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Posts Tagged ‘debt’

Diminishing returns

Posted by Richard on January 9, 2016

Charles Hugh Smith has an interesting post about how the world-wide orgy of “stimulus” spending, with money created by expanding debt, is working (emphases in original):

We can summarize the official “solution” to the Global Financial Meltdown of 2008 in one line: borrow and blow trillions–of yen, yuan, dollars, euros, reals, you name it.
The goal of borrowing and blowing trillions was to re-invigorate “growth”— any kind of “growth,” no matter how wasteful, unproductive or even counter-productive it might be: wars, nation-building, ghost cities, needless MRIs, useless college diplomas, bridge to nowhere–anything the borrowed money was squandered on counts as “growth” in the Keynesian status quo.
Unsurprisingly, this strategy yields diminishing returns as the negative returns on all this debt-fueled spending piles up. While the yield on the “investment” is either negative or only fleetingly positive, the interest due on the debt is forever. That’s the source of diminishing returns in a nutshell.

Here’s one of the graphs illustrating the point, but go read the whole thing.


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Eating our seed corn

Posted by Richard on March 31, 2012

The economic recovery isn’t going well in a number of respects, according to Reason’s Tim Cavanaugh. Americans are earning less (after taxes and inflation) and spending more. So borrowing has increased and saving has collapsed. The cheerleaders for the Obama administration and the Bernanke Fed at CNN think this is good news.

Of course it is. Any farmer will tell you that the way to ensure bigger harvests in the future is to eat some of your seed corn.

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Disturbing history of Fed

Posted by Richard on February 16, 2012

Gresham’s Law has a sobering graphical history of the Federal Reserve System’s assets from 1915 to 2012. Here’s Tom Gresham’s introduction:

Here we present a history of the Fed in charts. As you’ll surely glean from the below — the Fed has degenerated from a by and large passive institution (dealing only in high-quality self-liquidating commercial paper and gold) to an active pursuant of junk, an enabler of wars, a ‘benevolent’ combatant of the depressions of its own creation, a central planner of employment & prices and of course a forgiving friend to inconvenient market follies.

The first graph, showing the entire 97-year history, is a hockey stick if there ever was one. And unlike Mann’s bogus global warming hockey stick, it’s not based on jiggering the data.

There are only two possible endgames: default or devaluation of the currency. My money’s on the latter.

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Happy Dysfunctional New Year?

Posted by Richard on December 31, 2011

Mark Steyn doesn’t think much of how the U.S. spent 2011, and he’s less than optimistic about 2012:

… The year began with a tea-powered Republican caucus taking control of the House of Representatives and pledging to rein in spendaholic government. It ended with President Obama making a pro forma request for a mere $1.2 trillion increase in the debt ceiling. This will raise government debt to $16.4 trillion — a new world record! If only until he demands the next debt-ceiling increase in three months’ time.

At the end of 2011, America, like much of the rest of the western world, has dug deeper into a cocoon of denial. Tens of millions of Americans remain unaware that this nation is broke — broker than any nation has ever been.

Public debt has increased by 67% over the last three years, and too many Americans refuse even to see it as a problem. For most of us, “$16.4 trillion” has no real meaning, any more than “$17.9 trillion” or “$28.3 trillion” or “$147.8 bazillion.” It doesn’t even have much meaning for the guys spending the dough.

Look into the eyes of Barack Obama or Harry Reid or Barney Frank, and you realize that, even as they’re borrowing all this money, they have no serious intention of paying any of it back. That’s to say, there is no politically plausible scenario under which the $16.4 trillion is reduced to $13.7 trillion, and then $7.9 trillion, and eventually 173 dollars and 48 cents.

At the deepest levels within our governing structures, we are committed to living beyond our means on a scale no civilization has ever done. Our most enlightened citizens think it’s rather vulgar and boorish to obsess about debt. The urbane, educated, Western progressive would rather “save the planet,” a cause which offers the grandiose narcissism that, say, reforming Medicare lacks.

Read the whole thing.

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The Bernanke crash

Posted by Richard on September 22, 2011

Ronald Reagan famously said that the most frightening words in the English language are "I'm from the government and I'm here to help." Yesterday, Ben Bernanke declared "I'm from the Federal Reserve and I'm here to help." The S&P 500 has dropped over 6% since. I think we may have reached the point where investors react with panic whenever the government threatens yet again to "fix" things.

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“Not part of the deal”

Posted by Richard on August 9, 2011

Jimmy Kimmel, commenting on Monday's precipitous stock market plunge:

For years, we've been told that our kids and grandkids would have to pay for our out-of-control spending. Now we're being told that we have to pay for it?? That was not part of the deal!

There's a lot of painful truth in that joke. In response to concerns about the long-run consequences of his economic policy recommendations, Lord Keynes famously sneered, "In the long run, we are all dead." The long run has arrived. And we're not dead yet.

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The baseline budgeting scam

Posted by Richard on August 5, 2011

A new CNN/Gallup poll shows most Americans disapprove of the debt ceiling deal, and CNN claims it's because of the process. Nonsense. It's the substance. An earlier CNN poll found that 2/3 of Americans favored the much tougher Cut, Cap and Balance Act, including a majority of every single demographic surveyed, even liberals.

Most Americans recognize a failure to honestly address the spending and debt crisis when they see it. If they knew just how the baseline budgeting scam works, they'd be even more disgusted by this sham "debt control" deal, which will increase the federal debt by at least $7 trillion (that's $7,000 billion) in the next 10 years. And that's assuming some pretty rosy projections for economic growth. 

Baseline budgeting proponents began with a seemingly reasonable suggestion: "Instead of starting each budgeting process from scratch [zero-based budgeting], why don't we use the previous budget as our starting point and make adjustments from there?" Then they added, "Of course, we'll need to adjust the previous budget numbers to account for inflation, population growth, increased demand for services, and a big fat dollop of 'What the heck, we can get away with it!' to create the baseline for next year." And they've been getting away with it for years.

The result of this process is that the starting point for each new federal budget — the baseline, which by bipartisan ruling class consensus represents "no spending increase" — is about 7-8% higher than the previous year's spending. Fiscal year 2011 spending is going to be about $3,800 billion. So, under baseline budgeting, if FY 2012 spending increases only to $4,066 billion, that's no increase at all! "Look how fiscally responsible we are! We held spending to the current level!" 

Of course, a 7% annual increase means the budget will double in 10 years to about $7,600 billion. But the baseline budgeters call that a 10-year spending freeze!

So let's put this "historic" Congressional compromise into perspective. They've agreed to $900 billion in "cuts" over 10 years, and their bipartisan committee is supposed to come up with $1,500 billion more in "cuts" this fall. If they really do (and Obama, Reid, et al, are already clamoring for the $1,500 billion to be mostly "revenue enhancements," i.e., tax increases), then the 2022 budget will be "cut" from its $7,600 billion baseline to a mere $5,200 billion. 

That's a 37% increase over 2011. They call that a massive cut. The establishment, ruling class Republicans are congratulating themselves for this monumental achievement. They're telling the Tea Party that they've won, that they've "changed the terms of the debate" and "turned things around."

Um, no. They've slowed the rate at which we're approaching the apocalypse. They've bought themselves another year or two (and maybe helped Obama buy another term) before the US turns into Greece. They've once again kicked the can down the road. And a significant proportion of the American people — far more than ever before — recognize this deal as the irresponsible charade that it is.

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Bloodbath on Wall Street

Posted by Richard on August 5, 2011

A few minutes before market close, the Dow is down over 450 points (nearly 4%) and the S&P 500 is down 55 points (over 4.25%). 

With apologies to Instapundit: They told us Tea Party people that if we opposed raising the debt ceiling the stock market would plummet … and they were right!

UPDATE: The Dow closed down 512 points (-4.31%) and the S&P 500 was down 60 (-4.78%). The broader Russell 3000 lost over 5%. And this evening comes news that Asian markets are tumbling.

ABC Nightline's Bill Weir had the line of the day: "President Obama picked a hell of a day to turn 50."

"As ye sow, so shall ye reap." 

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Ever wonder what the US debt looks like stacked up in $100 bills?

Posted by Richard on July 30, 2011

Go here to find out. It's one of the most effective uses of informational graphics I've seen in a very long time. Very nicely presented. And quite sobering.

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It’s the spending, stupid!

Posted by Richard on July 11, 2011

So far, John Boehner is hanging tough on his "no new taxes" pledge. But can we count on him and the GOP establishment to continue to do so? I certainly hope so, but I think it depends on people like you and me keeping the pressure on.

The President is arguing that trillions of dollars in tax increases must be part of a "compromise" solution to the deficit problem, along with a significant bump in the debt ceiling. So he's basically arguing that the government must be allowed to borrow more, tax more, and spend more. That's irresponsible, immoral, and outrageous. 

The Fiscal Year 2007 budget (the last budget before the Democrats took over Congress, and subsequently stopped passing actual budgets at all) was about $2.7 trillion. FY 2011 spending will be about $3.8 trillion, with a deficit of about $1.6 trillion. So about $1.1 trillion of this year's deficit is due to the massive spending increase, and about $0.5 trillion is due to the drop in revenue. 

Or to put it another way, for more than 50 years, with rare exceptions and regardless of tax rates, federal revenue has remained around 17-19% of Gross Domestic Product, and spending has been about 18-20% of GDP (see here for historical data). But the Obama administration (with a kick-start from Bush, when his Treasury secretary, former Goldman Sachs CEO Hank Paulson, threw him into a panic in late 2008) has exploded federal spending to more than 25% of GDP. And he now wants to claim that that's the new normal, and raise revenues to match. 

It will never happen. The 17-19% of GDP revenue number has persisted regardless of whether the top marginal tax rate was 28%, 39%, 50%, or 70%. Contrary to the wishful thinking of the left, tax rates affect people's behavior, and if tax rates go up, they just adjust their affairs to reduce the bite.

Right now, due to the recession, the revenue rate is unusually low, at around 15%. Personally, as a libertarian, I think that's more than enough (the Christian God only asks for 10%). So I signed on to WorldNetDaily's No More Red Ink campaign, which opposes any increase in the debt limit. That wouldn't cause a default or world-wide crisis, as the MSM would have you believe. It would simply require the federal government to reduce expenditures to match its revenues. I think that's a good start. 🙂

But in the spirit of compromise, I'd settle (for now) for this: cut federal spending back to its historical average of 19% of GDP in return for increasing the debt limit by enough to accommodate the difference between that and expected revenue (at current tax rates) for the next two years. As long as it's coupled with a significant roll-back of all the new federal regulations, which (along with the burden of massive federal borrowing) are one of the reasons the economy is so sluggish (and thus revenue is so far below the historical norm). 

So here's what you do, Speaker Boehner: Pass a bill that (1) caps federal spending at 19% of GDP and raises the debt ceiling by however many hundreds of billions that amount is above the projected revenues for FY 2012-2013, and (2) rescinds significant portions of the economy-stifling regulations the Obama administration has enacted in the past 2.5 years. Then dare the Senate to reject it or the President to veto it. Make it clear to both that there is no Plan B — it's a take it or leave it proposition. 

My friends, we can't continue on our current path. And we can't allow federal spending of 25-26% of GDP to become the new "baseline." At a minimum, we have to go back to the historical norm of 18-19% of GDP.

Preferably, we should simply refuse to increase the debt ceiling and force the federal government to cut expenditures to match current revenues (as a first step to fiscal sanity). That's really all that not increasing the debt ceiling does: it imposes a "balanced budget amendment" (which lots of Republicans claim to favor) immediately. No need for a Senate super-majority or ratification by the states. All it takes is for the House of Representatives to not increase the debt ceiling.

I have little hope that the Republicans have enough stones to go that far. But maybe if we keep the pressure on, they'll at least pass a bill along the lines of my compromise proposal. 

Sign onto the No More Red Ink campaign. And go to AFP's to get your free "Cut Spending Now" bumpersticker. Membeship is free, but if you make a donation, you can choose to have the corresponding number of bumperstickers distributed on your behalf or sent to you to distribute. 

I know you've heard this before (and with far less justification), but it really is for the children. And the grandchildren.

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Four big lies about the debt ceiling

Posted by Richard on June 7, 2011

Tea Party Patriots, the wonderful umbrella organization of Tea Party groups across the country, is challenging head-on both Republicans and Democrats with regard to the so-called debt ceiling crisis:

At this very moment members of congress are trying to decide what pieces of America's future they will trade away as part of a deal to raise the debt ceiling. We've had the chance to talk with many of them. And even most of those who claim to be on the side of fiscal responsibility are giddy with excitement that they can trade their vote on this debt ceiling "crisis" in exchange for a handful of magic beans offered by the liberals.

Our answer is simple.

It is not acceptable to use the future of America as a bargaining chip.
Do not raise the debt ceiling.

They've identified four big lies that, in countless variations, we're going to be told over and over again in the coming weeks: 

Big Lie 1 "The current financial crisis was inherited."

Bush created all of these problems.  We are trying to solve them but it's much worse than we thought and it will take years for our solutions to have an impact."

Big Lie 2 "There's no way to cut enough spending. So we must raise the debt ceiling."

"There's no way to cut enough spending. So we must raise the debt ceiling. If we don't raise it America will not be able to pay back its creditors and the rest of the world will never trust us with money again. It will be a disaster!!!"

Big Lie 3 "We can haggle for some really great deals now that we have them over a barrel."

Members of the republican "leadership" will tell you this lie.

"Raising the debt ceiling is inevitable; and the democrats want it so badly they're willing to give us some really great deals in order to get it. We can take advantage of it and get some cool stuff in exchange for our votes. It'll be great!"

Big Lie 4 "You just don't understand all of the complicated details. Let us handle it. We're smart."

Their responses to the first three lies are excellent (I haven't see the fourth part yet). 

Check out Part 1 and Part 2 (I'll update with links to 3 and 4 when I have them, but I suspect they'll appear on the home page at some point). And please donate what you can to help them counter these lies. If you care about your future, your children's future, your grandchildren's future — this battle is very, very important.

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The wheels are coming off

Posted by Richard on April 19, 2011

Herb Stein famously said, "If something cannot go on forever, it will stop." Today, Standard & Poor's sent Washington the message that the borrowing has to stop soon:

The ratings agency Standard & Poor’s warned the United States on Monday that it could lose its coveted status as the world’s most secure economy if lawmakers don’t rein in the nation’s nearly $14.3 trillion debt. 

The finding, the first of its kind in the 60 years that S&P has been judging the country’s credit quality, sent a jolt through the markets and injected a new sense of urgency into the debate gripping Washington over whether to allow the Treasury to keep borrowing.

S&P changed its outlook on the United States from “stable” to “negative” and said the federal government could lose its AAA rating if officials fail to bring spending in line with revenue. 

The negative outlook means that the US might lose its AAA credit rating within the next year or two.

If you think the deficit problem can be solved by taxing the rich a little bit more, please see my previous post

If you think the Chinese, Arabs, and private investors won't let a downgrade dampen their demand for US debt, note that PIMCO, the world's largest bond manager, is now shorting Treasuries — that is, betting that they'll lose value. 

But not to worry! The Federal Reserve is already buying 70% of US Treasury notes with money it creates out of thin air. Geithner can just crank up the printing presses and buy even more. Look how well that worked for Zimbabwe!

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Tons of debt

Posted by Richard on April 16, 2011

The brilliant satirist Iowahawk has created a video that offers a unique perspective on the American government's debt and spending levels. It's at the same time entertaining and quite sobering. Please watch. And hit the Like button at the YouTube link. 

[Iowahawk link]
[YouTube link]

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America’s message to GOP: don’t cave!

Posted by Richard on April 7, 2011

The President’s meeting with John Boehner and Harry Reid ended a short time ago with no agreement, but all three claimed they were getting closer to averting a government shutdown. That concerns me, because if past history is any indication, getting closer to an agreement means the Republicans are giving ground.

Before they indulge in their natural inclination to cave and compromise, I hope Boehner and the GOP leadership take a deep breath and consider some recent poll results. For instance, this Rasmussen poll released Tuesday (emphasis added):

In the ongoing budget-cutting debate in Washington, some congressional Democrats have accused their Republican opponents of being held captive by the Tea Party movement, but voters like the Tea Party more than Congress.

The latest Rasmussen Reports national telephone survey finds that 48% of Likely U.S. Voters say when it comes to the major issues facing the country, their views are closer to the average Tea Party member as opposed to the average member of Congress.  Just 22% say their views are closest to those of the average congressman. Even more (30%) aren’t sure. (To see survey question wording, click here.)

This shows little change from a survey in late March of last year.

Forty-nine percent (49%) of voters think the Tea Party movement is good for the country, consistent with findings since May 2010. Twenty-six percent (26%) disagree and say the grassroots, small government movement is bad for America. Sixteen percent (16%) say neither.

Or this one from last Friday (emphasis added):

A majority of voters are fine with a partial shutdown of the federal government if that’s what it takes to get deeper cuts in federal government spending.

A new Rasmussen Reports national telephone survey finds that 57% of Likely U.S. Voters think making deeper spending cuts in the federal budget for 2011 is more important than avoiding a partial government shutdown. Thirty-one percent (31%) disagree and say avoiding a shutdown is more important. Twelve percent (12%) are not sure. (To see survey question wording, click here.)

Or this Fox News poll from today (emphasis added):

American voters would rather shut down the government than raise the debt limit, even though most believe a shutdown would have a dramatic effect on everyday Americans.

A Fox News poll released Wednesday asked voters to imagine being a lawmaker in Washington who had to decide whether to increase the debt ceiling. The poll found 62 percent would vote against raising it — even at the risk of shutting down the government.

About one-in-four voters (26 percent) would raise the limit to allow the government to spend more.

Or this Tarrance Group poll from a couple of days ago (underlines in original):

Voters have turned the corner and have made clear their support for deep cuts to the budget. Nearly three quarters of voters (73%) say it is very important that the budget include “significant” spending cuts.  When it comes to $100 billion in cuts, only 23% say this percentage is too high, while a majority (63%) says $100 billion is too low (34%) or about right (29%). This is virtually unchanged from February, when 21% said $60 billion was too high, and a majority (67%) said the figure was too low (36%) or about right (31%).
Supporting $100 billion in cuts would result in a net positive political impact for members of Congress.  A majority (55%) are more likely to support their member of Congress if he or she supports these cuts, while only 24% are less likely.  This is also similar to February, when 52% were more likely to re-elect their member if he or she supports $61 billion in cuts.…

When presented with three arguments about raising the debt ceiling, less than a quarter of voters most agree with the argument that the debt ceiling needs to be raised in order to avoid things like a shutdown and Social Security checks not being mailed.  In fact, a plurality chooses to NOT raise the debt ceiling at all:

30%:  Some people say that Congress should only raise the debt ceiling if it can also guarantee real, significant spending cuts starting this year.  We will never balance the budget until we drastically cut the amount of money we spend.

22%:  Other people say that Congress must act to raise the debt ceiling regardless of whether it includes spending cuts, or else the United States government will shut down and will default on its obligations, such as not being able to make Social Security checks and salaries for police and teachers.

 42%:  Still other people say that we should NOT raise the debt ceiling even if spending cuts are made because the nation must eliminate the trillion dollar debt we face instead of adding to it.

The message to the GOP leadership is clear. The American people (at least those most likely to vote) have recognized the utter seriousness of this nation’s fiscal crisis and want bold action, even if it involves temporary pain. The Democrats are in complete denial, whistling past the graveyard. If the GOP wants to be taken seriously as the party willing to address our fiscal problems seriously, they must resist the urge to compromise, wheel, and deal. Stand firm for once, you bastards!

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Purchasing power of dollar vs. gold

Posted by Richard on March 31, 2011

MineFund has a couple of graphs that every American needs to look at. The first shows the change in purchasing power for the US dollar from 1792 to today. The second shows the same for gold.

The relentless and near-precipitous decline in the value of the dollar after it was "unfettered" from gold is sobering. With the Federal Reserve creating new dollars ("monetizing the debt") hand over fist, what do you suppose that graph will look like a few years from now?

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