Life without electricity

Unbelievable Rockies game

I am not much of a baseball fan, as it is overpriced and boring, but something incredible happened on July 30th, Friday night at Coors Field. I think a verbal description expresses it more than watching a video clip would.

It was the bottom of the 8th, and the Rockies were leading 5-2.
Sean Marshall replaces Justin Berg as pitcher for the Cubs.
1. Clint Barmes doubles.
2. Melvin Mora singles, Barmes to third.
3. Dexter Fowler strikes out.
4. Ryan Spilborghs strikes out. There are two outs.
5. Carlos Gonzalez singles to right, Barmes scores, Mora to second.
6. Troy Tulowitzki doubles, Mora scores, Gonzalez to third.
7. Brad Hawpe doubles, Gonzalez scores, Tulowitzki scores.
8. Andrew Cashner relieves Marshall. Chris Iannetta triples, Hawpe scores.
9. Ian Stewart homers, Iannetta scores, Stewart scores.
10. Clint Barmes singles.
11. Mora doubles, Barmes scores.
12. Fowler homers, Mora scores, Fowler scores.
13. Spillborghs singles.
14. Brian Schlittler relieves Cashner. Gonzalez singles, Spilborghs to second.
15. Tulowitzki doubles, Spilborghs scores, Gonzalez scores.
16. Hawpe walks.
17. Inannetta walks, Tulowitzki to third, Hawpe to second. Bases are loaded.
18. Stewart finally flied out.

The score was now 17-2. The Rockies get 13 hits, including 11 straight hits and score 12 runs. Every single player was at-bat twice, and each player scored at least once. Gonzalez, Tulowitzki, Mora and Barmes had two hits apiece. Fantastic!

A crisis of confidence

We are in the late-phase of a multi-decade historic Credit Bubble. The greatest risk at this point is that massive issuance of non-productive governmental debt foments a crisis of confidence at the very heart of our monetary system. The top priority must be to ensure that such a devastating outcome is avoided – and at significant unavoidable cost. It is imperative that we as a nation come to the recognition that real financial and economic pain must be endured to protect the long-term viability of our monetary system. The inflation rate is not the key issue. And efforts to try to inflate our way out of structural debt problems are a lost cause. We must instead move forcefully to rein in our deficits and avoid further debt monetization in order to protect the soundness of our money and Credit – or else risk a financial crash.

Most regrettably, Washington policymaking (fiscal and monetary) is on a trajectory that will inevitably destroy the creditworthiness of our nation’s vast liabilities. With ominous parallels to the mortgage/Wall Street finance Bubble, Federal Reserve policies have fostered Bubble dynamics throughout our Treasury, agency and debt markets, more generally. Instead of market dynamics working to discipline Washington’s profligate debt expansion, Federal Reserve interventions ensure that a distorted marketplace again accommodates perilous Credit excess. Our central bankers should heed Mr. Trichet’s warning. Additional quantitative ease will only fuel the Bubble and risk calamity.
--http://dollarcollapse.com/articles/doug-noland-significant-unavoidable-cost/

Collapse like a thief in the night

Yet what if history is not cyclical and slow-moving but arhythmic, at times almost stationary, but also capable of accelerating suddenly, like a sports car? What if collapse does not arrive over a number of centuries but comes suddenly, like a thief in the night?

Great powers and empires are complex systems, which means their construction more resembles a termite hill than an Egyptian pyramid. They operate somewhere between order and disorder, on "the edge of chaos", in the phrase of the computer scientist Christopher Langton.

Such systems can appear to operate quite stably for some time; they seem to be in equilibrium but are, in fact, constantly adapting.

But there comes a moment when complex systems "go critical". A very small trigger can set off a phase transition from a benign equilibrium to a crisis.
--Niall Ferguson

The tipping point is unknown

From: http://cboblog.cbo.gov/?p=1249

With U.S. government debt already at a level that is high by historical standards, and the prospect that, under current policies, federal debt would continue to grow, it is possible that interest rates might rise gradually as investors’ confidence in the U.S. government’s finances declined, giving legislators sufficient time to make policy choices that could avert a crisis. It is also possible, however, that investors would lose confidence abruptly and interest rates on government debt would rise sharply, as evidenced by the experiences of other countries.

Unfortunately, there is no way to predict with any confidence whether and when such a crisis might occur in the United States. In a brief ("Federal Debt and the Risk of a Fiscal Crisis") released today, CBO notes that there is no identifiable “tipping point” of debt relative to the nation’s output (gross domestic product, or GDP) that would indicate that such a crisis is likely or imminent. However, in the United States, the ratio of federal debt to GDP is climbing into unfamiliar territory—and all else being equal, the higher the debt, the greater the risk of such a crisis.

If you are standing near the edge of a cliff, and you know there is a possibility that you could go over as well as the possibility that the ground could collapse near the edge but you don't know exactly where the danger point is, wouldn't it make sense to stay far away from that point, instead of tempting fate?

The only thing we have to fear is austerity

David Blanchflower, former economist with the Bank of England and now a professor at Dartmouth, wants more spending and cites Paul Krugman in support of his views.

Prepare for hyper-inflation

Comment: While hyper-inflation seems unimaginable now with the depression we are in, there is so much money out there, things can change very quickly once the economy starts to recover in a few years.

My revised budget projection

This basically takes the latest OMB numbers and combines them with a previous projection that I made which is based partly on CBO numbers.

The mighty Obama has commanded the recession to be over and for the budget deficit to be cut in half overnight, but cynic that I am, I doubt some of his powers and am projecting what I see as more realistic numbers. I don't think it makes sense to extrapolate this any further because of all the unknowns but I think it would reach the tipping point about 2028.

Category/Year	2009	2010	2011	2012	2013	2014	2015	2016
Revenue	2105	2132	2426	2728	2948	3160	3254	3383
Mandatory	2112	2041	2186	2112	2176	2371	2491	2649
Discretionary	1219	1377	1433	1443	1487	1532	1578	1625
Interest	187	185	221	294	385	480	554	617
Total Spending	3518	3603	3840	3849	4048	4383	4623	4891
Deficit	-1413	-1471	-1414	-1121	-1100	-1223	-1369	-1508
Debt held by public	7552	9023	10437	11558	12658	13881	15250	16758
GDP	14300	14600	14900	15500	16200	16900	17400	17900
Debt %	53%	62%	70%	75%	78%	82%	88%	94%

Update 6/19/2012:  I label this B-2.  This is eerily accurate so far, two years later.

New Budget

A new OMB budget just came out which I will present before analyzing it. I'm only going to show this through 2016.

Category/Year	2009	2010	2011	2012	2013	2014	2015	2016
Revenue	2105	2132	2426	2814	3102	3441	3597	3853
Mandatory	2112	2041	2186	2112	2175	2371	2491	2649
Discretionary	1219	1377	1433	1316	1274	1284	1309	1339
Interest	187	185	221	294	385	480	554	617
Total Spending	3518	3603	3842	3725	3838	4139	4359	4610
Deficit	-1413	-1471	-1416	-911	-736	-698	-762	-758
Debt held by public	7552	9023	10439	11350	12086	12784	13546	14304
GDP	14,256	14817	15516	16412	17383	18384	19369	20337
Debt %	53%	61%	67%	69%	69%	70%	70%	70%

Note: The debt held by public is calculated by adding the current year deficit to the previous year's total.

How the baby boomers ruined everything

Lunar landing anniversary

Yesterday was the 41st anniversary of Apollo 11. It is doubtful that we will return to the Moon within 41 years.

When Money Dies

Here is an interesting book called "When Money Dies: The Nightmare of the Weimar Collapse". Excerpt:

Undoubtedly, though, inflation aggravated every evil, ruined every chance of national revival or individual success, and eventually produced precisely the conditions in which extremists of Right and Left could raise the mob against the State, set class against class, race against race, family against family, husband against wife, trade against trade, town against country. It undermined national resolution when simple want or need might have bolstered it. Partly because of its unfairly discriminatory nature, it brought out the worst in everybody — industrialist and worker, farmer and peasant, banker and shopkeeper, politician and civil servant, housewife, soldier, merchant, tradesman, miner, moneylender, pensioner, doctor, trade union leader, student, tourist -especially the tourist. It caused fear and insecurity among those who had already known too much of both. It fostered xenophobia. It promoted contempt for government and the subversion of law and order. It corrupted even where corruption had been unknown, and too often where it should have been impossible. It was the worst possible prelude — although detached from it by several years — to the great depression; and thus to what followed.
...
if you wish to destroy a nation you must corrupt its currency. Thus must sound money be the first bastion of a society's defence.

Another explanation of the subprime crisis

The biggest national security threat is the National Debt

2011 Budget

Here is the 2011 Budget.

Category	2011 Baseline	2011 Proposed	My 2011 est.
Revenue	2583	2567	2460
Mandatory	2100	2165	2156
Discretionary	1379	1418	1401
Interest	250	251	244
Total Outlays	3728	3834	3801
Deficit	-1145	-1267	-1341

===========
Update 10/12/12.  Actual numbers for 2011 were:
Revenue: 2302
Interest: 266
Total Outlays: 3601
Deficit: -1299

So the forecasts overstated revenue and understated interest expense.

2010 Update

The CBO recently produced their Monthly Budget Review for 2010, so I decided to try to compare how close my estimates were. One thing that is evident is that the defition of Mandatory Spending v. Discretionary Spending isn't clear. It's still interesting to compare the actual v. estimates.

The 2010 extrap. column is the extrapolation from the first 9 months to the full 12 months. Spending is lower than the budgeted amount. I believe agencies have to spend the budgeted amount or they will lose out in future budgets, so spending is likely to increase in the last 3 months of FY 2010.

Category	2010 YTD	2010 extrap.	2010 Budget	My 2010 est.
Revenue	1597	2129	2381	2118
Mandatory	1051	1401	2020	2034
Discretionary	1379	1839	1368	1375
Interest	172	229	164	209
Total Spending	2602	3469	3552	3618
Deficit	-1005	-1340	-1171	-1500

Edit: Another source shows total spending for 2010 budgeted at $3,721B.

Projected budget deficits

Category / Year	2009	2010	2011	2012	2013	2014	2015	2016
Revenue	2105	2118	2460	2728	2948	3160	3254	3,383
Mandatory Spending	2094	2034	2156	2091	2176	2322	2409	2519
Discretionary Spending	1237	1375	1401	1443	1487	1532	1578	1625
Interest	187	209	244	298	365	406	470	519
Total Spending	3518	3618	3801	3832	4028	4260	4457	4663
Deficit	-1413	-1500	-1341	-1104	-1080	-1100	-1203	-1280
Debt held by public	7,552	9,052	10,393	11,497	12,577	13,677	14,880	16160
GDP	14,300	14,600	14,900	15,500	16,200	16,900	17,400	17,900
Debt %	53%	62%	70%	74%	78%	81%	86%	90%

Some of the numbers are based on CBO projections and some of them are my projections, so take with a grain of salt.

Prof. Glenn Beck teaches the Kondratieff wave theory

He gets the years wrong, but at least he illustrates the general idea.

Kondratieff wave theory

Nikolai Kondratieff was a Russian economist who predicted that the economy moves through 40-60 year waves. Looking back at history we can see these waves. They go back much further but this is enough for my purposes.

1. Railroad wave, from 1843 to 1897. (54 years). This was a boom caused by the growth of railroads and collapsing with their overbuilding.
a. beginning (spring), 1843 when the Panic of 1837 was over.
b. peak (summer), post-Civil War boom starting in 1864, peaking in 1873
c. start of decline (autumn), Panic of 1873, continuing into the Long Depression
d. trough (winter), Panic of 1893.

2. Electricity wave, from 1897 to 1938 (41 years). Growth during this period was caused by electrification of factories and by other technologies such as the telephone, motion pictures, automobile, skyscrapers, airplanes and the Panama Canal. The Great Depression was caused in part by overinvestment, underconsumption, and the breakdown of international trade.
a. beginning (spring), 1897, when the Panic of 1893 was over
b. peak (summer), 1920, the start of the Roaring 20's
c. start of decline (autumn), 1929 with the stock market crash on Black Tuesday, continuing into the Great Depression, which technically ended in 1933.
d. trough (winter), Recession of 1937 which ended in 1938.

3. War and Post-War, Automobile and Oil wave, from 1938-1982 (44 years). This era was characterized by the great growth in automobiles, road construction, oil exploration, and suburbanization and came to a crash with the quadrupling of oil prices and stagflation.
a. beginning (spring). In 1938, the economy began to recover, and WW2 brought full employment.
b. peak (summer), in 1958, the stock market gained 33%. The peak year was 1972 when the Dow reached 1000.
c. start of decline (autumn), 1973 oil crisis, leading to stagflation.
d. trough (winter), 1980 recession, followed closely by the 1981 recession.

4. Internet wave, from 1983 to present. This started with the optimism caused by the election of Reagan, and continued with the World Wide Web, which started about 1991.
a. beginning (spring). The early 1980's recession ended in November 1982. During this period, Black Monday occurred when the stock market dropped by 22% for no apparent reason.
b. peak (summer). The stock market began a rapid ascent in about 1990, growing from 2,800 on 1/2/90 to 11,700 on 1/14/2000. The dot-com bubble collapsed in 2000. The attacks on 9/11/2001 caused a mini-recession, but a housing bubble developed which peaked in 2006.
c. start of decline (autumn). On about Sept. 18, 2008, there was a near systemic collapse as investors started withdrawing funds from money markets in a panic, saved only by quick action by the Federal Reserve, so this is the best date for the start of the decline. The recession technically began earlier, in Dec. 2007.
d. trough (winter). This is just a wild guess, but based on prior trends there will probably be a recovery at some point about 2015 or so, followed by a final recession about 2020, with recovery starting about 2023, when the next cycle will begin. (Note that this is a prediction of an economic cycle, which is completely independent of the financial crisis caused by too much debt).

Berkeley grads can't find jobs

Steve Wynn v. Washington

Damm the deficit, full speed ahead!

From: http://mrzine.monthlyreview.org/2010/galbraith160710.html
Excerpts:

There Is No Economic Justification for Deficit Reduction

With high unemployment, high public deficits are inevitable. The only choice is between an active deficit, incurred by putting people to work or otherwise serving national needs -- such as providing a decent retirement and health care to the aged -- and a passive deficit, incurred because at high unemployment tax revenues necessarily fail to cover public spending. Cutting public spending or raising taxes, now or in the future, by any amount, cannot reduce a deficit due to high unemployment.
...
The only way to reduce a deficit caused by unemployment is to reduce unemployment.
...
One more time: without private credit, deficit reduction plans through fiscal austerity, now or in the future, will fail. They cannot succeed. If at the time the cuts take effect the economy is still relying on public expenditure to fund economic activity, then reducing expenditure (or increasing taxes) will simply reduce GDP and the deficits will not go away.

Further, if the finances of the private sector could be fixed, then an austerity program would be entirely unnecessary to reduce public debt.
...
Entitlement cuts, no matter how severe, cannot and will not achieve deficit reduction.
...
the mandate to reduce the primary deficit to zero by 2015 is unnecessary.
...

Insolvency, bankruptcy, or even higher real interest rates are not among the actual risks to this system. The actual risks in this system are (to a minor degree) inflation, and to a larger degree, depreciation of the dollar. However at the moment there is wide agreement that a lower dollar would be a good thing -- against the Chinese RMB and now also the euro. So it is difficult to believe that the goal of deficit reduction per se serves any coherent, or presently desirable, economic objective.

We can conclude that there is actually no economic justification for the target of reducing the primary deficit to zero by 2015 or any other date.

Comment: I don't follow his logic but I do understand his conclusion. Deficits are good! Higher deficits are better! Spend, spend, spend, spend!

New green jobs in California

Alex Jones says collapse is imminent

Of course, he says the same thing every day, so I would take this with a grain of salt.

Explanation of the subprime crisis

The dollar carry trade, Chimerica and de-zombification

This is an interesting video I ran across. It illustrates some of the dangers of low interest rates. While the Fed thinks that low interest rates help stimulate the economy, they instead encourage speculation. In this video Warren Pollock shows how investors can borrow US dollars at 1% and buy Australian bonds for 4% and make an arbitrage profit.

Here are some more thoughts it triggered in me. Borrowing money has another positive aspect to it as it allows you to short the dollar. If a lot of people either go long or go short on a given asset, it can become a self-fulfilling prophecy, e.g. people buying real estate drives the price up. So the huge debts, denominated in dollars, can actually drive the dollar lower, in a reverse bubble. And since investors profit on this and as other investors jump in, the dollar falls even more. Our government is in a sense, also a speculator in this market, because it is borrowing money now that it can repay in cheaper dollars in the future. The losers are those who are long the dollar, i.e the Chinese investors in US t-bonds. Anyways, to me, this illustrates some of the dangers of very low interest rates.

=========================
Another relative mini-topic has to do with the "false bull market". Instead of people buying Australian bonds, they might invest in the stock market. By borrowing money to do this they can short the dollar, so this is another example of the dollar carry trade. Keeping the rates artificially low benefits those who can borrow at low rates and do the dollar carry trade. It is form of fiscal stimulus, but only a few rich people benefit. They should call it a trickle-down stimulus.
======================

Another unrelated issue I have been thinking about has to do with Chimerica, which Niall Ferguson described. Chimerica is the dysfunctional marriage of Mr. China and Ms. America. America is a wild crazy unpredictable woman who likes to go shopping and max out her credit card. China is the boring hard-working man who is in love with America and keeps paying her bills in the hope that she will love him back. But she never will. And someday China is going to wake up and complain about being taken advantage of and will want a divorce. But not today. China is an enabler and encourages America in her self-destructive behavior.

=========================
Yet another topic I want to blog about but don't want to make a separate post has to do with de-zombification. A zombie bank is one that has a negative net worth but is still kept alive. Creditors of a zombie bank may value its debts at face value, whereas if the bank were to die, the debts would be worth much less. The suspension of mark-to-market allows banks to value assets at their 2006 peaks instead of current fair market value. This discourages them from trying to resell foreclosed houses because if they resell them they would have to recognize losses whereas if they keep them on the books they can pretend that they are worth much more. The banks are not crying over spilled milk because they are pretending that the milk never spilled. They are living in denial in a fantasy land.

Debtors can also be zombies if they pretend that they can someday pay their debts when it is clear that they can't. The reason for hanging on to toxic debts can be pride and refusal to face reality, but it doesn't do them or their creditors any good. Being a zombie prevents you from actually living and fulfilling your capacity. And it also stops those who are relying on your false promises from moving forward.

It is time for a break from the past, which is necessary to move forward to the future. It is time for de-zombification, for deleveraging, for debt destruction on a massive scale. Yes, this will cause many banks to fail, but that isn't such a bad thing. We can live without credit or debt and this would be very empowering. Yes this will cause deflation but that is a good thing because it will make the dollar stronger and encourage savings. Those who are against this are those who are benefiting from the destruction of the dollar, like the dollar trade speculators.

Chimerica

Empty Store Shelves Coming to America

Classic Niall Ferguson

Niall Ferguson talks so much that Glenn Beck can't get a word in edgewise.

Quotes: "If you look at the Congressional Budget Office data, the United States is never again going to run a balanced budget. Never. I mean, beyond our lifetimes, every year there's going to be a trillion dollars of new debt. Now that game can come to an end very quickly indeed when investors look at the math and they say, wait a second, a debt to GDP ratio of 100% in 2012? That can't be right. And we get the same treatment the PIIGS are getting now. So my message is: PIIGS R US. We're not that much better off than Portugal, Greece, Spain and Ireland.

Sure the Japanese got up to 200% before the markets took fright, but we're not going to get that far. I mean these numbers are in some ways rather arbitrary because what happens is all to do with the interest on your debt. If you are paying a 3.5% on the debt as the US is broadly speaking now, you can ratchet up quite a lot of debt. But if as happened to the Greeks, the markets say, now wait a minute, we would rather have 5.5 or 7.5% then very quickly your debt starts to kill you. And that's what I am most afraid of, Glenn. What worries me is that the cost of servicing this huge debt could suddenly spike upwards, and when that happens - it will! - it starts to consume a larger and larger share of the budget, it goes from maybe 9% of total revenue to 25%, and then you are in the kind of fiscal crisis that we are seeing in Europe right now. I think that could happen in the United States this year.

You either have to default on a large part of the debt or you have to inflate it away. There really aren't many other options open to a country that has debts this size. And neither of those processes is really much fun. So I don't think that we easily get to a, back to the ideal of a true free market republic.

I see a consensus in Congress between Republican tax cutters and Democratic spenders to run deficits for the rest of time. That is the political consensus that has emerged in Washington. And what is - it's doomed - completely lacking - it's doomed, right? - is a will to reform the US tax system, to cut income tax, to introduce some other tax on consumption that might actually help to balance the budget and simplify the whole system cause right now it is just a mass of poverty traps and distortions. And the other thing, the politicians just don't want to touch are the entitlements, which are bankrupting the country. Until those things are done, until there is a political leader that has the courage to spell out to Americans, "we need to do this, we need to reform our system root and branch", then I am afraid we are going to slide downhill in the direction not just of European economics, but of Latin American economics.

The lesson of the Russian experience I think is slightly different, Glenn. I think what it tells you is that a very well-intentioned leader who for some people appears to be the solution to the problems can completely wreck the system. Mikhail Gorbachev was the man who broke up the Soviet Union. And the collapse of the Soviet Union 20 years ago happened with incredible speed. Nobody was really expecting his reforms to completely destroy not only the Soviet empire in Eastern Europe but the Soviet Union itself. And I worry a little bit about our own situation today. I think we could collapse much more quickly than people assume. I hear debates all the time about the crisis of Social Security or the crisis of the national debt, but it all seems to play out decades away from now so we can kind of not worry about it now. But I think the lesson of what is going on in Europe today and what happened in Russia 20 years ago is that collapse can sneak up on you and strike very suddenly indeed, no matter how good your intentions are."

Fiscal cancer

The co-chairmen of President Obama's debt and deficit commission offered an ominous assessment of the nation's fiscal future here Sunday, calling current budgetary trends a cancer "that will destroy the country from within" unless checked by tough action in Washington.

[Erskine] Bowles said that unlike the current economic crisis, which was largely unforeseen before it hit in fall 2008, the coming fiscal calamity is staring the country in the face. "This one is as clear as a bell," he said. "This debt is like a cancer."

The commission leaders said that, at present, federal revenue is fully consumed by three programs: Social Security, Medicare and Medicaid. "The rest of the federal government, including fighting two wars, homeland security, education, art, culture, you name it, veterans -- the whole rest of the discretionary budget is being financed by China and other countries," Simpson said.

"We can't grow our way out of this," Bowles said. "We could have decades of double-digit growth and not grow our way out of this enormous debt problem. We can't tax our way out. . . . The reality is we've got to do exactly what you all do every day as governors. We've got to cut spending or increase revenues or do some combination of that."

--http://www.washingtonpost.com/wp-dyn/content/article/2010/07/11/AR2010071101956_pf.html

Comment: They can't cut spending or increase revenues or that will make our recession worse. There is no way out. We will have a depression AND end up gutting Social Security and Medicare AND probably end up facing a hyperinflationary collapse.

The Collapse Is Upon Us

The Second Great Depression has now begun

First, read this article as background.

if all sectors taken together aim to run a financial surplus, i.e. want to spend less than their expected income and use the difference to pay down debt - the economy will tend to operate below potential.

We can illustrate this point using some simple assumptions. First, we assume that the current account is fixed at a deficit of 3% of GDP. This is a big simplification, but it does capture the fact that at least some of the factors causing a retrenchment in the United States are also causing a retrenchment in other countries that experienced a credit bubble.

Second, we assume that the public is uncomfortable, or Congress believes that the public is uncomfortable, whenever the general government deficit is above 7% of GDP. While larger deficits are possible for short periods of time, Congress ultimately responds to them by cutting spending and/or raising taxes. The precise number is obviously arbitrary, but we do believe that there is a level of government deficits beyond which the political demands for retrenchment become difficult to resist.

These assumptions imply that the private sector cannot aim to run a financial surplus of more than 4% of GDP without sapping aggregate demand. This is a serious problem because our analysis a few weeks ago concluded that the private sector may target a financial surplus of significantly more than 4% of GDP for the next few years in order to reduce its debt burden at an acceptable pace.
--http://www.zerohedge.com/article/will-public-austerity-cause-private-sector-paralysis

What we have, ladies and gentlemen, is a Mexican standoff. There are three parties involved, and no one wants to back down. First, there is the private sector, which includes consumers and private companies, who for some reason insists on saving more than 4% of its income. (Saving in this context includes paying down or defaulting on debt). Second, there is China (and other foreign exporters to the US), who insists on exporting in excess of 3% of GDP in order to keep its own economy running. Third, there is the government, which refuses to run deficits in excess of 7% of GDP for any extended period of time.

We are going to remain in this paralyzed zombie-like state (which really is the essence of a Depression) indefinitely, until someone back down.

The solution here is Hayek. Cut taxes, or at least roll back the scheduled tax increase to give the consumer a break. Yes, this will increase the deficit, but it will break the standoff. Yes, it will increase the chance of a sovereign default, but that will hurt only the bankers, who need to take a haircut.

The blame, since we need to point figures at someone, fall squarely on Obama. If you are going to be a Keynes disciple, you have to follow him all the way through. You don't cut spending (e.g. massive cuts to Medicare) or raise taxes during the middle of a recession. A depression is guaranteed, and if it hasn't already begun, it will on January 1, 2011 when all the massive tax increases will kick in.

Eustace Mullins and Ezra Pound

I just ran across something interesting and want to very briefly note it for future reference. First, read "An Afternoon With Eustace Mullins". Eustace Mullins wrote "Secrets of the Federal Reserve" with help from Ezra Pound. Eustace claimed that the John Birch Society was controlled by Nelson Rockefeller. Ezra Pound was a political prisoner in the US from 1946 to 1958 because of his support for Mussolini.
The book "Secrets of the Federal Reserve" was supposedly banned in Germany and was reprinted in the US in 1983. It is available online and should be an interesting read.

Pete Stark: debt = wealth

How I learned to stop worrying and love the national debt

I don't see how debt can continue to skyrocket. But, to be fair, there are other opinions, for one Roger Mitchell. Check out his website at http://rodgermitchell.com/ and his blog at http://rodgermmitchell.wordpress.com/ .

I don't quite understand his ideas, but he seems to think that the deficit is not a problem at all, and that the solution to our current financial crisis is more spending. And by the way, this will not cause hyperinflation.

There is some twisted logic to his reasoning, so I will pursue this a little further. He likes high interest rates, because they pump more money into the economy. I agree that higher interest rates are a good thing because they encourage more saving and on a micro level they discourage taking on more personal debt. Also, high interest rates will maintain the strength of the dollar and ward off hyperinflation.

He dislikes taxes because they take money out of the economy. I agree with this. At some point, and I think it is fairly low rate, maybe 25%, taxes become a disincentive to work harder. Why not abolish federal income taxes altogether?

Anyways to quote his conclusion:

1. The Federal government never can go bankrupt, because it always can create money (Federal debt) to pay all its bills, no matter how large.
2. Medicare and Social Security, being Federal agencies and part of the federal government, never can go bankrupt. If the overall organization (Federal government) is immune from bankruptcy, its integral parts (government agencies) also are immune.
3. Federal taxes are unnecessary, not only unnecessary, but economically harmful, because they use resources that could be applied more productively.
--http://www.rodgermitchell.com/SolutiontoMedicare.html

But what about hyperinflation? Not a problem, just raise interest rates:

Prewar Germany, Brazil, et al, generated too little demand for their money. Had these countries acted quickly to raise interest rates, they would have avoided hyperinflation.
For every level of risk, there is some level of reward that makes the risk worthwhile. Those who did not buy Brazilian money when the Brazilian government was paying 15%, would have bought it at a return of 50%. Or 150%. Or 5,000%. At some level, demand for Brazilian money would have been stimulated, and the hyperinflation would have ended.
Where would Brazil have found the money to pay those interest rates? By selling bonds, notes and bills, which would have been made possible by the high rates.

So stop worrying! We need more government spending, more more more! The government is the source of all wealth, and we need more wealth so we need to spend more.

Rebuttal of the Uber-Keynesians

I haven't thought this through too much so this is just a first pass.

Uber-Keynesian is a term I invented to refer to those who believe that the government can freely spend and create money without any negative consequences. I doubt that Keynes would agree with their position.

1. Ok I agree that under our current system money equals debt. It still doesn't mean that debt is a good thing. If there were less debt in the system then this would make money more valuable, which would make prices on goods drop leading to deflation. For some reason, economists are scared to death of deflation, but that is another article. I don't understand why deflation equals a recession.

1a. Since money equals debt, it is impossible for all the debt to be repaid with interest. Therefore a certain number of defaults and foreclosures are built-in to the system and are inevitable.

2. Don't confuse money with wealth. Money is only a medium of exchange. With deflation, money becomes more valuable, with inflation, money is less valuable. What is important is what money can buy, not money itself. The economy will adjust to either an increase or a decrease of the aggregate money supply. Printing more paper doesn't create more wealth.

3. I agree that under our current system, a certain level of debt is needed for there to be money. However, that amount is relatively small. There is about $1 trillion of Federal Reserve Notes outstanding. (Notice that these are debt instruments that pay no interest - nice if you can do it). These need to be backed with collateral; however, the collateral doesn't have to be debt by the US government, as it could be municipal bonds, corporate bonds, or foreign government debt. Even assuming that it must be backed with US government debt, there is no need for this to be more than $1 trillion.

4. The belief that deficits don't matter ignores interest rates. Even at very low rates of interest, with a high enough debt, the interest amount becomes substantial. And investors want at least the interest to be paid. That is why the ratio of debt to GDP is important. Even assuming that the debt will never be repaid, investors want to know how much GDP can be potentially taxed to pay the interest.

5. The uber-Keynesians assume that the debt will never have to be repaid and that it will constantly expand. The first assumption is obviously absurd, since at some point all debt must either be repaid or defaulted on. The second assumption leads to unstability, since nothing can expand forever without constraint. The uber-Keynesians have made the US government debt their god - it is the source of all wealth, it lasts forever, and it fills all things.

6. At some point the limit of expansion will be reached, and at that point the system will collapse, since in order to exist it must continue to expand. It is not clear where the limit is. We obviously haven't reached it yet. I've speculated that it could be at 300% of GDP, but it really depends on the interest rates. But we shouldn't test the boundaries.

7. What I think is happening is that private debt is contracting, leading to a decrease in the money supply (the horrors!). So the federal deficit is expanding to try to compensate. At some point, the private debt will reach maximum contraction and will start expanding again. The deficit should then start contracting, but it is way more difficult to shrink the US government than it is to expand it. This will be the danger point, when inflation will start to kick in and interest rates will jump to try to fight it. Now the interest paid on the huge national debt will become a problem, causing the deficit to increase, and the debt to increase exponentially until it gets out of control.

8. Conclusion: Don't fear the recession. This is a natural part of economic life and is a necessary counterpart to the boom times. Instead, fear the next recovery. This is when the problems really will begin.

To be revised ...

Are we falling off a cliff?

It is now looking more likely that we will fall of a cliff starting July 1st. Extended benefits will be ending. Most states start a new fiscal year and they are all dead dead dead on revenue. Any benefit we got from the census will be in reverse gear. By August 1st approximately 1mm temporary workers will again be out of a job. Housing is falling off a cliff.
--http://brucekrasting.blogspot.com/2010/06/whats-ben-gonna-do.html

In this blog I have focused on the threat of hyperinflation destroying the value of the dollar. But it appears that the opposite is occurring. A depression may have started on July 1, where there is a vicious cycle for businesses of declining sales, so they lay off workers. These laid off workers reduce spending, to state the obvious, so demand disappears, and those who have jobs also increase saving and reduce spending because of the possibility that they will be laid off. Declining tax revenues causes local governments to cut budgets and lay off workers contributing to the misery. And the Fed is oblivious to it all because they and their buddies have already been bailed out and don't feel any pain.

There are two basic roads out of this. First, the Keynesian solution. Take Paul Krugman's advice and spend, spend, spend. Bailout out everything in sight starting with local governments. Give tax refunds to everyone making under $50,000/year in an amount equal to the SS taxes they paid last year. Basically flood the system with cash so we can go back to worrying about hyperinflation. How about this - buy up and pay off half of every residential mortgage in the country. This would stop foreclosures and stabilize the housing market and also help the banks. The problem of course is that Keynesian economics is insane, and it turns all normal virtues upside down - spending is good, savings is bad, debt is good, stealing (in the form of devaluation of currency) is good. In the long run, the Keynesian solution will destroy the country.

Then there is the honest road out of this. Let's declare a national or world jubilee and cancel all debts, and abolish all central banks, and get rid of the income taxes and the IRS. Of course the crooks in charge would never agree to this, so this has to be done on a personal basis. Get rid of all debts either through paying them off, bankruptcy or repudiation. Stop using dollars and banks except as absolutely necessary. Buy a safe and create an alternate economy based on barter or gold and silver or perhaps the Swiss franc. Stop speculating on the stock market and go back to farming or manufacturing. Buy food and goods such as clothing at local farmers markets and flea markets. Build your own house.

I say bring it on. The depression we will be facing causes pain like going on a diet is painful but it will be good for us in the long-run.

IMF lectures US on debt

The IMF praised US efforts to cut the long-term deficit through health system reform, but said more needed to be done now.

"The authorities' commitment to halve the budget deficit by 2013, and intention to stabilize public debt at just over 70 percent of GDP by 2015 are welcome, although much remains to be done to achieve these aims."

At a recent summit of the Group of 20 leading economies in Toronto, Obama vowed to halve the deficit within three years.

But the IMF projected that the deficit will stand at 64 percent of gross domestic product this year, rising to just over 96 percent by 2020.
--http://news.yahoo.com/s/afp/20100708/pl_afp/useconomyimf

If even the IMF thinks there is a problem, maybe someone will wake up. And they don't believe Obama when he claims to halve the deficit within three years.

Why a bank loves a foreclosure not a loan modification

Niall Ferguson says we have 6 years left

American politicians don't have a sense of urgency, Ferguson contended. They feel the country can limp along for another 20 years or so in its current financial health without making tough decisions about fiscal policy. He believes they are wrong. The federal government's debt has grown so large in the past decade that the United States will inevitably devote an increasing amount of taxes to it. Meanwhile it's facing a greater burden through the Medicare and Social Security programs as Baby Boomers age. It's also currently fighting two wars. All that while revenues have plummeted in the recession.

“If you really want to see when an empire is getting vulnerable, the big giveaway is when the costs of serving the debt exceed the cost of the defense budget,” Ferguson said. That will happen in the United States within the next six years, he predicted.

To add to the doom and gloom, Ferguson said the collapse could come much quicker than people realize.

“Most empires collapse fast,” Ferguson said. “They're complex systems. They exist on the edge of chaos. It doesn't take much to tip them over, and when they tip over, they fall apart really quickly.”
--http://www.aspentimes.com/article/20100706/NEWS/100709901/1077

The Crisis of Capitalism - awesome animation

St. Augustine's arithmetic

Give you a number ... suppose we talk about a trillion dollars more or less in spending in the next year or two. Um, a trillion dollars, the US government can currently borrow if it issues inflation indexed-bonds it can currently borrow at an interest rate of about 1.7%. So 1 trillion dollars of spending is going to add to future interest costs only 17 billion dollars a year. With a 2.5 trillion dollar federal revenue base it's not going to make a significant difference but it could make all the difference in the world to the state of the economy in the near term. So the arithmetic says that yes - well the arithmetic is basically St. Augustine's arithmetic that says - oh Lord make me chaste and continent but not yet - yes, let's have serious fiscal adjustment but not until the economy has recovered.
--Paul Krugman from http://www.youtube.com/watch?v=7-pndXGafUg

Keynesian v. Hayek rap

Napoleon Hill on How FDR broke the back of the Great Depression

Quote of the Day

What the Greeks discovered you are fine until you are not fine with the bond market and if you have a non-credible fiscal strategy of borrowing a $1 trillion a year for the rest of time, never ever again running a balanced budget, at some point the markets are going to get spooked, and I think that point is nearer than Paul Krugman believes.
--Niall Ferguson at http://www.zerohedge.com/article/niall-ferguson-if-obama-administration-listens-paul-krugman-it-would-lead-imminent-debt-cris

Inflation is Salvation!

Counterpoint

I should mention that there is an alternative point of view and in this alternative universe, the national debt is not a problem at all. I'm not going to fully explain it here, since there is a website dedicated to it, but I will express some concerns and thoughts here:

1. How can the Treasury Dept. issue dollars without the Federal Reserve involvement? I think that there would be practical and legal problems on doing this as the Federal Reserve seems to have a monopoly on issuing dollars. But the Fed pays some sort of tax to the Treasury to account for the seignorage, so doesn't this about have the same effect?

2. The claim can be made that printing an unlimited amount of dollars (or by doing the electronic equivalent) is not a problem at all as long as the country is in a recession. I think I could almost agree with this claim. But this raises a question: How are these newly-created dollars to be distributed? Are they to be lent to bankers at zero percent interest for them to lend out? Spent on pork barrel projects to benefit those who are politically connected?

3. The claim can further be made that if inflation ever does start to become a problem, it can be brought under control by issuing bonds at high rates of interest that will suck the excess money out of circulation. My objection is that the interest paid will at some point become a huge part of the national budget and will increase the national debt even more and will at some point become ridiculous (e.g. quadrillions).

What do you think, should we try it? The analogy I am thinking of is that we are on a train that is out-of-control, heading toward a bridge that is washed out ahead. Might it be possible to fire up the engines and pick up speed so fast that we can jump over the washed out bridge?

Projected budget details

Here are more details from my last projection, with some changes. I actually have them all the way through 2031 but I want to focus just on the next few years. (Sorry about the screwed up numbers, there is no good way to present them in HTML, since tables require a huge amount of work and don't show up properly either.)

Category 2009 2010 2011 2012
====== ==== ==== === ====
Revenue 2105 2118 2460 2728

Mandat 2094 2034 2156 2091
Discreti 1237 1375 1401 1443
Interest 187. 209. 244. 298.
-------- ----- ----- ----- -----
Spendng 3518 3618 3801 3832
Deficit -1413 -1500 -1341 -1104
PubDebt 7552 9052 10393 11497

Notes:
(1) The revenue of $2118B in 2010 comes from the CBO estimate of the President's budget.
(2) I get the total Public Debt at 9/30/10 by adding the previous years total and the current year deficit. The public debt does not necessarily equal these two due to gimmicks such as "off-budget" spending. The CBO projects 2 different numbers: 8797 and 9221 and my number of 9052 falls right in the middle. The actual total as of 7/1/10 is 8627, so we will learn shortly which number is closest.
(3) Again in 2011, for Public Debt I get 10393 by adding 9052 and 1341. The CBO gives 2 different estimates, 9785 and 10512 and my number is in the middle.
(4) For revenue in 2012, the CBO gives three different numbers: 2964 (in the baseline), 2808 (in the estimate of the president's budget) and 2728, which comes from the Alternative Fiscal Scenario revenue percent of 17.6% times the estimated GDP for 2012 of 15,500.
(5) For discretionary spending in 2012, the CBO gives 2 different numbers, 1344 and 1334. I seriously doubt that discretionary spending will go DOWN in 2012, so I will use my own number, which is the prior year + 3% to get 1443. (At least it looks similar to the other estimates with lots of 3's and 4's).
(6) For total public debt at the end of 2012, again I add 10393 + 1104 to get 11497. The CBO has number of 10479 and 11579, so this is in the middle although close to the higher number.

This is a good start on a budget projection.

Another projection

Here is another projection I ran, which shows 2031 as the end date. For this analysis, I am using Debt held by the public as the key number and assuming that 200% is the maximum it could reach. The maximum interest rate used is 3.77%. If interest ever exceeds this amount, then the debt would increase much quicker.

Year Debt % 0f GDP
=== ==== =====
2009 7811 55%
2010 8797 60%
2011 10144 68%
2012 11137 72%
2013 12038 74%
2014 12988 77%
2015 14113 81%
2016 15417 86%
2017 16784 92%
2018 18118 97%
2019 19493 102%
2020 20947 107%
2021 22515 113%
2022 24250 119%
2023 26204 127%
2024 28397 135%
2025 30778 144%
2026 33353 153%
2027 36149 163%
2028 39150 173%
2029 42362 184%
2030 45777 195%
2031 49403 206%

Update 6/19/2012:
I label this B-1.  The debt numbers are right on, maybe even a little low.  The GDP numbers are too low.