Category Archives: Debt

UPDATED: GOP ‘Sequesteria’ & The GDP Gambit (When Debt = Growth)

Debt, Democrats, Economy, Federal Reserve Bank, Government, Republicans

Are you able to tease apart Republican “sequesteria” from the Democratic position on the effects of a miniscule decrease in the increase in US government spending, for this year?

I can’t.

The Democrats are adamant that a cut in oink-sector spending will destroy the chances of an economic recovery and will lower GDP.

It didn’t have to happen this way, lament the Republicans. Negotiations could have produced a better honed cutting instrument.

Note that the Republicans have never made relevant points such as that, “Government spending increases unemployment because it crowds out so much private sector job creation” (Thomas J. DiLorenzo, Organized Crime: The Unvarnished Truth About Government, p. 202).

Or, as Larry Kudlow put it, “When the government spending share of GDP declines, so does the true tax burden on the economy. As a result, more resources are left in the free-market private sector, which will promote real growth.”

Ask yourself why GDP would shrink if the burden of government is reduced slightly. Why would Gross Domestic Product be affected by a threat of a reduction in the parasitical sector–the sector (government) that doesn’t produce wealth, but only consumes it?

Could this paradox be a result of the way in which GDP numbers are crunched?

Indeed.

Gross domestic product (GDP) gauges economic activity based on spending, or “consumption,” which is not what creates wealth. Production creates wealth. (Gross domestic income (GDI) is a lesser-known calculation used by the Federal Reserve to gauge economic activity based on income.)

Official GDP numbers also chart—and include—the growth of government debt. As Vox Day has explained, “GDP counts spending but doesn’t subtract debt, so it’s like saying that you’re rich because you maxed out your platinum Mastercard. Until the debt is paid back, you can’t properly count it as economic growth. And almost all of the GDP growth over the last 20 years has been nothing but debt growth.”

The GDP is a political construct, defined, tracked and manipulated by the D.C. political machine.

GDP statistically conflates the growth of debt with economic growth.

When our economic definitional building blocks are thus perverted, it becomes easy to peddle the GDP hoax. And that hoax is that a reduction in state spending and debt is also a reduction in economic growth, and that reducing debt must be avoided at all costs.

As Ayn Rand would have advised, “Check your premises.”

UPDATE (3/3): “THE SEQUESTER ISN’T REALLY THERE.” Via the fabulous EPJ: Ron Paul on the Sequester:

The Fed is minting $85 billion a month in funny-money!

A Budget Cut In D.C. Doublespeak (I.E., Bowel-Speak)

Barack Obama, Debt, Economy, Government, Taxation, The State

Tom DiLorenzo (he’s a friend) on D.C. bowel-speak:

In Washingtonese, if one proposes a $100 billion spending increase, and actual spending increases by “only” $90 billion, they call it a $10 billion budget cut.

And on the Washington Monument Syndrome game, via LRC.com:

The game is this: Whenever a politician is “threatened” with a minor slowdown in spending, the first thing to do is to eliminate police, firefighters, ambulance services, school buses, etc. — everything that inflicts the maximum discomfort on the victims of the government monopoly (a.k.a., taxpayers). The booboisie then wake up from their American Idol stupor for a moment to raise a fuss, and the proposals to slow down spending growth disappear. (It’s called the “Washington Monument Syndrome” because the head of the National Park Service shut down the Washington Monument in the ’60s in response to Congress’s temporary refusal to fund his complete spending wish list. Tourists from every state complained to their congressmen, and the Park Service wish list was fully funded).

Updated: The Oink Sector Is Always Seen (‘A Decrease In the Spending Increase’)

Barack Obama, Debt, Economy, Government, libertarianism, Paleolibertarianism, Political Economy, The State, War, Welfare

“The art of economics,” wrote Henry Hazlitt, “consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.” Hazlitt was encapsulating Bastiat’s What-Is-Seen-and-What-Is-Not-Seen principle.

“Flanked by emergency medical personnel,” write the editors at the WSJ, “Mr. Obama made his usual threat of Armageddon if automatic spending cuts go forward on March 1. Americans can expect more such melodrama in the coming days, so as a public service we thought we’d break down the President’s three biggest political tricks.”

Members of the “oink sector” were front and center in Obama’s show. What you didn’t see were the many private-sector suckers who work to fund the wealth consuming sponger sector, members of which were on show. What you didn’t see were the unemployed in the private sector, who are displaced because of the growth of government.

Think zero-sum, or parasite vs. host. The first (the parasite) is sucking the lifeblood of the second (the host). The larger the parasite gets, the weaker the host will grow.

UPDATED (2/22): “What a bunch of Keynesians,” writes the Fox News column “Power Play” about … the Republicans. Now that’s progress. (Fox News is usually a megaphone for the GOP.)

So here sit Republicans, teeth clenched, gripping their desks, waiting for the “devastating” cuts to explode the economy and just hoping that Obama will get some of the blame for having invented the thing. They are assuming that $85 billion less spent by the government will cause devastation in an economy of some $16 trillion.

The sequester, as everyone knows, “was …the brainchild of Team Obama.” It is nothing more than a “decrease in the increase in spending,” another good way to describe the “crippling reductions [Obama] says will result from the government spending only $15 billion more this year than last year.”

Updated: ‘Fractional-Reserve Banking Inherently Inflationary’ (QE Ad Infinitum)

Business, Debt, Economy, Federal Reserve Bank

It might seem obvious to follower of the Austrian School of economics that fractional-reserve banking “inevitably expands the money supply,” causing cycles of boom, bust and malinvestment. But the reptilian brains in Congress need someone like Dr. Joseph T. Salerno to explain to them the consequences of “issuing deposits not fully backed by cash.” This Salerno, whose lectures I enjoyed at the Mises Institute, has always done magnificently:

… when people deposit an additional $100,000 of cash in the bank, depositors now have an additional $100,000 in their checking accounts while the bank accumulates an additional $100,000 of cash (dollar bills) in its vaults. The total money supply, which includes both dollar bills in circulation among the public and dollar balances in bank deposits, has not changed. The depositors have reduced the amount of cash in circulation by $100,000, which is now stored in the bank’s vaults, but they have increased the total deposit balance that they may draw on by check or debit card by the exact same amount. Suppose now the loan officers of the bank lend out $90,000 of this added cash to businesses and consumers and maintain the remaining $10,000 on reserve against the $100,000 of new deposits. These loans increase the money supply by $90,000 because, while the original depositors have the extra $100,000 still available on deposit, the borrowers now have an extra $90,000 of the cash they did not have before.
The expansion of the money supply does not stop here however, for when the borrowers spend the borrowed cash to buy goods or to pay wages, the recipients of these dollars redeposit some or all of these dollars in their own banks, which in turn lend out a proportion of these new deposits. Through this process, bank-deposit dollars are created and multiplied far beyond the amount of the initial cash deposits. (Given the institutional conditions in the United States today, each dollar of currency deposited in a bank can increase the US money supply by a maximum of $10.00.) As the additional deposit dollars are spent, prices in the economy progressively rise, and the inevitable result is inflation, with all its associated deleterious effects on the economy.

Then there are the artificially low interest rates:

Fractional-reserve banking inflicts another great harm on the economy. In order to induce businesses and consumers to borrow the additional dollars created, banks must reduce interest rates below the market-equilibrium level determined by the amount of voluntary savings in the economy. Businesses are misled by the artificially low interest rates into borrowing to expand their facilities or undertake new long-term investment projects of various kinds. But the prospective profitability of these undertakings depends on expectations that bank credit will remain cheap more or less indefinitely. Consumers, too, are deceived by the lower interest rates and rush to purchase larger residences or vacation homes. They take out second mortgages on their homes to buy big-ticket luxury items. A false economic boom begins that is doomed to turn into a bust as soon as interest rates begin to rise again.
As the inflationary boom progresses and prices rise, the demand for credit becomes more intense at the same time that more cash is withdrawn from bank deposits to finance the purchase of everyday goods. The banks react to these developments by sharply raising interest rates and contracting loans and deposits, causing a decline in the money supply. Indeed the money supply may very well collapse, as it did in the early 1930s, because the public loses confidence in the banks and demands it deposits back in cash. In this case, a series of bank runs ensue that pushes many fractional-reserve banks into insolvency and instantly extinguishes their money substitutes, which had previously circulated as part of the money supply. Recession and deflation results and the binge of bad investments and overconsumption is starkly revealed in the abandoned construction projects, empty commercial buildings, and foreclosed homes that litter the economic landscape. At the end of the recession it turns out that almost all households and business firms are made poorer by fractional-reserve bank-credit expansion, even those who may have initially gained from the inflation.

MORE.

UPDATE (Feb. 20): QE ad infinitum. Federal Reserve and US government, a cog in the fractional reserve operation, buy up their own debt. The country is collateral. The purchases of government debt securities is known as “quantitative easing,” or QE ad infinitum.

The money mafia are easing to the tune of $85 billion in monthly bond purchases. If they’ve admitted to this much, you can be sure it’s much more.

The basis for debauching the coin? The Fed and his political masters assume that inflating the money supply and endless liquidity alleviate joblessness.

It’s the exact opposite.

The Fed’s latest shenanigans via Bloomberg:

Several Federal Reserve policy makers said the central bank should be ready to vary the pace of their $85 billion in monthly bond purchases amid a debate over the risks and benefits of further quantitative easing.
The officials “emphasized that the committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved,” according to the minutes of the Federal Open Market Committee’s Jan. 29-30 meeting released today in Washington.
The minutes showed policy makers were divided about the strategy behind Chairman Ben S. Bernanke’s program of buying bonds until there is “substantial” improvement in a U.S. labor market burdened with 7.9 percent unemployment, with some saying an earlier end to purchases might be needed, and others warning against a premature withdrawal of stimulus.
“They’re changing the debate toward when to scale it down rather than debating the point where it suddenly ends,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York. “With the economy looking more solid than they feared a few months ago, financial sector risks take on more importance.”