost of a home was $273,000. The 3-bedroom home across the street from me is asking $1,400,000 (it has less than 1900 square feet).

This will get messy!

Roy Filly