The government must do somethin

On Thursday, the Dow was off about 500 points in the first hour, presumably based on fears of European bank and sovereign failures.

The talking heads on CNBC were beside themselves, rationalizing what was happening and what should be done — the Federal Reserve should initiate QE3, more fiscal stimulus should be used, etc. etc. All spoke of the need for government solutions and quick actions.

By 10:30 I could take no more of “the government must do something.” Governments cannot solve this problem. They caused it! Intervening will only make the problem worse.

Politicians like zombies

So, what’s the difference between an angry zombie and a person who is angry because he’s tired of supporting zombies?

In economic terms, a zombie is a parasite. He contributes less to the economy than he takes from it. He lives at the expense of others.

Almost any profession or career can be a nest for a zombie; an auto mechanic who rips off his customers, for example, is a zombie…at least in a sense. But most often, zombies are created, enabled, and supported by government. Government transfer payments create whole armies of zombies. Government bailouts turn whole industries into zombies. Government programs and

Remarkable group of economists

Who were these people?
They were like scientists trying to address a convention of witch doctors.
They gave up career and fame to stick with the truth and say what had to be said.
… it is very dangerous for an economist to seek fame and fortune and to work closely with political establishments, simply because, in [Hayek's] experience, the most important trait of a good economist is the courage to say the unpopular thing. If you value your position and privileges more than truth, you will say what people want to hear rather than what needs to be said.
They chose freedom even when it was at the expense of their own bank accounts and even though their choice brought professional decline and risked failure in the eyes of their colleagues.
… the man who is willing to do what is right regardless of the circumstances.
It takes more than technical knowledge to be a good economist. It takes moral courage, and that is in even shorter supply than economic logic.
These were a remarkable group of economists that valued truth over fortune. In our materialistic, relativistic world, there are few like them today in any field. Too many economists have become “rent-an-economist,” willing to say or do anything for advancement and income. Other professions, including the physical sciences,

To help the stock market

Most people are convinced that QE3 (or its equivalent) will soon be with us. And most of these also believe that it will be good for the stock market.

TF Market Advisors cautions that the assumption that markets will respond may be incorrect:

Maybe all the Fed members can read Winnie the Pooh and the Money Pot prior to the September meeting.  It is a simple story of how greed, and gluttony, and doing what feels good now, can have some very negative long term consequences.  That story ends well, but maybe the path of printing money won’t.  Another round of QE3 may not do much to help the stock market this time since so many of the factors are different, so much has been priced in, and there were many other positives that helped stocks last year that may not reappear. 

Euro-scale unemployment

VodkaPundit has produced one of the best analyses of our current economic and political condition.

Reagan’s approach and results to an economic crisis were described in the article:

After choking off inflation, cutting taxes, and resisting any call for grand, new spending programs, President Reagan oversaw an amazing expansion of the U.S. economy. In just six years, the U.S. — quite cavalierly — conjured up an economy the size of West Germany’s and added it to the one we already had. Building on that base, President Clinton oversaw an even greater expansion, fueled by the entrepreneur-driven high-tech field.

Greece is broke

Reader JJC provides some insight on Greece. The same pretensions are going on in other European countries and in the US. Greece is merely further along than others, although all are headed for the same fate. The days of “extend and pretend’ are nearing an end in Europe and in the US.

The Greeks have shown an unflagging ability to obscure and outright lie regarding their finances.

Rumor has it that Finland wanted the Parthenon as collateral before they would loan any more money to Greece.  The Greeks balked at that, understandably.

Now the rest of the EU is lining up trying to secure hard assets for their bailout money

More spending will correct matters

The debate over Keynesian economics rages on. The political class, buttressed by their “rented economists,”  argues that Keynesian intervention is necessary. When promised outcomes do not develop, it is claimed that the remedial dosages were too small. More spending will correct matters.

Increasingly, the efficacy of Keynesian Economics is doubted. Common sense, rather than sophisticated formulas and models, is all that is required to see through the false claims and reasoning. Mish provides his view of Keynesianism and “stagflation:”

Investors expect them to continue

The Federal Reserve is in over its head. It is trying to solve a fiscal policy created by feckless, cowardly politicians. Monetary policy cannot solve this problem. For a while it was able to cover it up somewhat. That point has been passed.

Today, the Fed will make another announcement. There is little question that they will try to juice markets and the economy in some form or another. For them to announce that they are done would collapse markets and eventually the fiscal policies that cannot be supported without the continuous printing of money. That is why markets and investors expect them to continue.

The political economy would be hopelessly

Bernanke employs an elementary tactic in rhetorical obfuscation; i.e., presenting a problem without explaining the cause but going immediately into the prescription to be taken to counter its deleterious effects.

This tactic is helpful because it exonerates the FED from being implicated in the cause and, therefore, clears the way for the chairman of the FED to prescribe without excuses.

Picture if you will a doctor, Ben, who has been called into a case. The patient is suffering from severe bodily malfunctioning. Without disclosing that he was the doctor who has been treating the patient with ever increasing doses of heroin, Ben prescribes an even larger dose of heroin. Thus, as the patient’s condition continues to deteriorate, Ben explains that once the dosage of heroin is large enough, the patient would recover.

The stock market’s first reaction

The charade that is represented by world governments is becoming more strained by the day. Ben Bernanke’s decision to do nothing was ridiculous. Not in the sense that he can affect outcomes in any way shape or form, but in the sense that he can prolong the agony that the economy must endure. 

The stock market’s first reaction to today’s non-event was to sell off hard. But after the word got around that this was just a delay (and a short one at that)stocks caught a bid. Basically, the plan by Bernanke to leak his intentions worked.

Capital without labor

Any good economist will tell you that as complementary factors of production, labor and capital are not only indispensable but hugely dependent upon each other as well.

Capital without labor means machines with no operators, or financial resources without the manpower to invest in. Labor without capital looks like Haiti or North Korea: plenty of people working but doing it with sticks instead of bulldozers, or starting a small enterprise with pocket change instead of a bank loan.

There may be no place in the world where there’s a shortage of labor but every inch of the planet is short of capital. There is no worker who couldn’t become more productive and better himself and society in the process if he had a more powerful labor-saving machine or a little more venture

capital behind him. Capital can refer to either the tools of production or the funds that finance them. It ought to be abundantly clear that the vast improvement in standards of living over the past century is not explained by physical labor (we actually do less of that), but rather to the application of capital.

This is not class warfare. I’m not “taking sides” between labor and capital. I don’t see them as natural antagonists in spite of some people’s attempts to make them so. Don’t think of capital as something possessed and deployed only by bankers, the college-educated, the rich, or the elite. We workers of all income levels are “capital-ists” too—every time we save and invest, buy a share of stock, fix a machine, or start a business.

And yet, we have a “Labor Day” in America but not a “Capital Day.”

Like most Americans, I’ve traditionally celebrated labor on Labor Day weekend—not organized labor or compulsory labor unions, mind you, but the noble act of physical labor to produce the things we want and need. Nothing at all wrong about that!

But this year on Labor Day weekend, I’ll also be thinking about the remarkable achievements of inventors of labor-saving devices, the risk-taking venture capitalists who put their own money (not your tax money) on the line and the fact that nobody in America has to dig a ditch with a spoon or cut his lawn with a knife. Labor Day and Capital Day—I don’t know why we should have just one and not the other.

Happy Capital Day, America!

Fed monetary stimulus is now useless

Belief that government intervention, as advocated by Keynesian economists, can improve an economy should have ended in the early 1980s. Yet it has not because government power and control is dependent upon perpetuating the myth that government needs to manage the economy.

Continuing intervention eventually cripples an economy by distorting price signals and creating the  mis-allocation and waste of resources. Additionally, the general loss of flexibility to businesses reduces their willingness to respond to opportunities. Slowly, capital is destroyed via mal-investment. Entrepreneurs faced with increasing uncertainty are unable to find projects with expected returns that compensate for risk.  They refuse to deploy capital, hire workers or expand their businesses. At some point, the system shuts down.

Controlling the economy

The debate over Keynesian economics rages on. The political class, buttressed by their “rented economists,”  argues that Keynesian intervention is necessary. When promised outcomes do not develop, it is claimed that the remedial dosages were too small. More spending will correct matters.

Increasingly, the efficacy of Keynesian Economics is doubted. Common sense, rather than sophisticated formulas and models, is all that is required to see through the false claims and reasoning. Mish provides his view of Keynesianism and “stagflation:”

Exposure to traditional stocks

Most people are convinced that QE3 (or its equivalent) will soon be with us. And most of these also believe that it will be good for the stock market.

TF Market Advisors cautions that the assumption that markets will respond may be incorrect:

Maybe all the Fed members can read Winnie the Pooh and the Money Pot prior to the September meeting.  It is a simple story of how greed, and gluttony, and doing what feels good now, can have some very negative long term consequences.  That story ends well, but maybe the path of printing money won’t.  Another round of QE3 may not do much to help the stock market this time since so many of the factors are different, so much has been priced in, and there were many other positives that helped stocks last year that may not reappear. 

Perhaps TF Market Advisors is correct. My strong belief is that they are correct. Hence I have virtually no exposure to traditional stocks.

After choking off inflation

VodkaPundit has produced one of the best analyses of our current economic and political condition.

Reagan’s approach and results to an economic crisis were described in the article:

After choking off inflation, cutting taxes, and resisting any call for grand, new spending programs, President Reagan oversaw an amazing expansion of the U.S. economy. In just six years, the U.S. — quite cavalierly — conjured up an economy the size of West Germany’s and added it to the one we already had. Building on that base, President Clinton oversaw an even greater expansion, fueled by the entrepreneur-driven high-tech field.

Greek bank assets as collateral

Reader JJC provides some insight on Greece. The same pretensions are going on in other European countries and in the US. Greece is merely further along than others, although all are headed for the same fate. The days of “extend and pretend’ are nearing an end in Europe and in the US.

The Greeks have shown an unflagging ability to obscure and outright lie regarding their finances.

Rumor has it that Finland wanted the Parthenon as collateral before they would loan any more money to Greece.  The Greeks balked at that, understandably.

Now the rest of the EU is lining up trying to secure hard assets for their bailout money earmarked for Greece.  The entire agreement is at risk of being delayed indefinitely or blowing up.  Yet, who can blame them?  Loaning money to Greece is the same as just giving it to them, you’ll never get your money back.   so now, in an effort to please the hard asset crowd, German newspaper Handelsblatt reported today that EU leaders were considering bank shares as collateral.

Oh boy.  Greek bank assets as collateral?  What’s that worth?  Probably as much as the change lost inside the seat cushion of my couch.  OK, then, what’s next?  Cattle, sheep and other livestock?  How about olives and feta cheese?  A few goats?  How about a national garage sale?

Are any of these dolts listening to themselves?

Greece is broke.  Bankrupt.  Insolvent.

What’s worse is that there is really no means of that nation growing out of its debt or being able to service its debt load in a short, medium or long term fashion.

File national bankruptcy, default on your debt, get out of the Euro, and go back to being a beautiful and pleasant, but sleepy southern backwater.

The gold price plummeted

In the span of just a few trading days last week, the gold price plummeted from a high of $1,910 an ounce last Monday to a low of $1,712 three days later. The folks who never owned gold in the first place, and who have always held the precious metal in contempt, rushed to declare the “end of the gold bubble.” Many of the folks who did own gold wondered if the naysayers might be right this time.

But a few of the folks who own gold, especially those who have owned it for a while, recognized the selloff as the price of their success. In other words, the selloff was only painful if you were one of those investors who actually owned gold. And if you actually owned gold, you probably purchased it for less than $1,712 an ounce, maybe much, much less.

A $200 selloff in three days is not nothing; but it may not be that much worse than a jellyfish sting in Cannes. For perspective, $1,712 would have been an all-time record high for gold as recently as August 5! And even after the recent selloff, the gold price is up 10% over the last 30 days and 45% over the last 12 months. The S&P 500 Index, by comparison is DOWN 6% during the last 30 days and up only 15% during the last 12 months.

Confidence among world leaders has noticeably deteriorated

There was no joy in Mudvilc Jackson Hole this year. The central bankers of the world have mucked things up so badly that not even their fancy words and Wizard of Oz pronouncements were enough to penetrate the gloom.

The US economy and Ben Bernanke’s optimism have deteriorated from the prior year. Fed policies have not worked, and there is increasing recognition they are the wrong tool for the job. Economic results, body language and confidence among world leaders has noticeably deteriorated.

Econophile provides an analysis of the Jackson Hole dog and pony show. He describes the outcome:

We are witnessing the failure of contemporary economics on a grand scale. These policies are being played out on the worldwide stage much to the same result. Europe is experiencing a culmination of years of failed policies.

What concerns me greatly is the next step. It doesn’t look likely that the Fed will embrace Austrian theory economics.

Instead they will try the same things again. ZIRP has been continued to 2013. Perhaps the Fed will reduce interest on excess reserves, or not pay interest at all, in order to encourage banks to lend. Perhaps it will pursue “Operation New Twist” and roll its portfolio over into even longer term maturities. Perhaps it will reduce bank reserve requirements temporarily (assuming it could get by Dodd-Frank and Basel III).

Then there is QE3, more monetary stimulus through direct injections of cash into the financial markets.

Despite Mr. Bernanke’s promise to the late Milton Friedman, it (Depression) is happening again. Bernanke is out of tools, resources and apparently hope. That he was using the wrong policies is the cause of his dispirit, although he still does not recognize that. For Ben, the situation and its timing could not be worse:

What this means is that during the presidential election cycle, politically sensitive economic indicators such as unemployment will remain negative. This will result in a lot of pressure on the Fed and Dr. Bernanke to “do something.” Like all former Fed Chairmen, it will be hard for Dr. Bernanke to resist these calls from politicians. He will earn his moniker as “Helicopter Ben” and unleash more quantitative easing, a dangerous and regressive policy. Like most drugs it becomes less effective over time. It will further destroy real capital and delay recovery.

I concur completely with the above paragraph, although would add one more important consideration to the list. Even if economic conditions were improving, this paragraph would still be true. The US will be unable to fund its deficits without the Fed printing money. Until spending is reduced, QE is with us regardless of the state of the economy.