Category Archives: Debt

"In The Eye Of The [Economic] Storm"

The Wall Street Journal has a dilemma. How does an anti-Obama, Keynesian outfit treat the putative economic recovery. Here’s the compromise: “We’re not going to have a strong recovery … It’s likely going to be a pretty sluggish affair.”

The truth is much worse. But you already knew it. A couple of weeks back I warned against accepting the media-congressional-presidential complex’s contention that slight upticks in the GDP were indicators of a recovery. In “…Like A Housewarming For The Homeless” I explained that,

the GDP statistic is consumption-driven: it measures the kind of economic Brownian motion of which less is required. ‘This statistic is constructed in accordance with the view that what drives an economy is not the production of wealth but rather its consumption,’ confirms (Austrian) economist Frank Shostak. ‘What matters here is demand for final goods and services. Since consumer outlays are the largest part of overall demand, it is commonly held that consumer demand sets in motion economic growth.’

The temporary bump in the economy is due to the halcyon stimulative high—the effects of all the fiat funny-money floating around and further distorting production patterns.

Says Peter Schiff, the Austrian economics wizard who has yet to be wrong: We are now in an even deeper hole than when the crisis began. Rather than wrapping up a recession, we are actually sinking into a depression. If things look better now, it’s just because we are in the eye of the storm“:

By interfering with the unpleasant forces of the recession, we simply trade short-term gain for long-term pain. By propping up inefficient companies that should fail, we deprive more effective companies of the capital they need to grow. By holding up over-valued asset prices, we prevent the prudent or less well-off from snatching them up and, in doing so, creating a new price equilibrium based upon reality. By maintaining artificially low interest rates, we discourage the very savings that are so critical to capital formation and future economic growth. In addition, the false economic signals the Fed sends the market prevent a more efficient re-allocation of resources from taking place and leads to even more bad economic decision being made. By running such huge deficits, we further crowd-out private enterprise by making it harder for businesses to invest or hire

The verbose Donny Deutsch, a lefty business-cum-mediaman, who’s proving too much of a rightist for the front fems who anchor MSNBC programs, declared the “Clunkers for Cash” give-away, wealth-distribution initiative an example of economic innovation. Inoculate yourselves:

The recently passed “cash for clunkers” program (currently on-hold, as it ran out of funding in one week) is a perfect example of how government policy can make the economy worse. By incentivizing Americans to destroy fully paid-for cars so they can go deeper into debt buying brand new ones, the government weakens an already crippled economy. The last thing we want to do is subsidize Americans to go deeper into debt by buying more stuff. Don’t they realize that is precisely the behavior that got us into this mess?

Think about it this way. If your friend were in trouble because he had too much debt, would you encourage him to take on even more? Wouldn’t a real sign of progress be a reduction of debt, even if he had to cut back on his everyday expenses? What is true for an individual is also true for a collection of individuals, even if they call themselves a ‘government.’ If, as a country, we are even deeper into debt now than we were before, we are worse off. Period. The fact that the additional debt enabled better short-term GDP numbers is a long-term negative.

“In The Eye Of The [Economic] Storm”

Debt, Economy, Federal Reserve Bank, Inflation

the GDP statistic is consumption-driven: it measures the kind of economic Brownian motion of which less is required. ‘This statistic is constructed in accordance with the view that what drives an economy is not the production of wealth but rather its consumption,’ confirms (Austrian) economist Frank Shostak. ‘What matters here is demand for final goods and services. Since consumer outlays are the largest part of overall demand, it is commonly held that consumer demand sets in motion economic growth.’

The temporary bump in the economy is due to the halcyon stimulative high—the effects of all the fiat funny-money floating around and further distorting production patterns.

By interfering with the unpleasant forces of the recession, we simply trade short-term gain for long-term pain. By propping up inefficient companies that should fail, we deprive more effective companies of the capital they need to grow. By holding up over-valued asset prices, we prevent the prudent or less well-off from snatching them up and, in doing so, creating a new price equilibrium based upon reality. By maintaining artificially low interest rates, we discourage the very savings that are so critical to capital formation and future economic growth. In addition, the false economic signals the Fed sends the market prevent a more efficient re-allocation of resources from taking place and leads to even more bad economic decision being made. By running such huge deficits, we further crowd-out private enterprise by making it harder for businesses to invest or hire

The recently passed “cash for clunkers” program (currently on-hold, as it ran out of funding in one week) is a perfect example of how government policy can make the economy worse. By incentivizing Americans to destroy fully paid-for cars so they can go deeper into debt buying brand new ones, the government weakens an already crippled economy. The last thing we want to do is subsidize Americans to go deeper into debt by buying more stuff. Don’t they realize that is precisely the behavior that got us into this mess?

Think about it this way. If your friend were in trouble because he had too much debt, would you encourage him to take on even more? Wouldn’t a real sign of progress be a reduction of debt, even if he had to cut back on his everyday expenses? What is true for an individual is also true for a collection of individuals, even if they call themselves a ‘government.’ If, as a country, we are even deeper into debt now than we were before, we are worse off. Period. The fact that the additional debt enabled better short-term GDP numbers is a long-term negative.

Updated: Stocks Or Savings?

Debt, Economy, Federal Reserve Bank, Inflation

Is America back and are the statists out? If only, says the one-and-only Peter Schiff. “The statists aren’t out; they’re here, they’re in control.” The Fed has yet to raise interest rates as it ought to. Americans have yet to begin saving in earnest. The government’s sticky paws are all over the place, prices are not being allowed to fall to reflect reality. We’re still a broke and bankrupt consumer economy.

Peter Morici, on the other hand, smells the recovery—a fourth-quarter recovery, to be precise. I wonder whether he’ll be asked back on the “Kudlow Report” when his prediction turns out to be false? Who am I kidding. Being a commentator on the “idiot’s lantern” means never having to say you’re sorry.

Update (July 21): Schiff said nothing about saving dollars. Anyone who follows his advice knows he recommends divesting of US assets. And he’s big on gold. We discussed strategizing in “Survival On the Road To serfdom.”

Update III: Obama's Route To Economic Revival (A Stake Through The Heart Of The Economy)

Barack Obama, Debt, Democrats, Healthcare, Media, Socialism

A straitjacket is where this man and his followers belong. And where Bush before him should have been placed. For as much as the beaus and bimbos of FoxNews and their loyalists wish to forget, Bush paved the way for Barack’s Bacchanalia—“The unconstitutional campaign finance-reform bill and ‘Sarbanes-Oxley Act’ (a preemptive assault on CEOs and CFOs, prior to the fact of a crime); the various trade tariffs and barriers; the Clintonian triumph of triangulation on affirmative-action; the collusion with Kennedy on education; the welfare wantonness that began with a prescription-drug benefit that would add trillions to the Medicare shortfall, and culminated in the Kennedy-countenanced ‘New New Deal’ for New Orleans, for which there was no constitutional authority; the gold-embossed invitation to illegals to invade, and the ‘camouflaged amnesty'”—Barack wishes he’d done all this, but these were Bush’s babies.

Back to the bastard du jour : The New York Times editorializes approvingly on what Obama’s health care “reform” will accomplish:

It will “require virtually all Americans to carry health insurance or pay a penalty. And it would require all but the smallest businesses to provide health insurance for their workers or pay a substantial fee. It would also expand Medicaid to cover many more poor people, and it would create new exchanges through which millions of middle-class Americans could buy health insurance with the help of government subsidies. The result would be near-universal coverage at a surprisingly manageable cost to the federal government.

The nonpartisan Congressional Budget Office estimates that by 2015, 97 percent of all residents, excluding illegal immigrants, would have health insurance. The price tag for this near-universal coverage was pegged by the budget office at just more than $1 trillion over 10 years — at the low-end of the estimates we’ve heard in recent weeks.

The legislation would pay for half that cost by reducing spending on Medicare, a staple of all reform plans. It would pay for the other half by raising $544 billion over the next decade with a graduated income surtax on the wealthiest Americans: families with adjusted gross incomes exceeding $350,000 and individuals making more than $280,000.” …

Update I: Republicans on the Joint Economic Committee (led by Rep. Kevin Brady (R-TX), who, as far as I know, did less than nothing to highlight the evils of their Boy Bush’s prescription drug program, have developed the following organizational chart to illustrate the efficiencies built into to the Democrats’ healthscare politburo. Since the image, never the program, is quite small, check it out here.

Update II (July 17): “In total, CBO estimates that enacting [Obama’s healthscare) provisions would raise deficits by $1,042 billion over the 2010-2019 period.” But the CBO and the JCT hope that the net increase in the federal budget deficit of enacting H.R. 3200 will be only a meager $239 billion over the 2010-2019 period. That’s because of some “savings” the Act affords.

“That estimate reflects a projected 10-year cost of the bill’s insurance coverage provisions of $1,042 billion, partly offset by net spending changes that CBO estimates would save $219 billion over the same period, and by revenue provisions that JCT estimates would increase federal revenues by about $583 billion over those
10 years.”

Douglas W. Elmendorf, Director of the CONGRESSIONAL BUDGET OFFICE, who conducted the analysis of “H.R. 3200, America’s Affordable Health Choices Act of 2009,” summarizes the Act’s mandates:

The legislation would establish a mandate to have health insurance, expand eligibility for Medicaid, and establish new health insurance exchanges through which some people could purchase subsidized coverage. The options available in the insurance exchange would include private health insurance plans as well as a public plan that would be administered by the Secretary of Health and Human
Services. The specifications would also require payments of penalties by uninsured individuals, firms that did not provide qualified health insurance, and other firms whose employees would receive subsidized coverage through the exchanges. The plan would also provide tax credits to small employers that contribute toward the cost of health insurance for their workers.

I must say, I’m quite impressed with the CBO. Just the facts, ma’am.

Update III (July 18): Warns economist Peter Schiff: “the economy is walking dead anyway, and this measure is the equivalent of a stake through the heart.” From “Prescription for Disaster”:

“[T]taxing the rich to pay for health care for the uninsured is the wrong way to think about tax policy and is an unconstitutional redistribution of wealth. While the government has the constitutional power to tax to “promote the general welfare,” it does not have the right to tax one group for the sole and specific benefit of another. If the government wishes to finance national health insurance, the burden of paying for it should fall on every American. If that were the case, perhaps Congress would think twice before passing such a monstrosity.

In the second place, the bill is just plain bad economics. For an administration that claims to want to create jobs, this bill is one of the biggest job-killers yet devised. By increasing the marginal income tax rate on high earners (an extra 5.4% on incomes above 1 million), it reduces the incentives for small business owners to expand their companies. When you combine this tax hike with the higher taxes that will kick in once the Bush tax-cuts expire, and add in the higher income taxes being imposed by several states, many business owners might simply choose not to put in the extra effort necessary to expand their businesses. Or, given the diminishing returns on their labor, they may choose to enjoy more leisure. More leisure for employers means fewer jobs for employees.

More directly, mandating insurance coverage for employees increases the cost of hiring workers. Under the terms of the bill, small businesses that do not provide insurance will be required to pay a tax as high as 8% of their payroll. Since most small businesses currently could not afford to grant 8% across-the-board pay hikes, they will have to offset these costs by reducing wages. However, for employees working at the minimum wage, the only way for employers to offset the costs would be through layoffs.”

Read the complete column on Taki’s.