As we discussed here and here, at yesterday's Ira Sohn Conference, David Einhorn gave a speech entitled "Good News for the Grandchildren" about why sovereign debts, huge structural budget deficits, and debt monetization/QE/quantitative easing will matter for our generation and will have to be dealt with well before our grandkids' time.
It was an excellent speech. Below is the unabridged version. Enjoy. Think gold.
David Einhorn - Greenlight Capital - Ira Sohn Conference Speech 2010 - Good News For The Grandchildren
Showing posts with label Budget Deficit. Show all posts
Showing posts with label Budget Deficit. Show all posts
Thursday, May 27, 2010
Tuesday, May 11, 2010
Tuesday, March 02, 2010
Senator Jim Bunning Folds
Well, I guess he got what he wanted. He managed to get the Senate to sacrifice its "black liquor" subsidy to pay for the unemployment extension. At least he had principles, even if the fireworks didn't fully manifest. It feels somewhat anti-climactic (though perhaps not to holders of Boise warrants - you know who you are).
I'll always remember Bunning as "that guy that held up the Senate at gun point...and retired his seat creating an opportunity for Ron Paul's son Rand Paul to be elected to the U.S. Senate." Ah, you remember him, don't you? You know, That Guy? Oh, yeah, That Guy.
From this WSJ article:
I'll always remember Bunning as "that guy that held up the Senate at gun point...and retired his seat creating an opportunity for Ron Paul's son Rand Paul to be elected to the U.S. Senate." Ah, you remember him, don't you? You know, That Guy? Oh, yeah, That Guy.
From this WSJ article:
WASHINGTON—The Senate Tuesday reached a deal to lift Sen. Jim Bunning's blockade of a bill to extend unemployment benefits, following new moves by Mr. Bunning's fellow Republicans to distance themselves from his tactics.
The agreement allowed Mr. Bunning (R., Ky.), who had complained that the $10 billion bill was not paid for, to offer an amendment that would fund the legislation by rescinding a tax credit for a paper manufacturing byproduct.
His amendment was expected to fail later Tuesday night. After that vote, Mr. Bunning was set to lift his objection to the underlying bill, which was expected to pass.
Mr. Bunning argued that the unemployment bill violated congressional rules requiring new initiatives to be paid for. Democrats said the extension was emergency legislation, exempting it from those rules. The public relations battle appeared to be playing out in the Democrats' favor as more than 100,000 jobless workers saw their unemployment benefits dry up this week.
Democrats also agreed to allow Mr. Bunning to offer two amendments on Wednesday to a longer-term extension of unemployment benefits and other programs. Both amendments are expected to propose ways of paying for that larger measure.
After the deal was reached, Mr. Bunning reiterated his argument that federal spending was out of control.
"If we cannot pay for a bill that all 100 senators support, how can we tell the American people with a straight face that we will ever pay for anything?" he said. "That is what senators say they want, and that is what the American people want."
Democrats said Mr. Bunning had been offered the same deal last week but refused to take it. "The real question in this debate is who we are as a nation," said Sen. Richard Durbin (D., Ill.). "Do we care about these people, these breadwinners who are down on their luck?"
Mr. Durbin objected to Mr. Bunning's proposal to pay for the bill by rescinding a tax credit for "black liquor," a paper manufacturing byproduct, saying this revenue source was already set aside for another measure.
Mr. Bunning had held up the unemployment-benefits extension by objecting to Democrats' "unanimous consent" request to advance the legislation, a routine procedure that requires all senators to go along.
Monday, March 01, 2010
Jim Bunting Gives The Finger To...Well, To Everyone
...and we here at TILB fucking love it.
Before reading the below article, I didn't know jack about Jim Bunting save for one thing: he is retiring and his resignation has paved the way for the very real possibility that Ron Paul's son Rand Paul is elected to the U.S. Senate as Bunning's replacement.
That fact alone makes Bunning a hero in our eyes: even accidentally paving the way for potentially putting a Paul in the Senate is deserving of hero's praise.
But now we've learned one additional piecce of information about Senator Jim Bunning: he is single handedly holding up the extension (yet again!) of socialized unemployment and healthcare benefits. Workers already have had them extended from 26 weeks of state provided benefits to 26 weeks of state benefits plus 73 weeks from the Federal government! WTF!
Now without this extension, everyone is getting cut off once their current tier of benefits expires. While obviously it sucks tremendously for needy unemployed people, it is principled. All Bunting is saying is, (paraphrasing) "we need to cut an equal amount from somewhere else in the budget. I'm not going to be responsible for increasing the deficit any further given we already can't pay for what we have."
It's literally 99 to 1 in the Senate but it takes unanimity to extend an existing law without going through the traditional legislative process of actually passing a new law. As The Great Jim Bunning said on the Senate floor:
Oh, and because he's retiring and is basically untouchable as a result, he's literally flouting his opposition, including flicking off the media. Further, he actually told the Honorable Gentleman from Oregon, "Tough shit" when Senator Jeff Merkley criticized Bunning's stance.
I don't want to know anything else about the guy. Don't ruin this image of perfection.
I'm sure learning additional information would sully him in my eyes. But for now, he's perfect. On the one hand, he's going Mantan Moreland on them and putting his dick in the Senate's proverbial mashed potatoes while providing space for Rand Paul on the other.
Genius.
Stay strong, Jim. Stay strong.
Here's the Yahoo! article.
[HT: TD]
Before reading the below article, I didn't know jack about Jim Bunting save for one thing: he is retiring and his resignation has paved the way for the very real possibility that Ron Paul's son Rand Paul is elected to the U.S. Senate as Bunning's replacement.
That fact alone makes Bunning a hero in our eyes: even accidentally paving the way for potentially putting a Paul in the Senate is deserving of hero's praise.
But now we've learned one additional piecce of information about Senator Jim Bunning: he is single handedly holding up the extension (yet again!) of socialized unemployment and healthcare benefits. Workers already have had them extended from 26 weeks of state provided benefits to 26 weeks of state benefits plus 73 weeks from the Federal government! WTF!
Now without this extension, everyone is getting cut off once their current tier of benefits expires. While obviously it sucks tremendously for needy unemployed people, it is principled. All Bunting is saying is, (paraphrasing) "we need to cut an equal amount from somewhere else in the budget. I'm not going to be responsible for increasing the deficit any further given we already can't pay for what we have."
It's literally 99 to 1 in the Senate but it takes unanimity to extend an existing law without going through the traditional legislative process of actually passing a new law. As The Great Jim Bunning said on the Senate floor:
"If we can't find $10 billion to pay for something that we all support, we will never pay for anything on the floor of the U.S. Senate."Amen Saint Bunning. Amen.
Oh, and because he's retiring and is basically untouchable as a result, he's literally flouting his opposition, including flicking off the media. Further, he actually told the Honorable Gentleman from Oregon, "Tough shit" when Senator Jeff Merkley criticized Bunning's stance.
I don't want to know anything else about the guy. Don't ruin this image of perfection.
I'm sure learning additional information would sully him in my eyes. But for now, he's perfect. On the one hand, he's going Mantan Moreland on them and putting his dick in the Senate's proverbial mashed potatoes while providing space for Rand Paul on the other.
Genius.
Stay strong, Jim. Stay strong.
Here's the Yahoo! article.
[HT: TD]
Friday, January 29, 2010
The Final Countdown: Greek Sovereign Default
The aptly named band Europe brought us the epic music video and song "The Final Countdown" about 20 years too early (I mean, who cares about the countdown to the end of communism - let's talk about the PIIGS sovereign default).
As I read all these articles about Greece's impending doom, it's hard not to hear in the back of my head the implied complaint, "why won't they just lend us the money for free? This doesn't make any sense. Just lend us the money for free!"
[emphasis added and comments in brackets]
As we've been saying for a year, just wait until Japan blows. It's situation is nearly twice as bad as Greece's. Despite having 40% of the U.S.'s GDP, it has as much debt. If its blended cost of funding goes up from 1.5% to a bit over 3%, 100% of its tax revenue will be absorbed by interest expense. We're talking about the second largest economy in the world and it literally has no other options than massively debasing its currency or defualting on its debt (or, more likely, both). That's what they get for following Bernanke's wicked advice.
The sooner Japan blows, the better for the U.S. - I suspect our only hope of not suffering the same fate is to witness Japan's meltdown after having followed a similar prescription.
And as to Europe, just wait until Greece's implosion lights up Italy, which is a very large economy. That is the real worry the EU is facing: do we let Italy go?
Which brings us full circle, to The Final Countdown...
As I read all these articles about Greece's impending doom, it's hard not to hear in the back of my head the implied complaint, "why won't they just lend us the money for free? This doesn't make any sense. Just lend us the money for free!"
[emphasis added and comments in brackets]
Europe Weighs Possibility of Debt Default in GreecePeople think this is news?
New York Times
By STEPHEN CASTLE and MATTHEW SALTMARSH
European leaders are quietly considering whether to come to the aid of their troubled neighbor Greece amid fears that the nation might default on its debts and unleash another round of financial crisis.
Only a month after Dubai was rescued by its neighboring emirate Abu Dhabi, Germany, France and other European powers are discussing whether Greece might need a bailout too.
After a decade of debt-fueled profligacy, Greece is confronting what amounts to a run on the bank. And, despite repeated assurances from Athens, the nation’s strained finances have put already jittery financial markets on edge. On Thursday, the worries stretched all the way to Wall Street, where the stock market sank 1.1 percent.
Some economists worry that Greece’s troubles could have deep and lasting repercussions for Europe. The crisis poses complex challenges for the euro, which Greece adopted in 2001. The currency sank to a six-month low against the dollar and yen on Thursday.[ironically, TILB thinks letting Greece go could be an incredibly strong event for the euro]
“Greece failing is not an option, and lots of people think that we will have to intervene at some stage,” said one European finance official, who was not permitted to speak publicly on the matter. “It doesn’t have to happen, and we hope it won’t, but it would be better than seeing a default.”
...
But doubts have intensified over the credibility of the drastic austerity measures put forward to try to get Greece’s budget under control, in spite of concerted efforts by the Greek government to calm the markets.
Investors worry that the crisis in Greece could touch off a domino effect across Southern Europe. Many are fleeing bond markets in Portugal, Spain and Italy out of concern the troubles might spread. [TILB - Collectively known as the PIIGS when Ireland is included]
The market’s judgment has been swift and brutal. On Thursday, the difference between the interest rates on Greek and German bonds — a measure of the risk investors perceive in the Greek debt — rose to nearly four full percentage points, its highest level since the euro was adopted.
Officials in Athens, Frankfurt and Brussels remained adamant that Greece was not at risk of being forced to abandon the euro. [TILB - of course not. Could you imagine if they said, "hey, we're thinking of going back to the Drachma so that we can print our way out of this debacle?" That would be amazing.]
As a condition of any aid package, the Greek government led by Mr. Papandreou would be asked to provide a more detailed program to bring the country’s deficit — currently equal to 12.7 percent of gross domestic product — under control. European Union rules call for a maximum of 3 percent. Officials insist that any bailout must not put into doubt the credibility of the euro.
Another condition of any aid would be further guarantees over the reliability of Greece’s economic data. Last year the newly elected government in Athens announced a sharp upward revision of its deficit figures, which have since been exposed as seriously flawed.
Next week, the European Commission is expected to propose greater powers for the European statistical agency, Eurostat, to audit the accounts of national governments. [TILB - watch Czech president Vaclav Klaus give this interview where he presciently assesses the fact that the EU and the Euro are forfeitures of sovereignity and freedom, then watch the slow leech of powers from the states to the centralized United States of Europe]
The latest moves reflect a continuing skepticism among euro-zone members over the practicality of the plans put forward so far by the Greek government. Athens wants to reduce the deficit to 3 percent of G.D.P. by 2012, an objective described as unrealistic by one European diplomat, also speaking on condition of anonymity. These plans are also to be assessed by the commission next week.
Greece’s budget deficit is four times the E.U. limit, while the country’s debt amounts to 113 percent of G.D.P. But officials insist that, because Greece is not one of the euro zone’s larger economies, the problems created by its grim public finances can be absorbed. The Greek economy represents about 2.5 percent of the euro area’s G.D.P. [TILB - Japan is over 200% sovereign debt to GDP and the US is a bit over 80%. Carmen Reinhardt and Kenneth Rogoff show that 90% is the threshold past which few survive, as well as 60% externally financed debt to GDP - this latter point has been Japan's saving grace, though that is likely over]
...
For Greece’s neighbors, there is the possibility of a domino effect, with investors subsequently moving on to test the resilience of another heavily indebted member of the euro area — possibly Italy, whose debt is also 113 percent of its gross domestic product.
...
One option, deemed unlikely, would be issuing a sovereign bond for the entire 16-nation euro area. That would probably require complex legal changes among members. [TILB - see prior Vaclav Klaus reference]
...
On Monday, Greece paid a hefty 6.22 percent rate to borrow money in the bond market, underscoring investors’ concern. [TILB - and it's much more expensive for them already, just five days later. If memory serves us well, they have a number of huge maturities in April/May that will be challenging to finance affordably without German backstop...]
In an interview this week, the Greek finance minister, George Papaconstantinou, acknowledged that the high rates were punitive but asked that investors keep faith. Greece needs to raise at least 53 billion euros this year, much of it this spring.
As we've been saying for a year, just wait until Japan blows. It's situation is nearly twice as bad as Greece's. Despite having 40% of the U.S.'s GDP, it has as much debt. If its blended cost of funding goes up from 1.5% to a bit over 3%, 100% of its tax revenue will be absorbed by interest expense. We're talking about the second largest economy in the world and it literally has no other options than massively debasing its currency or defualting on its debt (or, more likely, both). That's what they get for following Bernanke's wicked advice.
The sooner Japan blows, the better for the U.S. - I suspect our only hope of not suffering the same fate is to witness Japan's meltdown after having followed a similar prescription.
And as to Europe, just wait until Greece's implosion lights up Italy, which is a very large economy. That is the real worry the EU is facing: do we let Italy go?
Which brings us full circle, to The Final Countdown...
Thursday, January 14, 2010
California Debt Is Downgraded: Schwarzies Prepare For A Comeback!
TILB is so incredibly thankful that - as we informed our readers over and over again last spring and summer (click here for all TILB posts referencing Schwarzies) - California has not at all fixed its budget woes. It has another $20 billion deficit expected in the coming 18 months.
It seems as if California lawmakers think this problem might solve itself. That somehow, they are going to miraculously bring in another $14 billion in tax "revenue" - annually mind you - over any reasonably near term period.
Spoiler Alert: Ain't gonna happen. In fact, the more you raise taxes when you are already a high tax regime like California, in the long run, the less tax "revenue" the state can expect to receive. It will actually worsen its problem by driving out marginal growth and productive investment.
The obvious solution is not to try to raise another $14 billion per year - it's to cut $14 billion more in spending per year. Free that capital up so that your citizenry can productively deploy it rather than having a bunch of proven morons in Sacramento deploy it destructively.
As we promised back in July 2009, TILB stands ready to laugh in California's face as their legislature acts like a political set of keystone cops.
Below and linked here is a Reuters article discussing the S&P downgrade [emphasis added and comments in brackets are TILB's].
It seems as if California lawmakers think this problem might solve itself. That somehow, they are going to miraculously bring in another $14 billion in tax "revenue" - annually mind you - over any reasonably near term period.
Spoiler Alert: Ain't gonna happen. In fact, the more you raise taxes when you are already a high tax regime like California, in the long run, the less tax "revenue" the state can expect to receive. It will actually worsen its problem by driving out marginal growth and productive investment.
The obvious solution is not to try to raise another $14 billion per year - it's to cut $14 billion more in spending per year. Free that capital up so that your citizenry can productively deploy it rather than having a bunch of proven morons in Sacramento deploy it destructively.
As we promised back in July 2009, TILB stands ready to laugh in California's face as their legislature acts like a political set of keystone cops.
Below and linked here is a Reuters article discussing the S&P downgrade [emphasis added and comments in brackets are TILB's].
UPDATE 4-California debt rating cut as cash crunch looms
8:03pm EST* S&P sees budget solution possibly crimping economy
* $19 bln shortfall tougher to close than last year's-S&P [no shit - you can't cut the fat you already cut, so it's all new fat here]
* Cash crunches seen in March, July, but RANs to be paid (Recasts, adds debt insurance costs and comparison)
By Jim Christie and Peter Henderson
SAN FRANCISCO, Jan 13 (Reuters) - California's main debt rating was cut on Wednesday by Standard & Poor's, which said the government of the most populous U.S. state could nearly run out of cash in March -- and another rating cut might follow.
The state government's budget gap of nearly $20 billion over the next year and a half leaves it in a precarious situation, requiring tax increases or spending cuts, either of which may slow economic recovery, the agency said in a statement.
"If economic or revenue trends substantially falter, we could lower the state rating during the next six to 12 months," S&P said after cutting the rating on $63.9 billion of California's general obligation debt one notch to A- from A.
The new level is four notches above "junk" status, a level at which many investors refuse to buy debt.
"The big question is, is there any fear they will get downgraded out of investment grade (so) you may have to sell ... that's where I think it would get interesting or hairy," said Eaton Vance portfolio manager Evan Rourke.
Bond prices did not move much, though, since many expected the downgrade, he said.
S&P's downgrade was overdue because the state's revenues have been so weak, said Dick Larkin, director of credit analysis at Herbert J. Sims Co Inc in Iselin, New Jersey. "Frankly I can't understood why it took S&P so long," he said. "They could have made that decision back in September." [September? Try March.]
$1 BILLION SHORT IN MARCH
California already had the lowest debt rating of any U.S. state before the downgrade, and 39 state governments are struggling with shortfalls this fiscal year, according to the nonpartisan Center on Budget and Policy Priorities.
Many are begging for more federal funds and caught between cutting social programs, raising taxes, or both.
The housing market implosion was felt especially strongly in California, a subprime mortgage lending center. Its double-digit unemployment rate, one of the highest in the United States, is expected to endure for a year or more.
California's government resorted to issuing IOUs last year for the second time since the Great Depression when it nearly ran out of cash. Officials are scrambling to raise $1 billion for March and the shortfall could be worse in July, S&P said. [sounds like Schwarzies are coming back; we're almost giddy with excitement!]
State Treasurer Bill Lockyer's spokesman Tom Dresslar said S&P's downgrade "highlights the critical need for the legislature and the governor to produce a swift budget resolution that is credible to the market."
"Standard & Poor's makes it clear the failure to act in a timely manner and with credibility threatens to further lower our GO rating," Dresslar said, adding that a further cut would hit taxpayers already paying higher interest rates than people in some emerging economies.
The cost to insure California's debt with credit default swaps is now higher than debt of developing countries, such as Kazakhstan, Lebanon and Uruguay. It costs $277,000 per year for five years to insure $10 million in California debt, compared with $172,000 for Kazakh debt. [phenomenal]
George Strickland, a municipal bond mutual fund manager at Thornburg Investment Management said S&P still has California GOs rated too high. Moody's Investors Service has a Baa1 rating on the debt and Fitch Ratings rates the bonds BBB.
"There's another notch to go before they hit bottom," Strickland said, adding that he expects another long and ugly battle to fill the state budget's shortfall.
Governor Arnold Schwarzenegger less than a week ago unveiled a plan to balance the state's books, largely with spending cuts that he described as draconian and which leaders of the Democrat-controlled legislature sharply criticized. [I can't wait to see the Donkey-proposed alternative - Lord willing it involves more unconstitutional minting of Schwarzies by Sacramento]
S&P said "timely progress" on a budget fix would be impeded by previous reliance on one-time measures, fewer choices for one-time cuts, extraordinary reliance on federal aid in Schwarzenegger's plan, and California's unusual requirement for a supermajority of lawmakers to pass a budget.
The Republican governor's budget plan also said that while the state government faces cash challenges in March, it will have sufficient cash to repay $8.8 billion in revenue anticipation debt in May and June as scheduled. [whether true or not, what else can they say? Any other statement would be a hand delivered invitation for the ratings agencies to slash the G.O. rating further]
State Finance Director Ana Matosantos along with Lockyer and State Controller John Chiang said on Monday they are working together so the state government honors its RAN debt.
Bond payments are by law a top state priority and state Finance Department spokesman H.D. Palmer said they will be honored: "Even though we've got to make some decisions in managing March we absolutely have ample cash on hand to make our RAN payments in May and June on time and in full."
Larkin said the three major rating agencies will hold off on more downgrades to California's credit rating to avoid roiling the municipal debt market, even in the event budget talks between Schwarzenegger and lawmakers drag on.
"They'll give the state an awful lot of rope," Larkin said. "For a state to go below investment grade would cast a pall on every state and local issuer out there." [at least market participants publicly acknowledge that the ratings agencies are pussies]
(Reporting by Jim Christie, Peter Henderson, Karen Brettell and Joan Gralla; Editing by Andrew Hay, Gary Hill)
Wednesday, December 09, 2009
The Singularity
We believe the world is walking a tight rope of low rates driven perceived safety. Reality is something uglier. Click here for our definitive take on The Singularity risk.
Saturday, December 05, 2009
Bread Is Money And Money Is Bread
"We have free markets."
This mantra is unquestioned around the world in the context of The United States of America. Nobody prevents you from buying the vast majority of products you desire and nobody prevents you from selling the vast majority of products. In broad terms, you can generally do what you wish with your money.
So, the mantra is true: we have free markets.
Or, perhaps before answering the question, we should allow our mind to churn a bit.
When asked by Congress and when giving speeches, Chairman Bernanke affirms his belief in the need for free markets. I am certain if you asked if he was in favor of price fixing, he would laugh at you and say, "of course not. The freer the better, (with certain 'protections')."
And yet, as chairman of the Federal Reserve, he is of course the world's largest price fixer. He controls the monopoly printing control of U.S. dollars and he controls the price and availability of these dollars. He controls who gets newly printed dollars and who does not. These dollars are backed only by the Full Faith and Credit of the United States, rather than by anything tangible. As such, these unbacked currencies are referred to as "fiat" money, as they are commanded into society be fiat, rather than choice.
Bernanke controls the price of dollars through Fed Funds rate implementations (and other similar tools) and he controls the availability in any number of manners, but suffice it to say a dollar's legal name is a Federal Reserve Note, so each dollar is theoretically a liability of the Fed and thus created always and everywhere by the Fed (banks sort of also create dollars through fractional reserve banking, but this is with the Fed's explicit blessing and under the Fed's control).
The price and supply of dollars is not set via market forces, it is set via the collective decision of a dozen or so bureaucrats sitting in the Washington, DC headquarters of the Federal Reserve.
In practice, the majority of those bureaucrats has never dissented from the opinion of the Fed Chairman, so Bernanke effectively dictates the price and supply of money with the advice of mandarins.
Luckily, money's not a very important instrument, so this seems like it shouldn't cause problems.
Everyone knows that is a ridiculous statement, but have you ever thought about what "money" is? I don't mean "dollars," I mean "money," in all its forms.
Money is simply a store of value, of man's productive output. When man innovates and produces above his cost of capital, money becomes more valuable because the same amount of money can now acquire more, different, and/or better things.
Money is exchangeable for goods and services and thus money represents some amount of claim on goods and services. As such, things like bread, milk and financial advice are all embodied in money. It is a fractional claim on everything.
Each transaction in life represents two sides of the same coin. While we generally think of a transaction as money buying bread, another way to think of it is of bread acquiring money. As such, bread is money and money is bread. They are claims on each other. In essence, every good and service is a claim on some amount of other goods and services and money is simply the trusted lubricant in the transaction.
This brings us back to Chairman Bernanke's seemingly benevolent dictatorship of the price and supply of money.
Because bread is money and money is bread, what is Bernanke actually controlling the price and supply of? Is he only price fixing dollars?
Obviously not. He is using an incredibly blunt (albeit convenient) mechanism - the dollar - to price fix everything in the economy.
If you've never thought of the nature of money before, this should scare the absolute shit out of you.
One guy is in charge of all of this?
Further, the Fed is a largely independent body of unelected officials with no meaningful transparency or accountability to We The People. We have handed the economic nuclear football to a bearded Princeton theoretician and told him it would be grand if he didn't use it, or at least use it responsibly.
This is truly insane.
It also means we live in anything but a free market. We live in a market that is manipulated at all times and in damnable ways. Not only are dollars not created and priced via natural supply/demand dynamics, they are a form of money that is manipulated and used to the benefit of certain special interests at the expense of everyone else in an opaque system.
Given this backdrop, in some sense it is almost amazing these United States have been as successful as they have.
I attribute the success we have had to a few things, not least of which is the reality that every country on Earth (that I am aware of) uses a similar or worse methodology for creating and pricing their imposed form of money, so the dollar has not served as a meaningful comparative disadvantage. In fact, its status as the global reserve currency - which is now waning - has been a substantial advantage as it imposed our price control structure onto many nations and global transactions and allowed us to export a good portion of our inflation.
We also have historically had greater freedom from governmental control in other aspects of life than most nations, giving us a further competitive advantage of more freedom, even if incomplete. That gap too is waning as certain other countries grow their freedom and we are actively and aggressively shrinking ours.
Importantly, we built our reputation as a nation of freedom during a time that predated the Federal Reserve and had a reasonably well enforced classical gold standard. We still lean on this reputation today.
The fact that other countries have been more evil than we have is not exactly the stand on which we should endeavor to hang our hat.
We should understand the long-term implications of what it means to live in a society that suffers from governmental imposed price fixing in every market. Some implications are as follows:
1) we suffer a drought relative to freedom that we should have;
2) we can know for a fact that our scarce resources are misallocated and scarce investment capital is maldirected as time and time again has shown the optimal system for directing resources and capital is a reliable price system;
3) the long-term governmental incentive to inflate the currency supply is overwhelming as this form of taxation is largely hidden from sight and fiat money allows it limitlessly. Monetary inflation thus leaves elected officials less accountable than if a more straightforward tax was required. This monetary system thus helps (in the short- to medium-term) the government finance things that are difficult to pay for with new taxes due to their unpopularity like war and freedom encroaching bureaucracy;
4) certain private industries and citizens benefit - these beneficiaries are in essence the early holders of newly printed dollars before they've cycled through the system and impacted prices (e.g., banks, bank borrowers, and wealthy investors) at the expense of holders that see the new money later in the process (e.g., fixed income retirees and middle class workers);
5) we risk our competitive advantage to countries that are willing to be more free than us. Increases in true freedom have everywhere and always improved the lot of the people (see modern day China, for example); and
6) someday we should expect that the build-up of problems caused by the system lead to the system's failure. What that entails is potentially awful. Historically massive wealth loss, poverty, political upheaval, class warfare and actual war are on the menu.
So, have we actually lived in a free market economy during the last few decades, waking every morning to an improving society?
No, we have not. The market will continue to fight against the current system until it breaks, as freedom once held cannot be suffocated, it can simply be constrained. Market freedom is a core freedom and it demands the right to carve its own path.
We now know that bread is money and money is bread - that money, is in fact a small part of everything that can be acquired. We know that as new money is brought into circulation, it dilutes the per unit (e.g., per dollar) claim we have on all goods and services. We know the perverse incentives of fiat money and the near certain direction that fiat money's supply will progress.
With those important pieces of information, you should perhaps ponder whether you prefer holding a money that is 38 years old (the fully unbacked dollar came into being in 1971, after the pseudo-gold backed dollar suffered its demise upon Nixon's command) or whether you prefer a form of money that has been freely selected by individuals in every geography on Earth in which it existed for the last 6,000 years.
Perhaps fiscal discipline will return and monetary discipline will follow. Perhaps government officials will choose to tax less and spend even less in the coming years, easing the pressure on the Fed to debase. Perhaps the Fed will see the folly of its ways and halt or reverse the printing press actions of the past year. Perhaps these things will all happen in the next two or three years before our debt gets past the point of no return.
Perhaps.
But I know my preference:
Gold.
[For more on the meaning of money, read Francisco D'Anconia's brilliant speech linked here]
This mantra is unquestioned around the world in the context of The United States of America. Nobody prevents you from buying the vast majority of products you desire and nobody prevents you from selling the vast majority of products. In broad terms, you can generally do what you wish with your money.
So, the mantra is true: we have free markets.
Or, perhaps before answering the question, we should allow our mind to churn a bit.
When asked by Congress and when giving speeches, Chairman Bernanke affirms his belief in the need for free markets. I am certain if you asked if he was in favor of price fixing, he would laugh at you and say, "of course not. The freer the better, (with certain 'protections')."
And yet, as chairman of the Federal Reserve, he is of course the world's largest price fixer. He controls the monopoly printing control of U.S. dollars and he controls the price and availability of these dollars. He controls who gets newly printed dollars and who does not. These dollars are backed only by the Full Faith and Credit of the United States, rather than by anything tangible. As such, these unbacked currencies are referred to as "fiat" money, as they are commanded into society be fiat, rather than choice.
Bernanke controls the price of dollars through Fed Funds rate implementations (and other similar tools) and he controls the availability in any number of manners, but suffice it to say a dollar's legal name is a Federal Reserve Note, so each dollar is theoretically a liability of the Fed and thus created always and everywhere by the Fed (banks sort of also create dollars through fractional reserve banking, but this is with the Fed's explicit blessing and under the Fed's control).
The price and supply of dollars is not set via market forces, it is set via the collective decision of a dozen or so bureaucrats sitting in the Washington, DC headquarters of the Federal Reserve.
In practice, the majority of those bureaucrats has never dissented from the opinion of the Fed Chairman, so Bernanke effectively dictates the price and supply of money with the advice of mandarins.
Luckily, money's not a very important instrument, so this seems like it shouldn't cause problems.
Everyone knows that is a ridiculous statement, but have you ever thought about what "money" is? I don't mean "dollars," I mean "money," in all its forms.
Money is simply a store of value, of man's productive output. When man innovates and produces above his cost of capital, money becomes more valuable because the same amount of money can now acquire more, different, and/or better things.
Money is exchangeable for goods and services and thus money represents some amount of claim on goods and services. As such, things like bread, milk and financial advice are all embodied in money. It is a fractional claim on everything.
Each transaction in life represents two sides of the same coin. While we generally think of a transaction as money buying bread, another way to think of it is of bread acquiring money. As such, bread is money and money is bread. They are claims on each other. In essence, every good and service is a claim on some amount of other goods and services and money is simply the trusted lubricant in the transaction.
This brings us back to Chairman Bernanke's seemingly benevolent dictatorship of the price and supply of money.
Because bread is money and money is bread, what is Bernanke actually controlling the price and supply of? Is he only price fixing dollars?
Obviously not. He is using an incredibly blunt (albeit convenient) mechanism - the dollar - to price fix everything in the economy.
If you've never thought of the nature of money before, this should scare the absolute shit out of you.
One guy is in charge of all of this?
Further, the Fed is a largely independent body of unelected officials with no meaningful transparency or accountability to We The People. We have handed the economic nuclear football to a bearded Princeton theoretician and told him it would be grand if he didn't use it, or at least use it responsibly.
This is truly insane.
It also means we live in anything but a free market. We live in a market that is manipulated at all times and in damnable ways. Not only are dollars not created and priced via natural supply/demand dynamics, they are a form of money that is manipulated and used to the benefit of certain special interests at the expense of everyone else in an opaque system.
Given this backdrop, in some sense it is almost amazing these United States have been as successful as they have.
I attribute the success we have had to a few things, not least of which is the reality that every country on Earth (that I am aware of) uses a similar or worse methodology for creating and pricing their imposed form of money, so the dollar has not served as a meaningful comparative disadvantage. In fact, its status as the global reserve currency - which is now waning - has been a substantial advantage as it imposed our price control structure onto many nations and global transactions and allowed us to export a good portion of our inflation.
We also have historically had greater freedom from governmental control in other aspects of life than most nations, giving us a further competitive advantage of more freedom, even if incomplete. That gap too is waning as certain other countries grow their freedom and we are actively and aggressively shrinking ours.
Importantly, we built our reputation as a nation of freedom during a time that predated the Federal Reserve and had a reasonably well enforced classical gold standard. We still lean on this reputation today.
The fact that other countries have been more evil than we have is not exactly the stand on which we should endeavor to hang our hat.
We should understand the long-term implications of what it means to live in a society that suffers from governmental imposed price fixing in every market. Some implications are as follows:
1) we suffer a drought relative to freedom that we should have;
2) we can know for a fact that our scarce resources are misallocated and scarce investment capital is maldirected as time and time again has shown the optimal system for directing resources and capital is a reliable price system;
3) the long-term governmental incentive to inflate the currency supply is overwhelming as this form of taxation is largely hidden from sight and fiat money allows it limitlessly. Monetary inflation thus leaves elected officials less accountable than if a more straightforward tax was required. This monetary system thus helps (in the short- to medium-term) the government finance things that are difficult to pay for with new taxes due to their unpopularity like war and freedom encroaching bureaucracy;
4) certain private industries and citizens benefit - these beneficiaries are in essence the early holders of newly printed dollars before they've cycled through the system and impacted prices (e.g., banks, bank borrowers, and wealthy investors) at the expense of holders that see the new money later in the process (e.g., fixed income retirees and middle class workers);
5) we risk our competitive advantage to countries that are willing to be more free than us. Increases in true freedom have everywhere and always improved the lot of the people (see modern day China, for example); and
6) someday we should expect that the build-up of problems caused by the system lead to the system's failure. What that entails is potentially awful. Historically massive wealth loss, poverty, political upheaval, class warfare and actual war are on the menu.
So, have we actually lived in a free market economy during the last few decades, waking every morning to an improving society?
No, we have not. The market will continue to fight against the current system until it breaks, as freedom once held cannot be suffocated, it can simply be constrained. Market freedom is a core freedom and it demands the right to carve its own path.
We now know that bread is money and money is bread - that money, is in fact a small part of everything that can be acquired. We know that as new money is brought into circulation, it dilutes the per unit (e.g., per dollar) claim we have on all goods and services. We know the perverse incentives of fiat money and the near certain direction that fiat money's supply will progress.
With those important pieces of information, you should perhaps ponder whether you prefer holding a money that is 38 years old (the fully unbacked dollar came into being in 1971, after the pseudo-gold backed dollar suffered its demise upon Nixon's command) or whether you prefer a form of money that has been freely selected by individuals in every geography on Earth in which it existed for the last 6,000 years.
Perhaps fiscal discipline will return and monetary discipline will follow. Perhaps government officials will choose to tax less and spend even less in the coming years, easing the pressure on the Fed to debase. Perhaps the Fed will see the folly of its ways and halt or reverse the printing press actions of the past year. Perhaps these things will all happen in the next two or three years before our debt gets past the point of no return.
Perhaps.
But I know my preference:
Gold.
[For more on the meaning of money, read Francisco D'Anconia's brilliant speech linked here]
Monday, July 20, 2009
Is The End Of California IOUs Nigh? Schwarzies, We Love You
The NY Times is reporting that California has reached a budget compromise, potentially imperilling new Schwarzie issuance. This is a sad day for America (not really) but an even sadder day for TILB (really).
Our friends at Directive 10-289 sent us this link which provides great detail on Schwarzie issuance, etc. We were going to cherish posting this graph:
But alas. The NY Times tells us that focus was all for not.
As an aside, all this budget does it get California to June 30th of next year...maybe their credit ratings and tax base will have stabilized by then allowing them to avoid further cuts (HAHAHAHAHA...not fucking likely). Further, it screws localities by forcing them to funnel money up to the mothership in Sacto, effectively passing the buck.
The NY Times reports the following (all emphasis added by TILB):
What is truly sad about all this is that California has actually taken a big step in the right direction, but it still is not a big enough step. In the end, legislators basically decided it was too much pain to take all at once.
We understand even if we disagree.
Cali's pain will continue until they finish out the process of establishing actual fiscal discipline. Our suspicion is they may not even be able to make it to the fiscal year end as tax "revenue" will come in well below forecast blowing an even bigger hole in the budget than forecast.
As a final aside, California had better pray to high heaven that its credit rating does not take that last downgrade to junk. That would set loose all hell.
Our friends at Directive 10-289 sent us this link which provides great detail on Schwarzie issuance, etc. We were going to cherish posting this graph:
But alas. The NY Times tells us that focus was all for not.
As an aside, all this budget does it get California to June 30th of next year...maybe their credit ratings and tax base will have stabilized by then allowing them to avoid further cuts (HAHAHAHAHA...not fucking likely). Further, it screws localities by forcing them to funnel money up to the mothership in Sacto, effectively passing the buck.
The NY Times reports the following (all emphasis added by TILB):
California lawmakers, their state broke and its credit rating shot, finally sealed the deal with the governor Monday night on a plan to close a $26 billion budget gap.We suspect this is not the last we will hear of California's budget woes. When California budget does finally break, you can be sure we'll be there, laughing in their face.
The plan, which is certain to be viewed with trepidation among legislatures across the country also facing huge budget gaps, distributes pain through nearly every aspect of government services. While the Legislature pushed back on Gov. Arnold Schwarzenegger’s proposal to eliminate health care programs for children and the state’s generous welfare program, both took large cuts. So did public education, universities and local governments.
All told, the deal contains $15.5 billion in cuts, about $2 billion in borrowing, $4 billion in new revenues and about $3 billion in accounting maneuvers like shifting a payday into the next fiscal year, which Mr. Schwarzenegger had claimed he would not brook.
Under the new budget, which runs through the 2010 fiscal year, localities will basically serve as unwilling lending agents to the state. It will raid their coffers and repay them over time as the state’s fiscal situation improves. [any day now!]
...
As a result, the state’s deficit continued to grow, and the controller has been forced to issue millions of dollars in i.o.u.’s [Schwarzies] to vendors and taxpayers in lieu of payment because the state is short on cash.
...
Local governments will lose millions of dollars that are used to build housing, among other purposes, and the state plans to borrow roughly $2 billion in property taxes from localities, which would have to be repaid within three years. Lawmakers believe that cities and counties could in turn borrow against that borrowing; localities bankrupt or nearly so would be exempt.
One of the biggest sticking points was over the $11 billion already cut from public schools. The budget deal calls for roughly $650 million more in cuts.
What is truly sad about all this is that California has actually taken a big step in the right direction, but it still is not a big enough step. In the end, legislators basically decided it was too much pain to take all at once.
We understand even if we disagree.
Cali's pain will continue until they finish out the process of establishing actual fiscal discipline. Our suspicion is they may not even be able to make it to the fiscal year end as tax "revenue" will come in well below forecast blowing an even bigger hole in the budget than forecast.
As a final aside, California had better pray to high heaven that its credit rating does not take that last downgrade to junk. That would set loose all hell.
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