Mac Slavo: The agenda no longer needs to be hidden from public view. With President Obama winning another term and democrats taking control of the Senate, the move to fundamentally change America from within has begun – with a vengeance. Read more…

Moody’s Investors Service has turned up the heat on US politicians, threatening a US debt downgrade as soon as July unless the Congress shows some backbone in planning on how to curb deficits. The problem is, of course, the over $14 trillion debt ceiling… a levee now on the verge of bursting.

The Democrats are pushing hard for tax increases, which Republicans detest, while the Republican side of the impasse is focused on massive spending reductions, a no-no for Democrat dealmakers.

While certain preachers have revised and pushed out their end of world predictions to October 21st, it looks like the US’ “Financial Reckoning Day” may loom much nearer.

Moody’s Gazes Upon US Debt Debacle While Congress Turns a Blind Eye originally appeared in the Daily Reckoning. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas.

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Moody’s Gazes Upon US Debt Debacle While Congress Turns a Blind Eye

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Global investors rediscovered Greece yesterday, which means that they might soon rediscover gold and silver as well.

The state of Utah is ready!

Headlines about the Greek government’s desperate financial condition buffeted financial markets around the globe yesterday, as investors seemed to acknowledge, en masse, “Yes, this situation in Greece is grim.” The Parthenon may be in ruins, but it is a pristine high-rise compared to the Greek government’s balance sheet.

Your editors here at The Daily Reckoning have been mentioning from time to time that the Greeks were sliding toward an inevitable default…or something that closely resembles a default. As early as 15 months ago and as recently as last Friday, we warned that the Greeks would fail to pay their bills, despite receiving a €110 billion bailout from the European Union and the IMF.

But global investors did not seem too troubled by this grim prospect…until yesterday. Greek stocks slumped to another new 14-year low, while Greek bond yields jumped to another new all-time high. The Greek government’s 10-year bond yields a hefty 17%…in theory.

A little to the north of these modern-day Greek ruins, all the major European markets posted losses. Asian markets also fell, while the Dow Jones Industrial Average dropped 131 points to its lowest level in a month.

But the Greeks don’t deserve all the blame for yesterday’s carnage…

According to the newswires, the Romans were responsible for yesterday’s selloff, not the Greeks. Standard & Poor’s downgraded Italy’s finances from “stable” to “negative.”

“Italy’s current growth prospects are weak,” S&P declared, “and the political commitment for productivity-enhancing reforms appears to be faltering. Potential political gridlock could contribute to fiscal slippage. As a result, we believe Italy’s prospects for reducing its general government debt have diminished.”

The mini-panic that ensued knocked the Italian stock market down about 3%, while shaving about 1% off the value of the euro. Meanwhile, gold and silver regained investor interest, as both metals inched higher.

The precious metals probably deserved a bigger rally yesterday, given the gravity of the unfolding sovereign debt problem/crisis. On the other hand, the recent volatility in the silver market may have undermined its “safe haven” allure for the moment.

But if, as we suspect, the fiscal distress in Greece triggers some sort of crisis in Europe and beyond, the precious metals will regain their luster…and then some.

The state of Utah is ready. While the “Beehive State” may not be famous as a trendsetter, it has made a big splash from time to time. Utah’s Mormon settlers, for example, practiced polygamy for decades. But this “plural wives” craze never really caught on nationally.

Now comes Utah with another counter-cultural idea: “plural currencies.” The Utah state legislature is the first in the country to legalize gold and silver coins as currency. (Let’s call it, “ploygmoney.”) The law also will exempt the sale of the coins from state capital gains taxes.

“Earlier this month,” the Associated Press reports, “Minnesota took a step closer to joining Utah in making gold and silver legal tender… North Carolina, Idaho and at least nine other states also have similar bills drafted.

“Making gold and silver coins legal tender sends a strong signal to Congress and the Federal Reserve that their monetary policy is failing,” said Ralph Danker, project director for economics at the Washington, DC-based American Principles in Action, which helped shape Utah’s law. “The dollar should be backed by gold and silver, so we have hard money.”

Ah, yes, but “should be” is not the same thing as “is.” What’s that expression: “If wishes were fishes, the sea would be full”?

We wish the dollar were backed by gold or silver. It isn’t.

Eric Fry
for The Daily Reckoning

From Greek Debt to Gold Money: Wishful Thinking in the World Economy originally appeared in the Daily Reckoning. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas.

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From Greek Debt to Gold Money: Wishful Thinking in the World Economy

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

You can chart the course of human progress in terms of how clean our clothing is. In early times people used animal skins, had no change of clothing, and had no soap. By Adam Smith’s day, soap had improved in quality, was produced industrially, and was becoming available to the common man.

In fact, the Industrial Revolution, which is usually discussed in terms of iron, steam, and factories, was actually all about bringing products like soap and underwear – previously only available to the rich – to the common peasants.

Only after WWII did electric automatic clothes washers displace hand-cranked machines. Then detergent replaced soap in the washing process, and competition resulted in much more effective products.

In 1956 the product Wisk was launched as the first liquid laundry detergent. And in 1968 its famous “Ring around the Collar” ads came along.

Other companies followed with products that were even better. Between the 1920s and the 1970s, washing clothes went from a grueling full-time job to a weekly activity that could be accomplished by young children.

Demographic researcher Hans Rosling has called the washing machine the greatest invention in the history of the Industrial Revolution. It liberated homemakers from boiling water and washing clothes. For women around the world, it makes the difference between poverty and prosperity.

Only two generations ago, nearly every mother in the world slaved at washing clothes. Today, no one in the developed world does this. Instead, they can read, do professional work, teach children, hold parties, and generally apply their time to building civilization. As Rosling says, “even the hard core of the green movement use the washing machine.”

But government is working on systematically reversing these advances – attacking the washing machine’s workings at the most fundamental level.

In 1996, Consumer Reports tested 18 models of washing machines. It rated 13 models as excellent and 5 models as very good. They found that with enough hot water and any decent laundry detergent, any machine would get your clothes clean.

In 2007, Consumer Reports tested 21 models and rated none of them as excellent and 7 models as poor; the rest of the models were rated mediocre. The old top-loading machines were mediocre or worse.

Consumer Reports found that in most cases your clothes were nearly as dirty as they were before washing. The newer front-loading machines worked better, but they were much more expensive and had mold problems, and you cannot add a dropped sock once the machine is started. None of the top-loading machines performed as well as a mediocre top-loading machine from 1996.

The government’s meddlesome hand is at fault. Between 1996 and 2007 the government’s energy-efficiency standards were dramatically increased. In order to meet those standards, manufacturers had to switch to the inferior front-loading washers, which are more “energy efficient,” and to design models that used less water. Less water in the machine means the machine uses less energy to rotate the clothes with the water and detergent. It also means less rinsing, which is a vital component to getting clothes clean.

The result is that clothes come out of the washer still dirty. The easy stuff like sweat is mostly removed, but all the tough stuff, like grease and body oils, largely remains. Most people are unaware of this problem, either because they have an older model, they don’t do their own laundry, or they are just oblivious to this type of thing.

Among those who face this problem, the answers are few. Some do multiple smaller loads with larger water levels, but of course this results in higher – not lower – energy and water usage. Others have tried to solve the problem by using more detergent, but this usually does not help – it can make the situation worse – and it reduces the durability of the machine – yet another inefficiency.

So there you have it. Politicians, environmentalists, and meddlesome bureaucrats have teamed up to dream up another attempt to serve the public interest. Left to its own, the invisible hand of entrepreneurial competition would have naturally made doing laundry easier, better, cheaper, and more efficient. Instead we have more expensive, more inefficient, and truly ineffective clothes-washing machines.

Then there have been changes to laundry detergent, which have in combination with the “energy efficient machines” led to a return of “Ring around the Collar.”

The invisible hand of the marketplace is the foundation of a free society and the source of prosperity. The invisible fist of government is the foundation of plunder and the source of social problems.

If we chart social progress by clean clothing, it is clear that we are headed backward in time. But the trend is easily reversed with a small change toward laissez-faire.

Regards,

Mark Thornton
for The Daily Reckoning

The Attack on the Washing Machine originally appeared in the Daily Reckoning. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas.

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The Attack on the Washing Machine

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Earlier this week, the “Gang of Six” hit a big road bump as Senator Tom Coburn (R-OK), “began pressing for sharper cuts to Social Security than had been previously agreed to” and “demanded deep and immediate cuts to Medicare that went beyond anything previously proposed.” Clear “cut” signs he was being uncooperative and had to go.

More recently, he announced that he’s cooking up “his own plan to reduce the deficit by $9 trillion over ten years.” Best of luck to him, though, as it looks unlikely that the US Congress has “teeth” do any real cutting. Much like the chainsaw below, the Congressional tools the nation has on hand don’t appear up to the job it’s been designed to perform.

See the cartoon below, which came to our attention via a Chicago Tribune opinion cartoon on the US’ budget chainsaw.

Leadership Gone off the Chain originally appeared in the Daily Reckoning. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas.

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Leadership Gone off the Chain

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

In a recent episode of The Daily Show, Jon Stewart skewered Fox News’ presentation of the first Republican presidential nominee debates. Widely panned as a “debacle” and “disastrous clash,” especially given its timing in relation to the death of Osama bin Laden, the debate provided plenty of fodder for The Daily Show’s special blend of humor.

Among other golden nuggets, Stewart highlights:

• That the Fox News debate starts off with an opening sequence that could easily serve as a horror movie trailer. As Stewart describes it, it sounds like a debate introducing “the candidates for the post-Apocalyptic hellscape we once knew as America [...] to forestall the day when our desperate citizens begin eating human flesh.”

• That the debate, despite Dr. Ron Paul’s presence, was mainly criticized for not attracting the likes of Mitt Romney, Donald Trump, and Mike Huckabee to show. The remaining nominees that bothered to attend included former Governor of Minnesota, Tim Pawlenty; former Pennsylvania Senator, Rick Santorum; former Governor of New Mexico, Gary Johnson; and lastly, Herman Cain, former Chairman and CEO of Godfather’s Pizza… delicious debate, indeed.

• That Dr. Paul, if he keeps up presenting clear and decisive views — as opposed to the waffling and flip-flopping more pervasive throughout the debate — will “never become a shell of his former self…” unlike other not-so-subtly hinted at politicians.

You can view the entire segment below, which originally aired earlier this week on Comedy Central.

Jon Stewart on the 2012 “Post-Apocalyptic” Republican Presidential Nominees originally appeared in the Daily Reckoning. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Bill Bonner, the founder of the the Daily Reckoning released his latest book Dice Have No Memory: Big Bets & Bad Economics From Paris to the Pampas in April 2011.

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Jon Stewart on the 2012 “Post-Apocalyptic” Republican Presidential Nominees

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Don’t Fear a Pullback in Prices originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2

.

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Don’t Fear a Pullback in Prices

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Notwithstanding our critical view of Japanese economic policy described in part one, clearly they did not bring the recent earthquake and tsunami upon themselves. The same cannot be true of western governments and central banks, which bear full responsibility for the credit crisis of 2008-09 and the counterproductive policy responses implemented in its aftermath. Having sowed the monetary wind with a massive expansion of the money supply in 2008 and early 2009, they are now reaping the inflationary whirlwind, as recent commodity, producer and consumer price data make increasingly evident.

While any informed observer is aware that commodity prices have risen sharply in recent months, not all may have noticed that commodities also have strongly outperformed the equity markets which, until recently, were also in a clear uptrend. The Dow Jones/UBS broad commodity index has risen by 23% in the past six months and by 28% over the past year, in comparison to the S&P500 equity index, which is up by only 16% and 12%, respectively, over those periods. An outperformance of commodities versus equities is a characteristic of a generally inflationary environment, as was observed during the 1970s, for example.

Evidence that commodity prices are pushing up producer prices is increasingly evident, yet a look behind the headline data indicates that much more inflation is coming through the pipeline. US PPI y/y is currently rising by 5.6%, but that for intermediate goods stands at 7.8% and that for crude goods at 15.9%, clear indications that pipeline inflationary pressure is building. Producer price inflation in most other parts of the world is also picking up. In Europe’s largest economy, Germany, it has risen to 6.4% y/y, notwithstanding the recent strength of the euro.

Consumer price inflation, now at 2.1% y/y, remains relatively subdued by comparison. But that is to be expected as CPI lags developments in commodity prices and PPI, sometimes by a year or more. The relationship, however, is clear. There have also been two unusually large back-to-back m/m increases of 0.4% and 0.5%, respectively, an indication that a surge in consumer price inflation is now underway. This is not lost on US consumers, who perceive that inflation is picking up. For example, according to the Conference Board, consumers currently expect inflation of 6.7% by next year, a large increase from an expectation of 5% in mid-2010 and well above the 10-year average.  This rise in inflation expectations is arguably more economically damaging than inflation itself. While inflation results in misallocated resources, it is when inflation expectations become entrenched that the potential for economic ‘stagflation’ grows. Rather than engage in normal commerce, economic behavior begins to change in ways which are inefficient. For example, businesses and households seek to hold larger inventories in anticipation of rising prices. But by withholding goods from circulation, the overall economy becomes less efficient, devoting more resources to storage rather than production, trade or consumption of goods, the basis of sustainable economic activity and growth thereof.

With specific reference to the US, there can be no clearer sign that inflation expectations are surging than when the Head of US Operations of none other than WalMart, Mr Bill Simon, makes a public statement that inflation is rising and that his firm has no choice but to raise prices. WalMart played a major role in consumer price disinflation over the past two decades, as China and other cheap producers came on line and exported their way to economic power, yet it has now called the end of the great disinflation and, drawing on the widespread evidence cited above, demonstrates that the ‘tipping point’ of inflation has been reached. The inflation tsunami is rolling across the economic landscape as we write.

So far, the Fed seems rather oblivious to this development. Indeed, the Fed keeps right on inflating as if it is not doing enough. One look at the recent surge in base money growth–the only form of money under direct control of the Fed–suggests that, at first glance, the Fed actually believes that it needs to add further liquidity to the already enormous inflation tsunami it created back in 2008-09. Perhaps the bureaucrats know something we don’t. Or perhaps they are making yet one more mistake in a long series of mistakes. We leave it to the reader to interpret the chart below and draw their own conclusions.

US base money growth has surged by over 20% year-to-date.

The Fed will soon have a mighty struggle on its hands to keep inflation, both actual and expected, under control. But this presents it with a dilemma: Either confront rising inflation expectations with sharply higher interest rates as Paul Volcker did in 1979-81, thereby triggering a deep recession amidst already high unemployment; or allow such expectations to become entrenched both at home at around the world, such that the dollar loses its pre-eminent reserve currency status, implying a far lower purchasing power than that which obtains today.

The Fed must either take the economy off of life support to save the dollar or keep the economy on life support and watch the dollar–at least as we know it–die. But let us not forget, this dilemma is entirely of the Fed’s own making, the inevitable result of a long-held inflationary bias, colloquially known as the Greenspan/Bernanke ‘Put’, that is, the implied bail-out for excessive risk-taking that has existed in theory ever since the Fed came into existence in 1914 but which was applied repeatedly in practice under Chairmen Greenspan and Bernanke, with Lehman Brothers proving the largest material exception to the rule.

There are those who, in the face of soaring money supply growth and inflation, believe that the Fed is in fact entirely comfortable with a somewhat higher inflation rate as this will help to erode the enormous debt burden carried by the US economy following the colossal housing and credit bubble of 2003-07. Perhaps. But we don’t think it matters whether the Fed is deliberately creating much higher price inflation or not. In either case, the rest of the world is not going to sit idly by and watch the Fed further destabilize the global economy. One country after another is taking action to try and insulate themselves from reflationary Fed policies.

Along these lines, China and India continue to raise interest rates, as do many other smaller economies. In a related action, last week Brazil announced it was imposing a 6% tax on foreign purchases of domestic bonds, as a way of reducing so-called ‘hot-money’ flows, that is, those seeking higher yields in Brazil relative to the US, Japan, Europe and other places where yields are historically low.

Such actions are a form of capital controls. It is a sign of the times, to be sure, that in a recent commentary, even the International Monetary Fund, historically no fan of capital controls, argues that there are, from time to time, situations in which they might play a constructive role. But for every capital control action there is an equal and opposite reaction: Constraining or otherwise distorting the flow of capital implies, in due course, constraints and general distortions on the flow of trade. You can’t have one without the other. And what is negative for global trade is, by definition, negative for global growth. The screws on the Fed’s printing press are tightening both at home and abroad. Beyond a certain point, additional growth in the US money supply will have next to no impact on real growth, only on nominal growth, as real goods are increasingly withdrawn from circulation, resulting in pure and immediate inflation.

When that point is reached, it is game over, checkmate. Sadly, in this game, there are no winners.

Regards,

John Butler,
for The Daily Reckoning

[Editor's Note: The above essay is excerpted from The Amphora Report, which is dedicated to providing the defensive investor with practical ideas for protecting wealth and maintaining liquidity in a world in which currencies are no longer reliable stores of value.]

The Inflation Tsunami (Part Two of Three) originally appeared in the Daily Reckoning. Daily Reckoning founder Bill Bonner recently wrote articles on stagflation and introduced his new book Dice Have No Memory: Big Bets & Bad Economics From Paris to the Pampas.

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The Inflation Tsunami (Part Two of Three)

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Over the past year The Amphora Report has written extensively on the topic of inflation, including in Guess What’s Coming to Dinner: Inflation! and The Inflation Tipping Point. While we prefer the monetary definition of inflation as growth in the supply of money and credit, we note that, beginning around mid-2010, the monetary expansion of 2008-09 began to feed through into consumer price inflation. This has continued to the present day and at an accelerating rate. Consumer price inflation data are now surprising to the upside just about anywhere one chooses to look: in Asia, Europe and, more recently, even in the US. To use a timely if tragic metaphor, the inflation ‘tsunami’ set in motion by a massive monetary expansion in 2008-09 is now making landfall around the world, pushing up prices for a broadening range of goods and services.

While the Japanese have been playing their part in this global inflation they have more recently upped their game in response to the Sendai earthquake. The Bank of Japan (BOJ) has printed some 15tn yen, or roughly $180bn US dollars, since the disaster struck. But the stimulus doesn’t end there. In response to a surge in the yen–a natural result of financial markets anticipating repatriation of Japanese capital to finance reconstruction–the Japanese Ministry of Finance (MoF) asked for and received the cooperation of most major central banks in intervening to weaken the yen, with the BoJ selling some 700bn yen (approx $6bn) for dollars, euros and other currencies. At one point reaching nearly 76 to the dollar, the yen has subsequently fallen back to 83, even weaker than it was prior to the quake. Coordinated FX intervention is rare and is one of the more blatant ways in which policymakers seek to manipulate the global economy.

We are always skeptical when central banks act as if they know better than the financial markets. Not only it is simply impossible for a handful of bureaucrats to regulate anything as dynamic as a modern economy or financial system but central banks also have a demonstrably poor track record. The credit market disaster of 2008-09 was a direct result of misguided central bank policy, specifically consumer price inflation targeting. Most modern central banks claim legitimacy because they keep inflation ‘under control’. Yet these are the folks that create fresh money in response to economic headwinds which are frequently of their own making. Orwellian rhetoric to the contrary, modern central banks are rightly understood to be the champions of inflation–if normally of the moderate sort–rather than its nemesis.

Let’s consider just why, exactly, the BoJ thinks it is doing Japan a favor by printing a huge amount of money and intervening to weaken the yen in response to the earthquake. Presumably it believes that this is going to stabilize the financial system and help with the coming reconstruction effort. But whereas the first point is probably correct to some degree, we doubt the second holds true. When a company loses a major factory to some natural disaster, it is a loss of productive capital. The company then has a choice to make. Should it rebuild the factory out of savings or, alternatively, allow itself to shrink instead and generate less future earnings? The correct decision, of course, is that which maximizes the net present value of the firm. If the cost of rebuilding exceeds the benefit of restoring the factory’s income stream, then the factory should not be rebuilt. Yet if the factory was profitable and costs less to rebuild than the expected future profits, the company should proceed with rebuilding.

How does printing yen and intervening in the FX market affect this decision? By driving down borrowing costs, it makes it appear less expensive to finance reconstruction. But as Japanese firms are large net savers, they don’t really have an incentive to borrow at all to rebuild; rather, they can dip into their extensive savings. As these savings are overwhelmingly denominated in yen, a weaker yen, therefore, makes it more rather than less expensive to rebuild. Yes, Japan is a large exporting nation so a weaker yen can be seen to support exports, but as a result of the earthquake which has destroyed or damaged much industrial capacity, Japan is now unable to export as much as before (at any given exchange rate) and will thus be relatively more reliable on imports during the reconstruction period. The BoJs action does not support the rebuilding effort. It in fact undermines it by preventing financial markets from adjusting in ways that would result in greater price discovery in import, export and financial markets and, therefore, a more economically efficient reconstruction process.

Moreover, long-term observers of Japan know that the last two decades have been characterized by endless fiscal stimulus of various kinds, resulting in chronic resource misallocation which has demonstrably failed to restore the higher rates of economic growth that were common from the 1950s through the 1980s.The legacy, however, is a massive public debt which needs to be serviced with tax receipts. As a country prone to major earthquakes, one could argue that, rather than build ‘bridges to nowhere’ in the 1990s and 2000s, the government would have better served the national interest by spending far less, thereby encouraging savers, including insurance companies, to build large reserves which would be available in the event of a disaster on the scale of the Kobe or Sendai earthquakes. The prospect of rebuilding after any major national disaster is intimidating, yet it would be somewhat less so today were government debt/GDP only around 100%–as was the case when the Kobe quake struck in the mid-1990s–rather than over 200%, as is the case today.

Regards,

John Butler,
for The Daily Reckoning

[Editor's Note: The above essay is excerpted from The Amphora Report, which is dedicated to providing the defensive investor with practical ideas for protecting wealth and maintaining liquidity in a world in which currencies are no longer reliable stores of value.]

The Inflation Tsunami (Part One of Three) originally appeared in the Daily Reckoning. Daily Reckoning founder Bill Bonner recently wrote articles on stagflation and the great correction.

Read more here:
The Inflation Tsunami (Part One of Three)

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Sometimes, the methods to produce results are counter-intuitive. For example, skillful pruning of grape vines is essential to the production of vineyards, and cutting back a rose bush promotes its growth. Based on experience, we can learn where cutting can lead to growth.

The following statement is at first just as counter-intuitive: A reduction in government spending will not slow job growth. In fact, the experience of the last two years provides compelling evidence that a reduction in government spending will lead to increased employment and output in the US economy.

Since 2008, annual federal spending less net interest has increased by $530 billion or 19%. Yet, even with February’s welcome gain of 192,000 jobs, there are 2.3 million fewer people employed today than in February 2009, the month before the Obama Administration turned on the spending spigots with the passage of its economic recovery plan. Over those 24 months, private sector employment has declined by 2.0 million. In spite of the rapid expansion of the Federal bureaucracy, government sector employment has fallen by 360,000.

Moreover, a comparison of these results to the recovery from the economic crisis of the early 1980s casts doubt on the Obama Administration’s claim that without the unprecedented increase in government spending, the recession would have been even worse and the recovery slower. In December 1984, two years after the Reagan tax rate reductions began to take effect, the equivalent of 11 million more Americans were employed, including 10.6 million in the private sector, and 460,000 in the government sector. Bottom line, two years of record spending and deficits have produced a 13 million jobs gap when compared to the recovery from the economic crisis of the early 1980s.

Why the abysmal results of the past two years?

First and foremost, it is due to a utopian view of government largesse, which considers only the benefits, and none of the costs. Such a view ignores the underlying human phenomenon that produces economic activity. A job is produced when individuals enter into exchanges that lead to mutual gains. As a consequence, they work for each other. Each individual improves his or her own economic condition; incomes rise; new opportunities for mutually advantageous exchanges are created; the number of jobs expands.

This basic economic proposition cannot be replicated by one-sided exchanges in which the government takes money from some, and gives it to others.

Advocates of government spending tout the jobs created as a direct result of the expenditures, but ignore the jobs that are lost as resources are taken from the rest of the economy, either through taxes now, or through borrowing now and higher taxes in the future. Every dollar the government spends has to come from those who would otherwise have spent or invested their money in the private sector. To the extent the money is borrowed from non-US residents, the money can no longer be spent on exports or foreign investments in the US private sector. In either case, the net cash flow and net increase in demand generated by government spending is zero.

However, the effects do not stop there. Since government spending is not based on mutually beneficial exchanges, it often is wasteful. By displacing the opportunities for wealth enhancing voluntary exchanges, wasteful spending further reduces employment and the overall wealth and income of the American people.

For example, labeling government spending as “investments” in so-called “green-jobs” is just political spin to cover money-losing investments by elite government bureaucrats with none of their own money on the line who, nonetheless, believe they have an ability to pick winners. But, squandering money on expensive energy gambits reduces our wealth, and therefore shrinks the economy and the number of jobs.

The path to more robust growth is first to stop doing what demonstrably has not worked for the past two years. As I wrote in “Toward a New Economic Consensus,” studies by professors from Harvard to the London School of Economics are providing a growing body of empirical evidence that shows the combination of spending restraint and reductions in tax rates are the best ways to stimulate economic growth and employment.

The Republican proposal to reduce 2011 spending by $61 billion is only a modest start, but at least headed in the correct direction. Such a “cut” would merely slow the estimated increase in Federal spending for 2011 to $300 billion, and represents less than 2 cents of every dollar of the $3.8 trillion the Federal government will spend this year. Given the failure of increased deficit spending to create jobs, the claim of several pundits that such a modest reduction in government spending would reduce employment by 700,000 jobs or more is simply preposterous.

A second important step would be to prohibit any new regulations, and to get rid of as many useless or counterproductive government mandates as possible. Regulations prevent economic activity that otherwise would take place. And although many are aimed at helping the middle-class and those with lower incomes, new regulations on credit and debit cards are driving up the cost of consumer credit and leading to new fees on checking accounts with less than significant balances.

The combination of lower government spending and fewer regulatory burdens would increase the space in which the American people could discover opportunities to create mutually beneficial exchanges. At the end of the day, those are the basis of economic activity, job creation, rising incomes, and an expanding tax base essential to restoring balance to federal, state and local budgets.

Regards,

Charles Kadlec,
for The Daily Reckoning

Want to Create Jobs? Cut Government Spending originally appeared in the Daily Reckoning. Daily Reckoning founder Bill Bonner recently wrote articles on stagflation and the great correction.

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Want to Create Jobs? Cut Government Spending

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Whether they realize it or not Americans live in a constant state of fear every day. I’m not referring to the fears of everyday life like losing a job or having an accident of some kind, but rather a more sinister and devious fear; a fear that Americans only dare talk about around the water cooler or at cocktail parties so as not to be taken seriously; a fear they try to mask with a with a whimsical tone of sarcasm or indifference. Whether Americans want to admit it or not, it’s the single greatest fear in their lives: fear of the government.

Right about now there are those reading this thinking: Don Cooper is a drunk. To which I reply: what’s that got to do with it? Maybe more people should drink if that’s what it takes to sober up and confront what they are really afraid of.

In their defense, I’ll admit that reality is scary. No argument that living in delusion is warmer, safer, cozier, and easier. Pretending is always more fun than reality, that’s why we go to the movies. But fear of the government is a fear that invades a person’s soul and – since the government intervenes in every aspect of our lives – it affects every move we make every day.

Fear of the government is hard to recognize and acknowledge. It’s a fear that we are taught early on in life and to which we become accustomed. We inevitably end up tucking it away in the far reaches of our minds in order to function “normally” every day and live our lives. But just as a car backfiring will trigger a sense of fear from a shell-shocked veteran, so too can the State trigger that sense of fear they’ve instilled in us.

One need only ask: when you see a cop in your rearview mirror with his lights on, do you feel a sense of safety and comfort or do you get a shot of adrenaline from your body’s “fight or flight” reflex? Do you immediately start asking yourself what he could possibly pull you over for, other than the fact that he was abused as a child, bullied at school and his mother didn’t love him, and now he’s going to whittle away at that chip on his shoulder by abusing you.

As you search for your proof of government permission to drive (i.e., your license), and your government permission to own the car (i.e., your registration), and your proof of government mandated insurance, do you do so calmly and with a smile on your face and with gleeful anticipation of speaking with someone who gives of himself to serve and protect you, or do you do so nervously, fumbling through your papers hoping everything’s up to date and acceptable to him for fear of being detained for whatever reason and having it affect your job, your family, and every aspect of your life?

And when it’s all over, do you feel glad that it happened or are you just glad it’s over? Later that evening do you recount the story to others with a sense of pride, or do you do so with a sharp tongue and kick yourself for all the things you wish you would have had the presence of mind to say at the time but didn’t? Do you feel happy that you have to pay $150 to the government because you were driving down the street faster than the government allows you to, or are you angry?

And in the end, do you send the money to the government even though you don’t agree with it? Even though you feel it’s unfair to have to pay so much money yet you’ve harmed no one? Of course you do. And why? Because you’re afraid of what the government will do to you if you don’t. In the end, you’ll retreat back into your cubby-hole of delusion in order to justify paying the fine by convincing yourself that what you did was wrong, the government was right, and you deserve the punishment.

My favorite delusional argument from those still attached to the matrix is that they pay their taxes voluntarily. To these people I ask: when you do your tax returns, do you take as many deductions as the government will allow you? Of course, the answer is always yes. Then I ask them that if they could take enough deductions such that their tax liability was zero would they do so? Again, not surprisingly, the answer is yes. I then ask them that if their preference is to pay zero taxes then why don’t they simply refuse to pay taxes. Inevitably, that’s where their train of thought always runs out of track. Of course everyone knows the answer: because they’re afraid of what the government will do.

I challenge everyone to ask themselves: when was the last time you even thought about the possibility you might be robbed, your house broken into or shot at? Can you even remember? Now ask yourself when was the last time you were afraid of doing something that could be deemed “illegal” by the government and for which you could be fined, detained or arrested? Something like not wearing a seatbelt, speeding, making a U-turn, going through a yellow light, not crossing the street at the cross-walk, riding a bike on a sidewalk, forgetting your license at home, taking too many deductions on your taxes, talking on your phone while driving, not allowing strangers to touch you or your children at the airport, cutting down a tree on your own property, owning and transporting a gun, collecting rain water and the list goes on. I would wager the answer is: daily! The first word out of everybody’s mouth when asked a normal, completely benign question these days is: “Well legally…” It’s first and foremost on our minds, and why wouldn’t it be, there are 76,000 pages to just the federal register alone. Some argue that everyone commits at least three felonies every day!

Ignorance is a dangerous thing, and it must be stopped in our lifetime, fo’ it kill somebody.

At the end of the day, all government mandates are enforced at the end of the barrel of a gun, and that scares the hell out of everyone, as it should. But if we truly believe we are free then we have to start acting like it. It’s time we cared about something bigger than ourselves. It’s time we stopped living our lives in fear.

Having said all that, I’m not holding my breath. It’s proven to be difficult to convince people that freedom is more important than the real housewives of New Jersey.

And that’s why I drink!

Regards,

Don Cooper
for The Daily Reckoning

American Fear originally appeared in the Daily Reckoning. Daily Reckoning founder Bill Bonner recently wrote articles on stagflation and the great correction.

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American Fear

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Our thoughts and prayers are with the people of Japan. The videos, images and stories of the devastation caused by last week’s earthquake and tsunami have touched our hearts and rattled investor psyches around the world.

The threat of disaster from the damaged Fukushima nuclear power plant unleashed a ferocious sell-off of Japanese equities, but the damage to other major markets has been limited. Already experiencing a slight pullback prior to the events on March 11, U.S. equities and emerging markets have held up quite well. The MSCI Emerging Markets Index has only pulled back 2 percent since the earthquake and the S&P 500 Index only 3 percent.

Japan has experienced similar disasters before on a smaller scale. In 1995, the Great Hanshin Earthquake severely damaged the port city of Kobe, killing more than 6,000 people. Japanese industrial production (IP) fell by 2.6 percent during the January following the earthquake, according to Societe Generale analyst Takuji Okubo. However, that drop-off was short lived. Okubo reports that IP sprang up 2.2 percent the following month and 1 percent during March.

Goldman Sachs estimates that the total cost of damage from the March 11 earthquake will be $198 billion—roughly 1.6 times that of the Great Hanshin earthquake. That works out to roughly 4 percent of GDP. However, Martin Wolf from the Financial Times points out that as of March 17, Japan has lost $344 billion worth of market cap since March 11, equaling nearly 7 percent of the country’s GDP.

Why have investors reacted this way? Investor anxiety and the selloff have been exacerbated by two trends which have plagued Wall Street over the past few years: The excessive use of Value-at-Risk (VaR) models and a risk-averse herd mentality.

The VaR Model is used by investment firms and others to measure the market risk of their asset portfolios by calculating the probability of maximum loss given a certain time period, i.e. “how much could I lose in a really bad day (month)?”

VaR models have three different components: A time period (generally a day or a month), a level of confidence (generally 95 or 99 percent confidence level) and an estimate of investment loss. There are three mathematical models used to calculate VaRs: Variance-Covariance, historical simulation and Monte Carlo Simulation.

All of the major investment firms have a risk management officer who uses some form of a VaR model. Their biggest concern is the daily, weekly, and monthly volatility. There’s a certain level of volatility that financial institutions can’t stomach because they are leveraged themselves.

It’s similar to the freezing point when water turns to ice. Once this level is reached, the risk management officers give portfolio and money managers a “tap on the shoulder” to reduce risk and raise cash levels. Since risk managers all over the world are using very similar models, it creates a herd mentality and stock sales all get triggered at the same time. Similar herd mentalities and groupthink have led to some of history’s most infamous financial calamities such as the crash of 1987 and 2008 after the fall of Lehman Brothers.

The VaR herd mentality shows up in the volatility index, or VIX, which is a measure of stress in the system. Currently, it’s a combination of forces (the ongoing turmoil in the Middle East and North Africa and Japan’s natural disaster) that is injecting stress into the system. The VIX pushed toward the 30 level last week, a level that has historically been associated with “extreme market turbulence.” As of mid-week, the two-week change in the VIX represented the sixth largest move in the past 20 years, according to Greg Weldon.

Once stability returns and a new equilibrium is found, the VIX then falls and the risk management officer allows the money managers to invest again.

Periods of high volatility and uncertainty generally cause investors to head for cover and liquidate assets but we think investors should do the opposite—classic contrarian thinking.

A prime example occurred two years ago. On March 18, 2009, we highlighted for investors in a special alert that a shift in government policy—an amended FASB-157 “mark to market” rule, a change to the short sell (uptick) rule and a $300 billion liquidity injection from the Federal Reserve—meant a strong wind was hitting the market’s sails and was likely to cause a massive price reversal. We were confident of this shift because these events fit into one of our core tenants of our investment process—that government policies are precursors to change.

Two years later, large growth funds, large value funds and world stock funds have all risen 40 percent or more, according to Morningstar. Some asset classes such as midcaps and natural resources stocks have doubled off of their lows but are still working to regain previous highs.

Unfortunately, instead of buying into the opportunity, more than $25 billion was pulled out of domestic and international stock funds while $22 billion flowed into bond funds, such as intermediate-term, short-term and intermediate government bond funds. The returns on those asset classes over the same March 2009 to March 2011 period were 11.9, 6.8 and 5 percent, respectively.

Another example is last year’s explosion of the Macondo Well in the Gulf of Mexico. Many investors dumped their investments in British Petroleum because of the regulatory uncertainty and growing costs of the cleanup, but BP’s stock has recovered more than 67 percent since its June 2010 lows.

The key difference between the events of two years ago and today is that natural disasters tend to cause great short-term anxiety but have minimal lasting effect, while shifts in government policy are generally precursors to significant change. BCA says that “natural disasters rarely change an economy’s growth trajectory and this earthquake should be no exception.” They continue to say that “the earnings picture of the Japanese corporate sector is unlikely to be significantly affected by this natural disaster.”

In fact, the total impact of the earthquake on Japan’s economy is likely to amount to 0.5 percent of GDP, not even comparable to the global credit crisis that reduced Japan’s GDP by 10 percent between the first quarters of 2008 and 2009, according to the Financial Times.

In America, following Hurricane Katrina, we saw that there are basically six to 15 weeks of misery before the rebuilding begins. Estimates show Japan will spend $500 billion to rebuild its economy and given the government’s long history of investing in the country’s infrastructure, we expect they will waste no time in rebuilding and repairing. Reconstruction spending will probably kick in some time during the second quarter, supporting the country’s growth rate, according to BCA.

We are also seeing nuclear projects being pushed back until engineers from around the globe can learn from this tragedy. This makes coal, natural gas and crude oil more attractive in terms of near-term demand.

A final variable to consider is the immense patriotism and pride inherent in Japanese culture. In his Financial Times column, Martin Wolf says “if any civilization is inured to such tragedies it is Japan’s. Its people will cope. This seems certain.” Japanese culture has a very strong family unit with high savings rates. If the picture of the family above is any indication, this strong culture of family will help them endure, adapt and move forward.

Regards,

Frank Holmes,
for The Daily Reckoning

P.S. John Derrick serves as director of research for U.S. Global Investors and contributed to this commentary. Also, for more updates on global investing from me and the U.S. Global Investors team, visit my investment blog, Frank Talk.

How the VaR Model and Japan’s Tragedy Affect Investors originally appeared in the Daily Reckoning. The Daily Reckoning now provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas.

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How the VaR Model and Japan’s Tragedy Affect Investors

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Following are some of my remarks prepared for Allen & Company’s Fifteenth Annual Arizona Conference. The discussion, “Munis and the Euro: Crises or Opportunities?”, took place on March 8, 2011. The moderator was Senator Bill Bradley, Allen & Co., New York. Participants were Dick Ravitch, Ravitch, Rice & Company, New York; David Kotok, Cumberland Advisors, Sarasota, Florida; Uri Dadash, The Carnegie Endowment, Washington, DC.; and Frederick J. Sheehan.

I will discuss four topics:

First, some background to current problems;

Second, why it is not wise to make predictions about the amount and size of defaults;

Third, some areas where municipal solvency and bonds are most vulnerable;

Fourth, the opportunities.

Okay, so let’s begin…

#1 – The background for today’s municipal funding crisis. The story, in essence, is very simple: There is a link between real estate bubbles and municipal finance bubbles.

A.M. Hillhouse, author of a splendid study of municipal bonds – Municipal Bonds: A Century of Experience, 1836-1936, analyzed the US municipal bond market across that century. He concluded: “[T]he major portion of overbonding by municipalities arises out of real estate booms… There will be no justification for a city’s coming forward [in the future] with the excuse that…its revenue has dried up in times of falling property values… [T]he cause of the debt trouble [must be regarded] as an unwarranted failure of the city to adjust its borrowing program to certain known facts.”

I wrote a study, “The Coming Collapse of the Municipal Bond Market” in 2009. The title may or may not turn out to be accurate, but there was and is no doubt municipal extravagance had left us with a grave problem. This extravagance was born of a massive real estate boom. A nearly identical scenario unfolded during the 1920s.

In a March, 1933 lecture before the American Economic Association, Professor Herbert D. Simpson, explained the link between the booming real estate market of the 1920s and municipal spending excesses:

During this period of prosperity, real estate taxes were paid with little complaint… [U]nder these conditions, public expenditures expanded and taxes were increased without protest; and public officials exploited the real estate groups as systematically and thoroughly as the real estate groups had exploited the rest of the public. The result has been a structure of public expenditure which has been difficult to curtail, and a volume of indebtedness whose solvency is now jeopardized on a large scale…

Throughout this period, there was another form of real estate speculation, not commonly classified as such, but one that has had disastrous consequences. This is the real estate “speculation” carried on by municipal governments, in the sense of basing approximately 80 per cent of their revenues upon real estate and then proceeding to erect a structure of public expenditure and public debt whose security depended largely on a continuance on the rate of profits and appreciation that had characterized the period from 1922-29.

Inflated civic conceit hired construction crews to build houses, roads, sewers, schools, skyscrapers, and highways that crossed the country for the first time. When Treasury “Secretary Mellon endeavored to cut back federal spending, state and local governments stepped up spending at a rate that more than offset the Mellon program….”

The spending did not stop until the real estate taxes dried up. Sound familiar?

Simpson concluded:

The financial difficulties of local governments in consequence of both the inflation and deflation of real estate values demonstrates strikingly the unwisdom of a revenue system concentrated so heavily upon real estate…

But no one listened.

#2 – It’s not wise to make predictions about the amount and size of defaults because there are too many “don’t knows.”

• We don’t know if unions and municipalities will reach agreements over benefit reductions.

• If they do not reach an agreement, and the decision goes to a court, we don’t know how courts will rule. Union pension plans are legal contracts. Yet, pensions and benefits are unsustainable. How will judges rule? It is worth keeping in mind that most, if not all, states have legal recourse to amend pensions under certain conditions. In California – I quote: “an employee does not have the right to any fixed or definite retirement benefits but only to a substantial or reasonable pension.”

• We don’t know what the federal government – including the Federal Reserve – will do if states and cities go into default. Treasury Secretary Geithner may copy Hank Paulson’s bazooka maneuver with Congress. The Fed may, or may not, buy a trillion dollars worth of municipal bonds before the Senate Banking Committee puts Chairman Bernanke in the witness box.

• We don’t know what cities and towns that rely on a certain level of state aid to pay the bills will do. This, of course, is a don’t know only after we do know that a state has stopped or reduced local aid payments.

• We don’t know if states and municipalities will tell the feds to fund their own mandates. That is, regarding state and local costs that were either signed into law or regulations imposed at the federal level, but were not funded by the federal government. We are seeing some opening salvos, here, in Arizona, which is making cuts to Medicaid. I think cities and towns will test the waters, for example, in schools – where, instead of laying off teachers, they may drop federally mandated requirements.

• We don’t know, once this step is taken, the response of the federal government and the courts.

• We don’t know if states and municipalities will raise taxes if they are unable to meet municipal bond payments. Rating-agency and brokerage-firm literature publish statements such as the following:

“What makes general obligation bonds…unique is that they are backed by the full faith and credit of the issuing municipality. This means that the municipality commits its full resources to paying bondholders, including general taxation and the ability to raise more funds through credit.”

But this is only true on occasion. A good place to study the variety of decisions is with a paper written by Kevin A. Kordana, an Associate Professor of Law at the University of Virginia. [“Tax Increases in Municipal Bankruptcies,” Virginia Law Review, September 1997, Volume 83, Number 6.]

• Another don’t know is the level of ignorance in cities and towns, where it is too often the case that nobody understands the financial situation. An outsider who drops by city hall can be amazed at how little anyone knows.

• Finally, and most importantly, the decision – or indecision, as it may be – to break the cities’ or towns’ contractual obligation to pay its lenders includes a lack of will among the parties. Here, we will have to wait and see.

#3 – Some areas where municipal solvency and municipal bonds are most vulnerable:

Disagreements about public employee benefits and payments are in the headlines, so I will start there….

I used to work with investment committees of corporate, union, and municipal pension plans, to design pension policies. This included analyzing assets and liabilities. Understanding future, annual cash flows – outflows to retirees – was important for duration- and cash-matching of assets to payments. I said to the pension committee of a town in 1989: “There will come a point when you won’t be able to pay these benefits.”

This was not a surprise at all. They knew that. They had no say in negotiations between the different union groups in the town and the selectmen who approved the benefits. There had been an increase in future benefits through improvements to the benefit formula almost every year for several years. And, there was a boost to the formula almost every year during the next decade.

The proportion of retirees to current workers was small back then. Plus, discounting the much higher future payments 20 or 30 years out produced tiny numbers that, over time, have blossomed. Now, we have reached the point when the benefit payments are exploding as a percentage of costs for many municipalities.

A second problem is maintenance expenses for municipalities that went on a building spree. A rule of thumb is they are about 30% higher than the prior trend.

A third potential problem is that many cities and towns are dependent on continual access to the bond market. If Treasury rates jump 3% or 4% in a failed auction, the light bill may not be paid.

A fourth means by which municipalities have telescoped the future into the present is by raising money through General Obligation bonds that is supposed to be used for a specific purpose but, the money is instead used to cover current expenses.

A fifth problem is the next step in the misuse of General Obligation proceeds. There are cities and towns that raise enough additional money in the bond market to cover the projected rise in next year’s operating expenses.

#4 – Are there any investment opportunities in the municipal bond sector?

Opportunities in municipal bonds will spring from ignorance. They already have. There may be a panic of indiscriminate selling when owners of munis understand a municipal bond is not simply “money good.” Such ignorance has produced great buying opportunities in the past.

For instance, in May 1933, all City of Miami bonds (with yields ranging from 4-3/4% to 5-1/2%, and maturities from 1935 to 1955) were quoted at $26. In the mid-1970s, the same combination of ignorance and fear created great buying opportunities for New York City bonds. All bonds traded for $25.

It will be awhile before buyers should pile in, but it’s no too early to begin paying close attention to the sector.

Regards,

Frederick J. Sheehan
for The Daily Reckoning

The Muni Minefield originally appeared in the Daily Reckoning. The Daily Reckoning now provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas.

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The Muni Minefield

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

There are things that are “seen”… and those that are “not seen.”

Seen:

Saturday, on the eighth anniversary of the invasion of Iraq, the United States opened up a third front in the “Forever War.” US, British and French warplanes carried out air strikes to enforce a “no-fly zone” over Libya.

When George H.W. Bush established a no-fly zone over parts of Iraq after the 1991 Gulf War, it was enforced with routine bombing for 12 years until his son ‘W’ sent in ground forces.

What, we ask with all the feigned interest we can muster, is the endgame in Libya? A cease-fire in their nascent civil war? “Regime change”? Oil exports diverted from their destinations in Europe and China…?

Does it matter?

“Circumstances will drive where this goes,” says Adm. Mike Mullen, chairman of the Joint Chiefs of Staff. And because “circumstances” have a funny way of getting out of hand, oil is again within a couple bucks of the high it set two weeks ago.

Precious metals are reacting too. Gold is up to $1,431. Silver is a nickel away from $36.

Not seen: “With whopping budget deficits of more than $1 trillion per year, a national debt of more than $14 trillion, and the US military already overstretched by two drawn-out occupations,” muses foreign policy analyst Ivan Eland, “one would think some sort of ‘Vietnam Syndrome’ would have set in.”

Not so.

“Traditionally, the foreign policy elites of declining empires have never accepted the need to retrench overseas before it was too late.”

And so it goes.

Addison Wiggin
for The Daily Reckoning

Budget Deficits and Foreign Policy originally appeared in the Daily Reckoning. The Daily Reckoning now provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas.

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Budget Deficits and Foreign Policy

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Thorsten Polleit, of the Frankfurt School of Finance & Management, penned an article in The Free Market newsletter of the Ludwig von Mises Institute titled “The Many Names for Money Creation.”

It starts off almost humorous, reading more like an interesting, mood-lightening sidebar to a banner article titled “We’re Freaking Doomed (WFD)!” as he notes that the dire economic conditions are such that “euphemisms have risen to great prominence. This holds true in particular for monetary policy experts, who are at great pains to advertise a variety of policy measures as being in the interest of the greater good, because they are supposed to ‘fight’ the credit crisis.”

He then illustrates how the term “unconventional monetary policy” is meant to convey the happy virtues of “courageous and innovative”, as opposed to the bad old “conventional” monetary policy, which is now “outdated.”

In a similar vein, he notes that “Aggressive monetary policy” is meant to signify “bold and daring action for the greater good,” and “quantitative easing” is just a confusing term used to make it difficult for people to see “what such a monetary policy really is – namely, a policy of increasing the money supply (out of thin air), which, in turn, is equal to a monetary policy of inflation.”

A policy of inflation! Yikes! What was in that article “We’re Freaking Doomed (WFD)!”?

From the perspective of the Austrian school of economics (the only true economic theory!), this is not going to be the ordinary kind of inflation, either, but the really nasty, evil kind, where “monetary policy pushes the market rate of interest below the natural rate of interest (the societal time-preference rate), thereby necessarily causing malinvestment rather than ushering in an economic recovery.”

In other words, the Fed and the government are making it worse.

And if you want to know about malinvestment, then ask my boss, who never tires of telling me that I am the only employee, alone, apparently in the whole freaking history of employees, that has a consistent negative value to the company, meaning that the bottom-line of the company would be immediately improved if I was, to coin a rhyme, removed.

So I asked her, “What’s with that ‘improved if I was removed’ stuff?” to which she asked, “What are you talking about? You are the one that said that in the previous paragraph, you moron!” to which I asked, “What?” and then she asked, “What?” and then we just looked at each other, confused as hell.

There was an awkward silence, as I struggled as if I was in some weird parallel universe, since her point was that she is, only now, realizing that I am, as an employee, a huge mal-investment, but I can’t be fired since I am too old and too savvy not to sue the hell out of all of them for my termination, even though their case is air-tight and I should have been fired long ago.

And, as I never cease saying, some other, much worse mal-investments, such as the stock market bubbles, and the bond market bubbles, and the derivatives bubbles, and the debt bubbles, and the housing bubbles, and the bubbles in the sheer, staggering size of governments, were NOT my fault, but are all the fault of the Federal Reserve creating the money that made it all possible

Now, as if playing right into my hands, Mr. Polleit writes, “Sooner or later the dependence of the people on government handouts reaches, and then surpasses, a critical level,” which I assume we have reached.

The worse news is that he figures that “People will then view a monetary policy of ever-greater increases in the money supply as being more favorable than government defaulting on its debt, which would wipe out any hope of receiving benefits from government in the future.”

The terrifying point of all of this is when he writes, ominously, “In other words, a policy of inflation, even hyperinflation, will be seen as the policy of lesser evil.” Hyperinflation! Gaaahhh!

Hyperinflation! Immediately, I go into We’re Freaking Doomed (WFD) mode, which usually involves a lot of hyperventilating and a feeling of panic until I realize that all I have to do is buy gold and silver to keep what is going to happen to everyone else from happening to me, and make a lot of dollars in the process, which always makes me feel better, leading to euphoria, as in, “Whee! This investing stuff is easy!”

The Mogambo Guru
for The Daily Reckoning

A Monetary Policy that Encourages Malinvestment originally appeared in the Daily Reckoning. The Daily Reckoning now provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas.

Read more here:
A Monetary Policy that Encourages Malinvestment

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.