Obama's nuclear-free fantasy
Strategic realities trump feel-good slogans
When it comes to the nuclear-weapons issue, President Obama wants to be a global community organizer. However, what we really need are some tough beat cops with a mandate to clean up the neighborhood.
On Thursday, the United Nations Security Council unanimously adopted a resolution drafted by the United States that calls upon, urges, encourages, but does not require U.N. member states to take various actions to curb the proliferation of nuclear weapons. Mr. Obama chaired the meeting and pressed the vision of a nuclear-weapons-free world that he had introduced in April. In the practical world of counterproliferation, the president is making little progress in dissuading Iran from building nuclear weapons, has rewarded serial proliferator North Korea with bilateral negotiations and is silent on Venezuela's announced intention to start a nuclear program.
The president's "no nukes" stance makes a nice bumper sticker, but achieving it will take more than feel-good rhetoric. French President Nicolas Sarkozy objected to the fact that the Security Council resolution did not mention Iran and North Korea, currently the two greatest problem states. "We live in a real world," Mr. Sarkozy said, "not a virtual world." But Mr. Obama said he did not want to single out any particular country. After all, we might offend them. It says something when France demonstrates a stronger international leadership role than the United States and well illustrates the style-over-substance approach of the Obama administration. Mr. Sarkozy wants results; Mr. Obama seeks applause.
The premise that a nuclear-weapons-free world would be safer is highly questionable. In the right hands, nuclear weapons play an important deterrence role. The problem is that they increasingly are being obtained by countries ruled by left-wing dictators and other unsavory types who either cannot be deterred or do not want to be. These bad actors understand that they can harness deterrence to their benefit. The United States is unlikely to risk concerted action against a country with a demonstrated nuclear-weapons capability and nothing to lose. Countries such as Iran and Venezuela see North Korea as a positive inspiration - an extremely poor country with about the same per capita gross domestic product as Chad but treated as a major player in world affairs primarily because of its atomic program. We shudder to imagine how much more powerful Tehran or Caracas would be with the same capabilities.
Self-interest points toward proliferation, not away from it, and formal arms control of the type the president advocates has a dubious record when stacked against strategic interests. The Strategic Arms Limitation Treaty (SALT) agreements between the United States and Soviet Union codified massive increases in what already were the largest nuclear arsenals in human history. But since the end of the Cold War, the total number of warheads between the two countries has declined 90 percent - not because of arms-control treaties but as the natural consequence of reduced tensions after the collapse of communism. Meanwhile, since the Nuclear Non-proliferation Treaty took effect four decades ago, India, Pakistan and North Korea have tested nuclear weapons; Israel is widely believed to possess them; and the Iranian bomb is right around the corner.
The United States is showing itself unwilling to take the hard steps necessary to stop nuclear proliferation. Countries that are willing to defy the international community know they can have the bomb if they make the investment and are patient. They might have to ride out some international sanctions, but once they have conducted a nuclear test and joined the club, they will have all the leverage they need.
Last week, Mr. Obama lectured the world that "international law is not an empty promise" - but laws that are not enforced become exactly that. If nuclear arms are outlawed, only outlaws will have nuclear arms.
Thank the Fed For Your Lack of Purchasing Power
Tampa Bay, Florida
In case you were wondering, there is no way to stop spending a debt-based currency once you start, which handily explains why Doug Noland, in his Credit Bubble Bulletin, asks “what about an exit strategy? Well, I see a ‘No Exit’ sign. These distortions have been going on for too many years and become too systemic. Indeed, government interventions are at the core of systemic fragilities that ensure Washington will continue to meddle.”
And that explains why Bloomberg reports, “Economic policy makers are signaling they plan to leave emergency stimulus in place even as the global economy pulls out of recession, delivering what Credit Suisse Group AG and Bank of America Corp. call a ‘sweet spot’ for financial markets.”
Well, being a guy who almost never turns down a chance to be scornful and gratuitously rude in response to ridiculous things being said by people who are supposed to know better than to sound so abysmally stupid, let me interpret that for you.
By “sweet spot” they mean a spot where Ben Bernanke and the other central bankers produce excess money and credit by pulling it right out of their nasty butts, and as for how “sweet” it is, look around you! Doesn’t it resemble a world going down the (in keeping with the “butt” theme) toilet? How sweet is that? Hahaha!
And now, although I groan aloud at the idea and my disgusting way with metaphors that seem to center around excretory functions lately, the central banks are promising more of the same, only much more of the same, and probably much, MUCH more of the same, but the same, nonetheless, only, like I said, much, much more, like in “so freaking much money that the whole financial landscape is changed into something weird where the laws of economics don’t even work anymore”, which was hitherto thought impossible but which is, obviously, not.
This confusing, disorienting “weirdness” is why I was happy to get an email from Junior Mogambo Ranger (JMR) David R., as it came just in time to indicate that, yes, things are weird! Thanks!
And, as a bonus, I see that I could use the email as a handy rebuttal to, as far as I could tell, everybody’s opinion that the only people who read my stupid Mogambo Guru newsletter are mental defectives and weirdo crackpots, with assorted gold bugs and gun nuts, and creepy guys who like looking at long-legged women dressed in short skirts and high heels.
Anyway, you can sense his high-powered intelligence when he asks, “Will this current experiment in fiscal insanity require a few hundreds of quadrillions MORE violations of the (economic) Rule Of Law before it all collapses into an economic black swan singularity? Is this where Hawking meets Von Mises??” which he closed with the rare “double question mark” as punctuation.
I was especially appreciative of this choice of punctuation, as it says, “Not only am I a smart guy who reads, or has read, the Mogambo Guru newsletters either once or perhaps many, many times and fully enjoyed them all, each more than the last, perhaps because the newsletter deserves to win a Pulitzer Prize or some other distinguished award that has a large cash component, but I also have an IQ so high that I can utilize various punctuation options in clever and highly emphatic ways, as befits my high intelligence, which you would not ordinarily know about me because people know that I read the Mogambo Guru newsletter, and those people are, (so I hear) mental defectives and weirdo crackpots, which I am not.”
I mention this only because Trichet, the head of the European Central Bank, said that he was willing to continually and always create more and more money, and that “it would be premature to declare the crisis over”, and decided that the European Central Bank should hold its benchmark rate at a record low of a measly 1%, which may have been what caused Bloomberg to decide to add the cryptic “to keep handing as much cash as banks want for up to a year at that rate”!
And on this side of the Atlantic, it gets weird that Bloomberg reported Fed Bank of Dallas President Richard Fisher as saying, “We are likely to see a prolonged period of sluggish economic performance”, which is odd, because I don’t remember the mission of the Federal Reserve, a private bank owned by who-knows-who, being able to achieve “prolonged periods of sluggish economic performance.”
The Fed was, as I recall, charged with maintaining a “stable currency”, which they have manifestly failed to do, seeing that the dollar has lost 96% of its value since 1913, which is now officially “enough of all of it that it can be considered to be all”, a lesson in “rounding off” that I learned after I took a lousy $20 from my wife’s purse when she wasn’t looking, and when I came back, there she was, bad mood and all, holding her stupid purse like I needed some kind of audio-visual materials to refresh my memory or something. So, to keep it from being a total loss, I gave her what I had left: 80 cents.
“But,” I explained, “you got back 80 cents, which is only a loss of 96% of the original $20, which is the same loss that the Federal Reserve has given us in the purchasing power of the dollar, but you don’t make a big fuss with the Federal Reserve! You won’t even sign the hate mail that I write for you to send to them, with your signature and your fingerprints on the paper, wherein you protest their glaring incompetence and their neo-Keynesian econometric stupidities!”
Well, let me tell you that I never, ever heard the end of the story about that damned $20. Never! But I noticed, and constantly protested, that nothing is ever, ever said of the 80 cents I gave her back. Nothing!
And why is that? Because it proves that, as far as she is concerned, I have lost “all” of the money, which she demonstrated by throwing the handful of change right at my head from point-blank range. One of the quarters hit my forehead with a “thunk!” where it left a red mark and a little lump, and when I cried out in my pain and mortal anguish, she laughed and said, “Good!” which shows you the kind of crap that I put up with around here all the time.
So there are several lessons here. One is that even a girl can throw a quarter hard enough to hurt the hell out of your forehead if she is standing close enough and is angry enough, and another lesson is to not spend the money you take from your wife’s purse for a few days to see if she notices it missing, and if she does, then you can seize the purse, saying, “Let me look in there!” and surreptitiously put the money back in the purse while rifling around in there so that you can “find” it and, holding it aloft, triumphantly say, “Hey!”
The biggest lesson is that the Federal Reserve is still destroying the dollar by creating so many more dollars so that the government can borrow them and spend them, which means that you should be buying gold, silver and oil in a Freaking Mogambo Panic (FMP), using the dwindling purchasing power your dollars.
And if you don’t, then you can take comfort in that you are in the majority of investors that must lose so that the minority of investors, who do, can make the money which makes it all so easy that you find yourself saying, “Whee! This investing stuff is easy!”
A 21st Century Depression
The inflation/deflation debate is hot… It crackles and pops like a pine fire. But it gives off little helpful light. Abe Lincoln may have read by the light of an open fire. But when tried it, we singed our eyebrows. It made us suspicious of Old Abe; maybe he wasn’t quite as truthful as he pretended to be. Later, we realized he was a mountebank. But that’s another story…
Today, we light a candle and try to interpret the shadows on the wall…
Yesterday, the Dow fell 81 points. Gold dropped $5 to $1009.
Will the feds succeed in causing inflation? Or will they fail? Will the dollar continue to go down? Or will it prove to be a safe haven currency in a time of deflationary trouble?
According to the papers, the feds have already done it. “Fed says recovery underway,” says a headline from yesterday’s press.
Another headline tells us that the feds are considering how and when to ease themselves out of their interventions. But what would the economy look like after they stopped meddling? Just look at auto sales. People bought cars when the feds bribed them to do so. When the bribes stopped, so did car sales. Now, the clunker program has ended and spiders are busy building their webs in showrooms again. Sales fell 38% from August to September…to a 28-year low.
House sales too have been goosed up by the feds’ tax credits. According to an estimate we reported yesterday, 350,000 new house sales since January were assisted by federal intervention – about 80% of the total. What will happen when this program ends in November? Hey…let’s guess…uh…housing sales will fall, right?
And speculators are worried about what will happen when the feds stop their intervention in the financial industry, scheduled for December. Thanks to taxpayer money, the bankers were spared the consequences of their own stupidity. Instead, taxpayers will pay for their mistakes. No one is particularly upset about it. The taxpayers don’t know what is going on. And bankers are happy to continue living in the style to which they have become accustomed. Reuters reports:
“You wouldn’t know it by his pay stubs, but Jiang Jianqing heads the world’s largest bank.
“Jiang, chairman of Industrial and Commercial Bank of China, made just $234,700 in 2008. That’s less than 2 percent of the $19.6 million awarded to Jamie Dimon, chief executive of the world’s fourth-largest bank, JPMorgan Chase & Co.
“The contrast illustrates the massive differences in pay among the CEOs of the world’s top banks. The compensation of the CEOs of the largest US banks towers above what’s paid to banking chiefs in other parts of the world, according to a Reuters analysis of pay at the 18 biggest banks by market value.
“The United States is home to four of the nine largest banks in the world – JPMorgan, Bank of America Corp, Wells Fargo & Co and Citigroup Inc. It is also home to four of the six most handsomely rewarded bank CEOs.
“China, for example, boasts three of the world’s four biggest banks, yet the leaders of those banks – Industrial and Commercial Bank of China, China Construction Bank Corp and Bank of China – are among the lowest paid of those surveyed by Reuters. The chairman and the president of each of the banks are paid roughly $230,000 per year.”
If America’s make-believe capitalists want to pay their CEOs exorbitant wages, that’s their business. A pox on all of them. But in come the feds…and now we’re all paying the price. And if the program ends in December, as scheduled, we’ll get to see how far the economy without taxpayers’ money in the gas tank. Let’s see…it comes to a complete stop?
But no matter how malign and imbecilic the feds are, the public is rooting for them. People think Bernanke has avoided a ‘Second Great Depression,’ and that the government has rescued the economy. Now they see nothing but clear highway ahead…perhaps with a little bump from time to time.
What’s ahead? We don’t know. Neither does anyone else. There is no precedent. Never before has a major central bank reacted so recklessly to a market correction. Never before has the monetary based exploded so violently. Never before have so many people with so many bills to pay had to face such a downturn.
But amid all the confusion, uncertainty and noise…your editor is calmly, cheerfully and confidently awaiting a depression. Yes, dear reader, we don’t know what markets will do. We don’t know how much gold will sell for next year…or what the actual GDP will be. But when we look at the shadows…we have a strong hunch that we are entering a depression…and that we won’t get out of it soon.
That said, we caution readers not to expect soup lines or people selling apples on the street corners. This is a depression a la 21st century. A depression with iPhones and Twitter. This is NOT your grandfather’s depression. Keep reading…
It’s not your grandfather’s depression, but it has many elements that your grandfather would recognize. This from David Rosenberg:
“Frugality theme is secular, not just cyclical.”
With so much noise…and so many distortions…it’s hard to tell what is really going on…and impossible to know how the markets will react. Still, there are some patterns that make sense. After a long period of credit growth, credit is now shrinking. At least in the private sector. And that is not likely to change. Well, it’s not likely to change unless the Fed goes nuclear. If they push the hyperinflation button, the whole picture changes radically and immediately. But that’s not likely to happen any time soon…so let’s ignore it for the present.
What we have before us now is a consumer economy where the consumer is cutting back. Despite the odd shadow shapes on the wall, that means a slowdown in hiring, business revenues and real prices…and tax revenues.
New York says its budget deficit will grow to $3 billion. And over on the sunny West Coast, California is selling $8.8 billion in notes to try to close its deficit.
Apartment rents in New York City are falling. Credit card defaults hit a new record. And The Wall Street Journal says that holiday jobs in the retail sector are likely to be scarce.
Not to mention the wave of mortgage loan defaults that is headed our way – and is already in progress.
Another thing you’d expect is a decline in America’s relative economic power and political influence. Richard Duncan, along with your editor, has been following the story. Bloomberg reports:
“US budget deficits will continue to pile up in the next decade, eventually reaching an unsustainable level that may result in an economic collapse, according to Richard Duncan, author of The Dollar Crisis.
“The US has little chance of resolving its deteriorating financial position because the manufacturing industry continues to shrink, leaving the nation with few goods to export, said Duncan, now at Singapore-based Blackhorse Asset Management.
“In The Dollar Crisis, first published in 2003, Duncan argued that persistent current account deficits by the US were creating an unsustainable boom in global credit that was destined to break down, resulting in a worldwide recession.
“‘The bad news is at the end of a 10-year period we’re still not going to have fixed the problem,’ Duncan said in an interview in Hong Kong yesterday. ‘Eventually it will lead to high rates of inflation well down the line and really destabilize things to the point where there may be irreparable damage. A kind of ‘Fall of Rome’ scenario.’”
Fall of Rome? Hey, Addison Wiggin and your editor wrote the book on the fall of Rome idea. Empire of Debt, we called it. It was such a hit that the publisher asked us for a new edition…which was released this summer.
Richard Duncan, with Bloomberg on lead guitar, was singing our song:
“The federal budget deficit will total $1.6 trillion this year, while combined shortfalls are forecast to total $9.05 trillion in the next 10 years, according to projections from the nonpartisan Congressional Budget Office.
“The US has run a current account deficit every year since 1982 except one, with a peak of $788 billion in 2006. Foreign purchases of US debt has propped up the dollar and allowed a credit-fueled spending boom by the nation’s consumers, according to Duncan.
“US workers are now likely to face declining wages and that may create a political backlash against free-trade policies, he said. The nation’s jobless rate jumped to a 26-year high of 9.7 percent in August, while wages logged a 2.6 percent increase from the previous year.
“As unemployment remains above 10 percent well into the foreseeable future, it won’t be long before Americans start voting for protectionism,” Duncan said. “That’s going to be bad because protectionism will mean world trade will diminish and will overall reduce global prosperity.”
Once the US debt burden becomes too large and the government can no longer sell debt to the public the Federal Reserve will likely step in and monetize it, resulting in high levels of inflation, he concluded.The Last Bear
London, England
Personal conversions sometimes mark dramatic turns in history. Saul of Taursus saw a vision so bright it left him blind. The next thing you know, he had changed his name and was pushing Christianity all over the world. According to Gibbon, the Roman Empire fell as a consequence. Then, on the advice of his mistress, Gabrielle, Henry IV became a Catholic, leading to the Edict of Nantes and its subsequent revocation.
Even in the world of finance, there are momentous conversions. As they say on Wall Street, a rally ends when the last bear gives up. An old friend had been a source of inspiration for tech bears for many years. He suddenly saw the light and gave up in 1999. Shares he had formerly scorned – often dotcoms with no revenue and no business plans – were suddenly added to his own portfolio. This also heralded a big change – the end of the tech bubble. Tech stocks collapsed. Most disappeared. Then, Stephen Roach became vaguely bullish in 2007, after a long period of doubt and misgivings.
Now it is Jim Grant who has changed his mind. A generation of investors has gotten used to Grant’s ‘doom is nigh’ warnings. Now, he says, it’s a boom that is nigh.
What is remarkable about the Grant conversion is that his vision gives off so little heat and light. His WSJ article shillyshallies around; rehearses the history of previous recessions and comes to rest in front of a flickering match: “The deeper the slump, the zippier the recovery.”
Many were the sheep in Grant’s flock. They feel betrayed, as if their shepherd had gone over to the wolves. Here at The Daily Reckoning, we take no personal offense. In the following few words we merely stoke up the fire.
We will not argue with Newton’s Third Law. For every action, there is a reaction. Every boom has a bust. And every busted bubble has a bounce. Even the Titanic’s stern rose, before she slipped below the waves.
First, we consult the facts. But facts are survivors. They will tell whatever tale their interrogators want to hear. As for opinions, after six months of a stock market rally, the once half empty glass has become half full. We predicted it ourselves. But we’ll let Robert Prechter say, ‘I told you so.’ Even before the rally began, Prechter foretold its story:
“Regardless of extent, it should generate feelings of optimism. At its peak, the President’s popularity will be higher, the government will be taking credit for successfully bailing out the economy, the fed will appear to have saved the banking system and investors will be convinced that the bear market is behind us.”
As to Mr. Obama’s popularity, Prechter was wrong. But 4 out of 5 ain’t bad.
Grant’s brief tour of recession history seems to confirm his Newtonian position: the further an economy falls, the further up it rises to get back to normal. This downturn has clipped nearly 4% off America’s GDP, substantially more than any previous downturn since WWII. Therefore, it will come back strong.
Today’s slump in the United States hardly compares to the one of ’29-’33, which took 27% off the GDP. Then, in the ranks of the unemployed, stood one out of every four able-bodied workers, as opposed to just one out of every 10, according to today’s statistical legerdemain. Still, the depth of the drop did not prevent a vigorous bounce; on the contrary, it seemed to demand it. After ’33, the US economy grew by nearly 10% in each of the next four years.
In the slump of ’82, GDP sank at a 6.4% rate. Again, the reaction was nearly equal and opposite to the action. “Not until the third quarter of 1984,” says Grant, “did real quarterly GDP growth drop below 5%.”
Of course, even a US Congressman will bounce, if you push him down the Capitol steps. But not every one will get up again. In the ’33 example, the US economy, still youthful and vigorous, got up nicely. But then it fell again. By the end of the decade he was still on his back, with 15% unemployment and 2% deflation. Only later, after four years of world war, did the economy begin a sustained recovery.
Now it is 2009. The poor fellow is down again. The feds rushed to help him to his feet. They gave him a combined fiscal and monetary shot-in-the-arm seven times stronger – in terms of GDP – than the average postwar countercyclical stimulus. The juice opened his eyes. But he still staggers. He has put on some weight over the years; he now carries three times the debt/GDP as he had in ’82. His stocks are three times as expensive, in P/E terms, too. His bones are more brittle and his mind a little slower. What’s more, in ’82, he had been on a deleveraging diet for more than a decade. In ’09, he has just begun.
What will happen next, we don’t know. But if we turn bullish on this economy and urge you to buy stocks, it will surely be time to sell them.
Enjoy your weekend,
In Search of a One-Armed Economist
London, England
How are we doing? Our Trade of the Decade, that is?
Yesterday, gold took a big dip down – minus $15. It closed under the $1,000 level. Now we’ll find out if the Chinese are supporting it at $1,000…or not.
If so, it should soon bounce back. If not…well, who knows?
But our Trade of the Decade doesn’t worry about what the metal does on a day-to-day basis. Back in 1998, we just noticed that the gold/stocks relationship had reached an absurd extreme. It took 43 ounces of gold to buy the Dow stocks. We figured that ratio was bound to come down.
It has. At today’s prices, you can buy the Dow for less than 10 ounces of gold.
David Rosenberg looks at 10-year returns by asset class. Here’s his chart:
Buy gold on dips; sell stocks on rallies. It was good advice 10 years ago. Is it still good advice?
Of course, it depends on what happens next. If the feds succeed at inspiring growth without also causing higher levels of inflation, gold will be a bad place for your money – relative to stocks. But here at The Daily Reckoning we are cheerfully, confidently, and calmly enjoying a depression. We don’t think it will stop any time soon.
What that means to us is that stocks are not likely to go up. And we don’t expect inflation to increase anytime soon either. So, as to gold itself, that puts us in an ambiguous position. On the one hand, depression will probably not push up gold prices – at least, not at the beginning. On the other hand, it won’t push up stock prices either.
On the one hand, the economy is probably going to sink further. Yesterday’s news brought the rally in stocks to a halt. The Dow lost 41 points after it was reported that the rate of existing house sales had fallen in August, following 4 months of gains.
But it’s very hard to make a diagnosis on this patient. He’s so doped up.
The Fed pumped $2 trillion worth of drugs into the economy. It won’t say exactly what elixirs it used…or what veins it put them into. But all this money must have an effect. Federal employment, for example, is rising.
Here, an aside. When people get government jobs, the employment numbers increase. But is the economy better off? It depends on what the people are doing, doesn’t it. If you think additional federal workers add to our prosperity or the quality of our lives…well, you probably shouldn’t be reading The Daily Reckoning. In our view, the feds already had too many parasites on the payroll.
But if the feds can make the world a better place, let’s hire more of them! Heck, let’s all work for the federal government.
Even with rising federal employment, the economy is still sinking. One headline tells us that luxury hotels may be headed for bankruptcy; their $850 rooms are empty. Another tells us that there are people living in the drainpipes under Las Vegas. Obvious solution: give the drainpipe people jobs with the government…and put them up in the luxury rooms! Hey…they can call room service and stimulate the economy even further.
The US Post Office has a problem too. It may need a $4 billion bailout, says one news item. Another tells us that ‘exhaustion’ has hit a new record. ‘Exhaustion’ refers to people whose unemployment benefits have run out. Apparently, more than half the unemployed run out of benefits before they find a new job – more than ever before.
Which brings us to the other hand. Without a real recovery in the real economy, the feds are going to keep their hands on the pumps. While the depression decreases the odds of inflation…the feds’ reaction increases them.
Of course, gold doesn’t always need inflation to rise…and stocks can do what they want.
So let’s see…economy sinking…should be bad for inflation. But maybe not…
Or, economy sinks with falling prices…should be bad for gold. But maybe not…
Or, economy improves…should be good for gold. But maybe not…
On the one hand…on the other hand… Harry Truman once remarked, “Send me a one-armed economist.” We’re tempted to cut off one of the hands ourselves.
But let’s forget the hands. Major trends tend to run in long, long cycles. Consumer credit has been expanding since 1945. It is contracting now. That trend is not likely to end after just six quarters. Instead, it is likely to continue for a long time. And it is likely to inspire tremendous exertions to stop it on the part of the feds. As to the exact type of ’flation that will result, we can only guess that there will be more of it. As to stocks, we guess that they will decline – in real terms – as long as the credit contraction continues. And as to gold, it is sure to go up and down.
At $1,000, is gold cheap?
The first car we ever owned was a ’37 Buick that we bought in the ’60s for just $75. It ran well. The only problem it had was a dented trunk door. New, that car cost just $825 – or about 24 ounces of gold.
Today, 24 ounces of gold is worth about $24,000. Can you buy a new car for that? Well…yes, you can. But not a new Buick. The 2009 Buick Lucerne sells for more than $29,000. So maybe gold is a little low. But not much.
In a stable, prosperous and growing economy, $1,000 gold might be no bargain. But what about a world that is probably in a multi-year depression…that the feds are fighting with trillions of dollars’ worth of new cash and credit? What about a world where the world’s largest debtor is borrowing another $9 trillion over the next ten years? What about a world where the imperial power is losing its grip? What are the odds that something will go wrong? What are the chances that the feds will miscalculate? And what will happen if they do? Possibly, the depression will deepen…and $1,000 gold will seem too expensive. Possibly, the feds will add too much new money to the financial system, causing a new bubble in gold. Possibly, the Chinese will dump the dollar…causing the dollar and the US bond market to collapse.
Too many ‘possiblies.’ Too many things we know we don’t know. And too many things we don’t know we don’t know too. And too many things about which we have no clue. We’re tired of thinking about it.
Until the picture becomes clearer, we will stick with our trade…buy gold on dips, sell stocks on rallies.
Health Care Is Not A Right
Delivered at a Town Hall Meeting on the Clinton Health Plan
Red Lion Hotel, Costa Mesa CA
December 11, 1993
Good morning, ladies and gentlemen:
Most people who oppose socialized medicine do so on the grounds that it is moral and well-intentioned, but impractical; i.e., it is a noble idea -- which just somehow does not work. I do not agree that socialized medicine is moral and well-intentioned, but impractical. Of course, it is impractical -- it does not work -- but I hold that it is impractical because it is immoral. This is not a case of noble in theory but a failure in practice; it is a case of vicious in theory and therefore a disaster in practice. So I'm going to leave it to other speakers to concentrate on the practical flaws in the Clinton health plan. I want to focus on the moral issue at stake. So long as people believe that socialized medicine is a noble plan, there is no way to fight it. You cannot stop a noble plan -- not if it really is noble. The only way you can defeat it is to unmask it -- to show that it is the very opposite of noble. Then at least you have a fighting chance.
What is morality in this context? The American concept of it is officially stated in the Declaration of Independence. It upholds man's unalienable, individual rights. The term "rights," note, is a moral (not just a political) term; it tells us that a certain course of behavior is right, sanctioned, proper, a prerogative to be respected by others, not interfered with -- and that anyone who violates a man's rights is: wrong, morally wrong, unsanctioned, evil.
Now our only rights, the American viewpoint continues, are the rights to life, liberty, property, and the pursuit of happiness. That's all. According to the Founding Fathers, we are not born with a right to a trip to Disneyland, or a meal at Mcdonald's, or a kidney dialysis (nor with the 18th-century equivalent of these things). We have certain specific rights -- and only these.
Why only these? Observe that all legitimate rights have one thing in common: they are rights to action, not to rewards from other people. The American rights impose no obligations on other people, merely the negative obligation to leave you alone. The system guarantees you the chance to work for what you want -- not to be given it without effort by somebody else.
The right to life, e.g., does not mean that your neighbors have to feed and clothe you; it means you have the right to earn your food and clothes yourself, if necessary by a hard struggle, and that no one can forcibly stop your struggle for these things or steal them from you if and when you have achieved them. In other words: you have the right to act, and to keep the results of your actions, the products you make, to keep them or to trade them with others, if you wish. But you have no right to the actions or products of others, except on terms to which they voluntarily agree.
To take one more example: the right to the pursuit of happiness is precisely that: the right to the pursuit -- to a certain type of action on your part and its result -- not to any guarantee that other people will make you happy or even try to do so. Otherwise, there would be no liberty in the country: if your mere desire for something, anything, imposes a duty on other people to satisfy you, then they have no choice in their lives, no say in what they do, they have no liberty, they cannot pursue their happiness. Your "right" to happiness at their expense means that they become rightless serfs, i.e., your slaves. Your right to anything at others' expense means that they become rightless.
That is why the U.S. system defines rights as it does, strictly as the rights to action. This was the approach that made the U.S. the first truly free country in all world history -- and, soon afterwards, as a result, the greatest country in history, the richest and the most powerful. It became the most powerful because its view of rights made it the most moral. It was the country of individualism and personal independence.
Today, however, we are seeing the rise of principled immorality in this country. We are seeing a total abandonment by the intellectuals and the politicians of the moral principles on which the U.S. was founded. We are seeing the complete destruction of the concept of rights. The original American idea has been virtually wiped out, ignored as if it had never existed. The rule now is for politicians to ignore and violate men's actual rights, while arguing about a whole list of rights never dreamed of in this country's founding documents -- rights which require no earning, no effort, no action at all on the part of the recipient.
You are entitled to something, the politicians say, simply because it exists and you want or need it -- period. You are entitled to be given it by the government. Where does the government get it from? What does the government have to do to private citizens -- to their individual rights -- to their real rights -- in order to carry out the promise of showering free services on the people?
The answers are obvious. The newfangled rights wipe out real rights -- and turn the people who actually create the goods and services involved into servants of the state. The Russians tried this exact system for many decades. Unfortunately, we have not learned from their experience. Yet the meaning of socialism (this is the right name for Clinton's medical plan) is clearly evident in any field at all -- you don't need to think of health care as a special case; it is just as apparent if the government were to proclaim a universal right to food, or to a vacation, or to a haircut. I mean: a right in the new sense: not that you are free to earn these things by your own effort and trade, but that you have a moral claim to be given these things free of charge, with no action on your part, simply as handouts from a benevolent government.
How would these alleged new rights be fulfilled? Take the simplest case: you are born with a moral right to hair care, let us say, provided by a loving government free of charge to all who want or need it. What would happen under such a moral theory?
Haircuts are free, like the air we breathe, so some people show up every day for an expensive new styling, the government pays out more and more, barbers revel in their huge new incomes, and the profession starts to grow ravenously, bald men start to come in droves for free hair implantations, a school of fancy, specialized eyebrow pluckers develops -- it's all free, the government pays. The dishonest barbers are having a field day, of course -- but so are the honest ones; they are working and spending like mad, trying to give every customer his heart's desire, which is a millionaire's worth of special hair care and services -- the government starts to scream, the budget is out of control. Suddenly directives erupt: we must limit the number of barbers, we must limit the time spent on haircuts, we must limit the permissible type of hair styles; bureaucrats begin to split hairs about how many hairs a barber should be allowed to split. A new computerized office of records filled with inspectors and red tape shoots up; some barbers, it seems, are still getting too rich, they must be getting more than their fair share of the national hair, so barbers have to start applying for Certificates of Need in order to buy razors, while peer review boards are established to assess every stylist's work, both the dishonest and the overly honest alike, to make sure that no one is too bad or too good or too busy or too unbusy. Etc. In the end, there are lines of wretched customers waiting for their chance to be routinely scalped by bored, hog-tied haircutters some of whom remember dreamily the old days when somehow everything was so much better.
Do you think the situation would be improved by having hair-care cooperatives organized by the government? -- having them engage in managed competition, managed by the government, in order to buy haircut insurance from companies controlled by the government?
If this is what would happen under government-managed hair care, what else can possibly happen -- it is already starting to happen -- under the idea of health care as a right? Health care in the modern world is a complex, scientific, technological service. How can anybody be born with a right to such a thing?
Under the American system you have a right to health care if you can pay for it, i.e., if you can earn it by your own action and effort. But nobody has the right to the services of any professional individual or group simply because he wants them and desperately needs them. The very fact that he needs these services so desperately is the proof that he had better respect the freedom, the integrity, and the rights of the people who provide them.
You have a right to work, not to rob others of the fruits of their work, not to turn others into sacrificial, rightless animals laboring to fulfill your needs.
Some of you may ask here: But can people afford health care on their own? Even leaving aside the present government-inflated medical prices, the answer is: Certainly people can afford it. Where do you think the money is coming from right now to pay for it all -- where does the government get its fabled unlimited money? Government is not a productive organization; it has no source of wealth other than confiscation of the citizens' wealth, through taxation, deficit financing or the like.
But, you may say, isn't it the "rich" who are really paying the costs of medical care now -- the rich, not the broad bulk of the people? As has been proved time and again, there are not enough rich anywhere to make a dent in the government's costs; it is the vast middle class in the U.S. that is the only source of the kind of money that national programs like government health care require. A simple example of this is the fact that the Clinton Administration's new program rests squarely on the backs not of Big Business, but of small businessmen who are struggling in today's economy merely to stay alive and in existence. Under any socialized program, it is the "little people" who do most of the paying for it -- under the senseless pretext that "the people" can't afford such and such, so the government must take over. If the people of a country truly couldn't afford a certain service -- as e.g. in Somalia -- neither, for that very reason, could any government in that country afford it, either.
Some people can't afford medical care in the U.S. But they are necessarily a small minority in a free or even semi-free country. If they were the majority, the country would be an utter bankrupt and could not even think of a national medical program. As to this small minority, in a free country they have to rely solely on private, voluntary charity. Yes, charity, the kindness of the doctors or of the better off -- charity, not right, i.e. not their right to the lives or work of others. And such charity, I may say, was always forthcoming in the past in America. The advocates of Medicaid and Medicare under LBJ did not claim that the poor or old in the '60's got bad care; they claimed that it was an affront for anyone to have to depend on charity.
But the fact is: You don't abolish charity by calling it something else. If a person is getting health care for nothing, simply because he is breathing, he is still getting charity, whether or not President Clinton calls it a "right." To call it a Right when the recipient did not earn it is merely to compound the evil. It is charity still -- though now extorted by criminal tactics of force, while hiding under a dishonest name.
As with any good or service that is provided by some specific group of men, if you try to make its possession by all a right, you thereby enslave the providers of the service, wreck the service, and end up depriving the very consumers you are supposed to be helping. To call "medical care" a right will merely enslave the doctors and thus destroy the quality of medical care in this country, as socialized medicine has done around the world, wherever it has been tried, including Canada (I was born in Canada and I know a bit about that system first hand).
I would like to clarify the point about socialized medicine enslaving the doctors. Let me quote here from an article I wrote a few years ago: "Medicine: The Death of a Profession." [The Voice of Reason: Essays in Objectivist Thought, NAL Books, c 1988 by the Estate of Ayn Rand and Leonard Peikoff.]
"In medicine, above all, the mind must be left free. Medical treatment involves countless variables and options that must be taken into account, weighed, and summed up by the doctor's mind and subconscious. Your life depends on the private, inner essence of the doctor's function: it depends on the input that enters his brain, and on the processing such input receives from him. What is being thrust now into the equation? It is not only objective medical facts any longer. Today, in one form or another, the following also has to enter that brain: 'The DRG administrator [in effect, the hospital or HMO man trying to control costs] will raise hell if I operate, but the malpractice attorney will have a field day if I don't -- and my rival down the street, who heads the local PRO [Peer Review Organization], favors a CAT scan in these cases, I can't afford to antagonize him, but the CON boys disagree and they won't authorize a CAT scanner for our hospital -- and besides the FDA prohibits the drug I should be prescribing, even though it is widely used in Europe, and the IRS might not allow the patient a tax deduction for it, anyhow, and I can't get a specialist's advice because the latest Medicare rules prohibit a consultation with this diagnosis, and maybe I shouldn't even take this patient, he's so sick -- after all, some doctors are manipulating their slate of patients, they accept only the healthiest ones, so their average costs are coming in lower than mine, and it looks bad for my staff privileges.' Would you like your case to be treated this way -- by a doctor who takes into account your objective medical needs and the contradictory, unintelligible demands of some ninety different state and Federal government agencies? If you were a doctor could you comply with all of it? Could you plan or work around or deal with the unknowable? But how could you not? Those agencies are real and they are rapidly gaining total power over you and your mind and your patients. In this kind of nightmare world, if and when it takes hold fully, thought is helpless; no one can decide by rational means what to do. A doctor either obeys the loudest authority -- or he tries to sneak by unnoticed, bootlegging some good health care occasionally or, as so many are doing now, he simply gives up and quits the field."
The Clinton plan will finish off quality medicine in this country -- because it will finish off the medical profession. It will deliver doctors bound hands and feet to the mercies of the bureaucracy.
The only hope -- for the doctors, for their patients, for all of us -- is for the doctors to assert a moral principle. I mean: to assert their own personal individual rights -- their real rights in this issue -- their right to their lives, their liberty, their property, their pursuit of happiness. The Declaration of Independence applies to the medical profession too. We must reject the idea that doctors are slaves destined to serve others at the behest of the state.
I'd like to conclude with a sentence from Ayn Rand. Doctors, she wrote, are not servants of their patients. They are "traders, like everyone else in a free society, and they should bear that title proudly, considering the crucial importance of the services they offer."
The battle against the Clinton plan, in my opinion, depends on the doctors speaking out against the plan -- but not only on practical grounds -- rather, first of all, on moral grounds. The doctors must defend themselves and their own interests as a matter of solemn justice, upholding a moral principle, the first moral principle: self- preservation. If they can do it, all of us will still have a chance. I hope it is not already too late. Thank you.
-- Copies of this address in pamphlet form are available from: Americans for Free Choice in Medicine. Almost ten years ago, Leonard Peikoff predicted that our medical system would be dismantled. Looking at the young people in the crowd, he remarked:
"If you are looking for a crusade, there is none that is more idealistic or more practical. This one is devoted to protecting some of the greatest [men] in the history of this country. And it is also, literally, a matter of life and death -- -YOUR LIFE, and that of anyone you love. Don't let it go without a fight!" -- From "Medicine: The Death of a Profession" by Leonard Peikoff from concluding remarks from 1985 presentation with Dr. Michael Peikoff.
Obama's Betrayal of Education
Instead of President Obama addressing school students across the nation, he might have accomplished more by focusing his attention on the educational rot in schools in the nation's capital. The American Legislative Exchange Council recently came out with their 15th edition of "Report Card on American Education: A State-by-State Analysis." Academic achievement in no state is much to write home about but in Washington, D.C., by any measure, it approaches criminal fraud. Let's look at the numbers.
Only 14 percent of Washington's fourth-graders score at or above proficiency in the reading and math portions of the National Assessment of Educational Progress (NAEP) test. Their national rank of 51 makes them the nation's worst. Eighth-graders are even further behind with only 12 percent scoring at or above proficiency in reading and 8 percent in math and again the worst performance in the nation. One shouldn't be surprised by Washington student performance on college admissions tests. They have an average composite SAT score of 925 and ACT score of 19.1, compared to the national average respectively of 1017 and 21.1. In terms of national ranking, their SAT and ACT rankings are identical to their fourth- and eighth-grade rankings -- dead last.
Washington's political and education establishment might excuse these outcomes by arguing that because most students are black, the schools are underfunded and overcrowded. Let's look at such a claim. During the 2006-07 academic year, expenditures per pupil averaged $13,848 compared to a national average of $9,389. That made Washington's per pupil expenditures the third highest in the nation coming in behind New Jersey ($14,998) and New York ($14,747). Washington's teacher-student ratio is 13.9 compared with the national average of 15.3 students per teacher, ranking 18th in the nation. What about teacher salaries? Washington's teachers are the highest paid in the nation, having an average annual salary of $61,195 compared with the nation's average $46,593. Despite the academic performance of Washington's students, they have a graduation rate of 61 percent compared to the national average of 70 percent. That suggests the issuance of fraudulent high school diplomas.
Currently, Washington, D.C. has an Opportunity Scholarship Program, which allows qualified low-income families to claim up to $7,500 per student toward a private education of their choice. Obama's Democratic Congress, acting on the behalf of the education establishment, has killed the program and there's the possibility that the 1,700 students currently enrolled will have to return to D.C. public schools.
The staunchest opponents of school choice are hypocrites. They want, demand and can afford school choice for themselves but for others not so affluent school choice it is a different matter. President and Mrs.
Barack Obama enrolled their two daughters in Washington's most prestigious Sidwell Friends School, forking over $28,000 a year for each girl. Whilst senator from Illinois, the Obama's enrolled their girls in the University of Chicago's Laboratory School, a private school in Chicago charging almost $20,000 for each girl. A Heritage Foundation survey found that 37 percent of the members of the House of Representatives and 45 percent of senators in the 110th Congress sent their children to private schools. Public school teachers enroll their own children in nonpublic schools to a much greater extent than the general public, in some cases four and five times greater.
In Cincinnati, about 41 percent of public school teachers send their children to nonpublic schools. In Chicago it is 38 percent, Los Angeles 24 percent, New York 32 percent, and Philadelphia 44 percent. The behavior of public school teachers is quite suggestive. It's like my offering to take you to a restaurant and you find out that neither the chef nor the waiters eat there. That suggests they have some inside information from which you might benefit.
For people in power to tolerate the Washington, D.C. school system is despicable. For a black president to do so might qualify as betrayal.
The Underdogs
It is a good reflection on Americans that they tend to be on the side of the underdog. But it is often hard to tell who is in fact the underdog, or why.
Many years ago, there was a big, lumbering catcher named Ernie Lombardi whose slowness afoot was legendary. Someone once said that not only was Ernie Lombardi the slowest man who ever played major league baseball, whoever was second slowest was probably a lot faster runner than Ernie Lombardi.
When Lombardi came to bat, infielders played back on the outfield grass. That gave them more range in getting to balls that Lombardi hit. They could snare line-drives that would otherwise be base hits. With ground balls, they could easily throw to first base from the outfield grass and get the slow-moving Lombardi out.
Despite all that, Ernie Lombardi had a lifetime batting average of .306 and even led the league in batting a couple of years. But many people said that, if Lombardi had had just average speed, he could have been a .400 hitter.
One day, as a teenager sitting in the Polo Grounds, the stadium where the then New York Giants played, I was privileged to watch a historic event. Ernie Lombardi laid down a bunt!
The crowd went wild. The play took forever, with Lombardi laboriously clumping down to first base-- running as hard as he could, but still not very fast-- while the third baseman made a long run in from left field to get to the bunt.
We cheered ourselves hoarse rooting for big Ernie as he doggedly but slowly made his way down the first base line. He barely beat the throw, which set off another explosion of cheers.
We were not just cheering for a home-town player. We were rooting for Lombardi to get revenge on those who had taken advantage of him for so long. We were cheering for the underdog.
But was Lombardi really an underdog? How many players end up their careers with a lifetime batting average over .300 or with two batting titles? Like most of us, Lombardi was handicapped in some ways and privileged in others.
Many people would consider it a handicap to be a black orphan, born in the Jim Crow South during the Great Depression of the 1930s. But the home into which I was adopted had four adults and I was the only child. Many years later, when I was a parent and asked one of the surviving members of that family how old I was when I started walking, she said: "Oh, Tommy, nobody knows when you could walk. Somebody was always carrying you."
You can't buy that. A leading historian of education has said that the New York City public schools were the best in the country during the 1940s. That was when I went to school there. That was enough piece of sheer good luck that came my way. Today the classes are smaller, the buildings more modern-- but the education itself is a disaster. I got the kind of education that people have to go to expensive private schools to get today.
Perhaps more important, nobody told me that I couldn't make it because I was poor and black, or that I ought to hate white people today because of what some other white people did to my ancestors in some other time.
Nobody sugar-coated the facts of racial discrimination. But Professor Sterling Brown of Howard University, who wrote with eloquent bitterness about racism, nevertheless said to me when I prepared to transfer to Harvard: "Don't come back here and tell me you didn't make it 'cause white folks were mean."
He burned my bridges behind me, the way they used to do with armies going into battle, so that they had no place to retreat to, and so had to fight to win.
One of the problems with trying to help underdogs, especially with government programs, is that they and everyone else start to think of them as underdogs, focusing on their problems rather than their opportunities. Thinking of themselves as underdogs can also dissipate their energies in resentments of others, rather than spending that energy making the most of their own possibilities.
It must have been discouraging for Ernie Lombardi, especially in his early years, to be repeatedly thrown out at first base on balls that would have been base hits for anybody else. But he couldn't let himself dwell on that-- not and win two batting titles.
Net Neutrality vs. Internet Freedom
America's leading Internet service providers (ISPs) have spent many years and billions upgrading their transcontinental networks, which constitute the backbone of the Internet. Now they are eager to profit by offering new, compelling services. One plan is to give certain websites high priority on their data, so as to guarantee "quality of service"--the speed, frequency, and reliability with which data is delivered. This would enable content providers to offer high-quality live TV and videoconferencing or advanced remote medical monitoring, without the delays and unreliability that plague the Internet today. Unfortunately, data prioritization is fiercely opposed by advocates of "Net Neutrality," who claim paradoxically that freedom and innovation demand that companies not be free to make this innovation.
Net neutrality is the idea that ISPs should not be able to favor some types of data over others; their networks must be "neutral" among all the data they carry. Net-neutrality supporters claim that if ISPs are free to give preferential treatment to certain websites' data, they might drastically slow down un-favored or less-wealthy websites, diminishing their ability to offer content and make innovations. A prominent net-neutrality coalition cautions: "If you are an aspiring entrepreneur, you may be impeded from providing the 'next big thing' on the Internet."
But such scenarios are nonsensical. For any of the nation's competing ISPs to offer customers slow, patchy, let alone nonexistent access to the websites they seek to visit, would be commercial suicide. As for innovation, websites are free to continue using standard, non-prioritized Internet service. The fact that this would be slower than premium service does not mean that it would be slow, just as UPS's decision to offer overnight delivery did not lead them to suddenly degrade their Ground shipping. Premium Internet services would enable, not stifle, innovation, by giving websites creative options they did not have before.
The specter of ISPs offering glacial access to certain websites is a smokescreen, designed to obscure the net-neutrality movement's goal: preventing anyone from having superior, unequal access to customers. In the minds of net-neutrality advocates, the Internet is a collectively owned entity, to which all websites have an equal claim and are entitled "equal access." As the title of a leading net-neutrality group proclaims: "It's our Net."
But it isn't.
The Internet is not a collectivist commune; it is a free, voluntary, and private association of individuals and corporations harmoniously pursuing their individual goals. (While it began as a government-funded project, the Internet's ultra-advanced state today is the achievement of private network builders, hardware companies, content providers, and customers.) Because the Internet is based on voluntary association, no one can properly compel others for their ad space, bandwidth, publicity--or data prioritization. Those who create these values have the right to use and profit from them as they see fit. Google has no more right to demand that Verizon be "neutral" with its network than Verizon has a right to demand that Google be "neutral" with its coveted advertising space.
The only thing equal about the participants on the Internet is that all have equal freedom to deal with others voluntarily. This means they are equally free to compete for the bandwidth, dollars, and talents of others--but not entitled to an unearned, equal portion of them.
It is the freedom of participants on the Internet to offer and profit from whatever products, services, or content they choose that has made it such a phenomenal source of content and innovation. Net neutrality would deny ISPs that freedom. It would deny their right to engage in creative, innovative, and profitable activity with those networks--in the name of those who demand their bandwidth, but are unable or unwilling to earn it in a free market.
The widespread support for net neutrality among successful Internet companies--including Google, Microsoft, Yahoo, eBay, and Amazon--is short-sighted and contemptible. These companies, which have benefited greatly from the unimpeded freedom of the Internet, are now trying to deny the same freedom to innovative ISPs and ambitious competitors under the egalitarian banner of "equal access." This is an invitation for any clever moocher to demand "equal access" to their hard-earned resources; indeed, Google is already being sued because its proprietary search engine allegedly gives "unfair" rankings to certain companies.
The Internet is one of the great bastions of freedom and innovation in our civilization. Let us keep it that way by rejecting "net neutrality."
Water and Health Care: A Parallel
From the time I arrived on Albuquerque, New Mexico's West Side some 14 years ago, I was impressed with New Mexico Utilities, the private enterprise that supplied our water. They did a superior job of keeping our water clean, fresh tasting and odor-free. They sent out periodic questionnaires to discover our concerns and/or grievances. One of their employees went from house to house to check on customer satisfaction. Their personnel were courteous and helpful. Because of my water-conserving methods, my bill was lowered.
About a year ago, the Albuquerque Water Authority unilaterally decided to take over New Mexico Utilities. Westsiders were dismayed. We had not been consulted. The West Side Coalition held a town hall in order to find out what we thought. Both New Mexico Utilities and the city were invited to present its case. The meeting hall was quite full. At least 200 residents attended. We listened to arguments and looked at charts and graphs for about 2 hours.
Afterwards a vote was taken whether to keep New Mexico Utilities or to switch to government management of water. Ninety-eight percent of the citizens expressed their satisfaction with New Mexico Utilities and voted to keep them.
The Water Authority ignored us. They forced New Mexico Utilities out of business. The result was a lowering in the quality of our water and a raising of rates that increased every month. Now and then the water has an unpleasant odor. It's expected to get worse.
Although I had not changed the amount of water I used and continued to use the same water-conserving methods, the Water Authority increased my bill by $8. I called the Water Authority to ask why. They claimed I was using more water. They were not helpful. They were rude and snippy.
There is nothing I can do. They are in complete control of our water. They are a monopoly. They are competing with no one for customer satisfaction.
There’s a parallel here that most readers will grasp. When government forces out private enterprise, the quality of product and/or service goes down, the price goes up. You can bet that the same thing will happen should we allow government to take over the health care industry.
Friday, September 25, 2009
Threading the Needle at the Fed
At its forthcoming meeting on September 22 and 23, the Federal Reserve’s Open Market Committee (FOMC) will have to perform a very delicate balancing act. It will need to maintain its highly accommodative and unorthodox monetary policy stance in order to provide support to the incipient yet fragile U.S. economic recovery. However, it will also have to assure the financial markets that the Federal Reserve remains vigilant about potential inflationary risks and that it stands ready to exit from its policy of extraordinary monetary policy easing at the first sign that the economic recovery is gaining traction.
The FOMC can be expected to confirm that the economic recession has at last ended. However, it will likely allude to the remaining risks that could threaten the recovery once the present support to the economy from the fiscal stimulus and inventory rebalancing fades. The risks that the Fed might highlight include the pronounced weakness in the U.S. labor market and the ongoing bursting of the U.S. commercial real estate bubble.
The FOMC is likely to indicate that the present very large gaps in the output and labor markets should keep inflation well contained in the year ahead. However, it will intimate that inflation developments will need to be carefully monitored especially if the U.S. dollar continues to weaken.
In terms of policy actions, one should expect that the FOMC will maintain its 0–0.25 percent federal funds rate target and it will repeat that it expects to maintain the federal funds rate at this level for an extended period of time. The FOMC is also likely to intimate that it does not intend to expand its quantitative easing program beyond the planned purchase of $300 billion in U.S. Treasury bonds and $1.25 trillion in mortgage-backed securities that it has already announced.
Among the indicators on which the FOMC will be focusing are the following:
(a) Signs that the cycle of inventory liquidation has run its course and that manufacturing output has begun to recover.
(b) Indications that consumer confidence has bottomed out albeit at a still very depressed level.
(c) Tentative signs suggesting that the U.S. housing market is finding a bottom and that new housing construction is beginning to recover.
(d) Clear indications that the financial markets are continuing to heal and that the equity market rally since March 2009 is at least partially reversing the $14 trillion in household wealth destruction over the past two years.
(e) Data showing that unusually large gaps have opened up in the labor and product markets and that the process of labor shedding is yet to have finally run its course.
(f) Clear indications that the large gaps in the labor and output markets are exerting significant downward pressure on prices and wages, which is keeping long-run inflation expectations well contained.
(g) Strong indications that consumer credit expansion is being scaled back to a considerable degree.
(h) Clear indications that the commercial property market is in the midst of a severe contraction.
(i) Troubling indications that the dollar remains under considerable pressure.
Desmond Lachman is a resident fellow at the American Enterprise Institute. Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney.
Pluck of the Irish
The finance minister of Ireland, Brian Lenihan, announced a comprehensive plan to remove troubled assets from the balance sheets of national banks. It is not the first time that the Irish moved first. At the height of the financial crisis last year, Ireland stopped their bank runs by offering virtually unlimited deposit insurance coverage. The allure of that insurance, even if given by a small country relative to the size of its obligations, threatened a tsunami of deposit flows away from other European Union countries to the protected locale. Other countries followed suit in an example of policy emulation, not policy coordination. Officials at the upcoming G-20 summit meeting would be wise to emulate the Irish model once again.
The Irish government intends to proffer legislation that creates the National Asset Management Agency (NAMA). This new entity can buy assets at a 30 percent discount and manage their disposition over time.
The haircut on those purchases will be based on independent valuations of legacy loans, not the inflated prices at which they likely are currently parked on balance sheets. Thus, Irish financial champions will have to admit to losses when they offer those assets to NAMA. But NAMA's valuations will be above the fire-sale prices those banks would get if they tried to dump them onto the market now. As a result, there is a disguised subsidy to help revive intermediaries.
Any form of bailout to the financial industry is distasteful, and, given the sour mood of the electorate, politically risky.
Any form of bailout to the financial industry is distasteful, and, given the sour mood of the electorate, politically risky. But with bank balance sheets impaired as they are now, there will not otherwise be enough new lending or financial-market trading to support economic recovery. Above-market purchase prices by NAMA represent the necessary ransom to free the hostage economy.
Such a strategy is far superior to the official policy of regulatory forbearance enshrined in the stress tests required of the leading 19 firms by the U.S. Treasury this summer. Those tests emphasized opportunities for flow profits rather than recognition of legacy losses. In principle, such forbearance redirects the attention of creditors and investors away from the bad decisions of the past toward a more hopeful future. This permits bankers to delay potentially costly near-term adjustments and gives time for the market for the troubled asset to recover.
On one level, this confidence game seems to have worked, in that bank equity prices have rallied and market spreads have narrowed. Under a policy of forbearance, however, the stock of legacy assets at banks becomes more valuable sitting on the balance sheet than if resold. This freezes the market for that asset class as investors rightly recognize the huge retained stocks sitting on the sidelines.
Policy makers seem to have been willing to tolerate the cost of a dysfunctional market for the benefit of maintaining the perception that banks are still solvent on a regulatory-reporting basis. But there is an unrecognized loss as well: Economic performance usually suffers from the lingering hesitancy of intermediaries and the impairment of a key financial market.
Above-market purchase prices by NAMA represent the necessary ransom to free the hostage economy.
The “lost decades” of Latin American countries in the 1980s and Japan in the 1990s stand as warning of that risk. In 1981 and 1982, widespread defaults by Latin American countries sent several important U.S. money center banks underwater. Rather than force the recognition of those losses, U.S. supervisors allowed those banks to carry the loans forward. Those banks limped along for many years thereafter, although there were enough other sources of economic impetus to permit a robust economic expansion in the United States. Not so for the economies to the south that were shut off from credit. Economic growth in Latin America averaged 1.5 percentage points slower than the rest of the world for a decade. In the 1990s, Japanese regulators first turned a blind eye to real-estate losses. Property prices fell in each year of the decade, and the overall economy grew 1.75 percentage points slower than the world.
The painful truth is that many large, complex financial institutions still retain real-estate-related assets on their balance sheets at above their market value. As long as those assets can be valued for regulatory purposes at above-market prices, those institutions will act as a sea anchor to global recovery. If officials believe that those institutions are too fragile to trust to markets, then they should lift those assets from balance sheets themselves. In that regard, Ireland has shown the way.
Vincent Reinhart is a resident scholar at the American Enterprise Institute.
Sorry, O: It Is a Tax
by Michael D. Tanner
"When I use a word," Humpty Dumpty told Alice, "it means exactly what I want it to. No more and no less."
President Obama has clearly been studying at the Lewis Carroll school of oratory.
During his blitz of Sunday's morning news shows, the president told ABC's George Stephanopoulos that his proposed mandate for every American to buy health insurance — policies that offer a specific, government-designed minimum-benefits package — is not a tax increase.
Not only that, he said, but no one thinks it is.
No one? Well, that would come as news to most health-care economists, who are nearly unanimous in calling such mandates "taxes."
Princeton University's Uwe Reinhardt, generally seen as the dean of health economists, writes: "[Just because] the fiscal flows triggered by a mandate would not flow directly through the public budget, does not detract from the measures' status as a bona fide tax."
Think of it this way: If the government took money directly from you, then turned around and gave it to an insurance company, everyone would agree that you've been taxed. How is that any different from the government mandating that you pay the insurer directly? At the end of the day, you still have less money to spend the way you want.
The No. 1 reason why today's uninsured say that they haven't bought insurance is that they can't afford it. Now the president is going to force them to either buy it — or pay a penalty (another non-tax, according to the president).
That penalty would be 2.5 percent of a person's income under the main House bill, and up to $1,900 for a family under the bill emerging from the Senate Finance Committee.
Sure, some of those people may have some of their costs offset by subsidies — but many will be considerably worse off. Will they be happy just because the president says it's not a tax?
There's more: Obama's mandate doesn't just hit today's uninsured: It zings anyone whose policy doesn't match the government-set specifications. If you're not paying for the benefits that Congress (or bureaucrats working at its direction) insists on, you'll have to switch to a new policy — probably a more expensive one.
That's more Americans who'll have to pay more — and keep less of their own money. But, hey, Obama says it's not a tax.
Of course, if my health-care bill already had more than $700 billion in direct taxes, as does the House bill, or included a 40 percent tax on some insurance plans, as does the Senate Finance Committee proposal, I wouldn't want to admit that even more taxes are hidden in the plan, either.
Nor should we forget the other mandate the president supports: a requirement that employers offer insurance to their workers.
Because insurance costs businesses, on average, about $12,000, the president will be raising the cost of hiring a worker by $12,000. Employers will have to offset that cost somehow, whether by lowering wages, cutting future pay increases, cutting other forms of compensation (good-bye, 401(k) match; so long, credit union) or benefits like vacation or retirement contributions — or by laying off workers or not hiring back workers they've laid off during the recession.
Whatever the mix of employer responses, at the end of the day, workers will be worse off. Well, at least they won't have been "taxed."
And, as with the individual mandate, this won't just affect companies that don't offer insurance now. Firms will have to switch from their current plans to the new, more expensive government-designed plans.
Of course, at least one prominent economist has said that such an employer mandate "is just like a tax from both the employer and employees' point of view."
The "nobody" who said that was Larry Summers, chairman of President Obama's Council of Economic Advisers.
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