Saturday, June 16, 2012

Obama -- Biggest Spender in World History!

Facts are still such stubborn things!

By Peter Ferrara at Forbes:
The U.S. has never before had a President who thinks so little of the American people that he imagines he can win re-election running on the opposite of reality. But that is the reality of President Obama today.
Waving a planted press commentary, Obama recently claimed on the campaign stump, “federal spending since I took office has risen at the slowest pace of any President in almost 60 years.”
Peggy Noonan aptly summarized in last weekend’s Wall Street Journal the take away by the still holding majority of Americans living in the real world:

“There is, now, a house-of-cards feel about this administration.  It became apparent some weeks ago when the President talked on the stump – where else? – about an essay by a fellow who said spending growth [under Obama] is actually lower than that of previous Presidents.  This was startling to a lot of people, who looked into it and found the man had left out most spending from 2009, the first year of Mr. Obama’s Presidency.  People sneered: The President was deliberately using a misleading argument to paint a false picture!  But you know, why would he go out there waiving an article that could immediately be debunked?  Maybe because he thought it was true.  That’s more alarming, isn’t it, the idea that he knows so little about the effects of his own economic program that he thinks he really is a low spender.”
What this shows most importantly is that the recognition is starting to break through to the general public regarding the President’s rhetorical strategy that I’ve have been calling Calculated Deception.  The latter is deliberately using a misleading argument to paint a false picture.  That has been a central Obama practice not only throughout his entire presidency, but also as the foundation of his 2008 campaign strategy, and actually throughout his whole career.
Rest assured, Ms. Noonan, that the President is not as nuts as he may seem at times.  He knows very well that he is not a careful spender.  His whole mission is to transform the U.S. not into a Big Government country, but a Huge Government country, because only a country run by a Huge Government can be satisfactorily controlled by superior, all wise and beneficent individuals like himself.  That is why he is at minimum a Swedish socialist, if not worse.  Notice, though, how far behind the times he and his weak minded supporters are, as even the Swedes have abandoned Swedish socialism as a failure.
The analysis by Internet commentator Rex Nutting on which Obama based his claim begins by telling us “What people forget (or never knew) is that the first year of every presidential term starts with a budget approved by the previous administration and Congress.”  Not exactly.
The previous administration, or President, proposes a budget.  The previous Congress approves a budget.  And what Congress approves can be radically different from what the President proposes.
As Art Laffer and Steve Moore showed in the Wall Street Journal on Tuesday, President Bush began a spending spree in his term that erased most of the gains in reduced government spending as a percent of GDP achieved by the Republican Congress in the 1990s led by former House Speaker Newt Gingrich, in conjunction with President Clinton.  But for fiscal year 2009, President Bush in February, 2008 proposed a budget with just a 3% spending increase over the prior year.  Fiscal year 2009 ran from October 1, 2008 until September 30, 2009.  President Obama’s term began on January 20, 2009.
Recall, however, that in 2008 Congress was controlled by Democrat majorities, with Nancy Pelosi as Speaker of the House, and the restless Senator Obama already running for President, just four years removed from his glorious career as a state Senator in the Illinois legislature.  As Hans Bader reported on May 26 for the Washington Examiner, the budget approved and implemented by Pelosi, Obama and the rest of the Congressional Democrat majorities provided for a 17.9 percent increase in spending for fiscal 2009!
Actually, President Obama and the Democrats were even more deeply involved in the fiscal 2009 spending explosion than that.  As Bader also reports, “The Democrat Congress [in 2008], confident Obama was going to win in 2008, passed only three of fiscal 2009’s 12 appropriations bills (Defense, Military Construction and Veterans Affairs, and Homeland Security).  The Democrat Congress passed the rest of them [in 2009], and [President] Obama signed them.”  So Obama played a very direct role in the runaway fiscal 2009 spending explosion.
Note as well that President Reagan didn’t just go along with the wild spending binge of the previous Democratic Congress for fiscal year 1981 when he came into office on January 20 of that year.  Almost no one remembers now the much vilified at the time 1981 Reagan budget cuts, his first major legislative initiative. Then Democrat Rep. Phil Gramm joined with Ohio Republican Del Latta to push through the Democratic House $31 billion in Reagan proposed budget cuts to the fiscal year 1981 budget, which totaled $681 billion, resulting in a cut of nearly 5% in that budget.  Obama could have done the exact same thing when he entered office in January, 2009, even more so with the Congress totally controlled by his own party at the time.
Reagan then ramped up the spending cuts from there.  In nominal terms, non-defense discretionary spending actually declined by 7.1% from 1981 to 1982.  But roaring inflation at the time actually masks the true magnitude of the Reagan spending cut achievement.  In constant dollars, non-defense discretionary spending declined by 14.4% from 1981 to 1982, and by 16.8% from 1981 to 1983.  Moreover, in constant dollars, this non-defense discretionary spending never returned to its 1981 level for the rest of Reagan’s two terms!  By 1988, this spending was still down 14.4% from its 1981 level in constant dollars.
Even with the Reagan defense buildup, which, remember, won the Cold War without firing a shot, total federal spending as a percent of GDP declined from a high of 23.5% of GDP in 1983 to 21.3% in 1988 and 21.2% in 1989.  That’s a real reduction in the size of government relative to the economy of 10%, a huge achievement.
In sharp contrast to Reagan, Obama’s first major legislative initiative was the so-called stimulus, which increased future federal spending by nearly a trillion dollars, the most expensive legislation in history up till that point.  We know now, as thinking people knew at the time, that this record shattering spending bill only stimulated government spending, deficits and debt.  Contrary to official Democrat Keynesian witchcraft, you don’t promote economic recovery, growth and prosperity by borrowing a trillion dollars out of the economy to spend a trillion dollars back into it.
But this was just a warm up for Obama’s Swedish socialism.  Obama worked with Pelosi’s Democratic Congress to pass an additional, $410 billion, supplemental spending bill for fiscal year 2009, which was too much even for big spending President Bush, who had specifically rejected it in 2008.  Next in 2009 came a $40 billion expansion in the SCHIP entitlement program, as if we didn’t already have way more than too much entitlement spending.
But those were just the preliminaries for the biggest single spending bill in world history, Obamacare, enacted in March, 2010.  That legislation is not yet even counted in Obama’s spending record so far because it mostly does not go into effect until 2014.  But it is now scored by CBO as increasing federal spending by $1.6 trillion in the first 10 years alone, with trillions more to come in future years.
After just one year of the Obama spending binge, federal spending had already rocketed to 25.2% of GDP, the highest in American history except for World War II.  That compares to 20.8% in 2008, and an average of 19.6% during Bush’s two terms.  The average during President Clinton’s two terms was 19.8%, and during the 60-plus years from World War II until 2008 — 19.7%.  Obama’s own fiscal 2013 budget released in February projects the average during the entire 4 years of the Obama Administration to come in at 24.4% in just a few months.  That budget shows federal spending increasing from $2.983 trillion in 2008 to an all time record $3.796 trillion in 2012, an increase of 27.3%.
Moreover, before Obama there had never been a deficit anywhere near $1 trillion.  The highest previously was $458 billion, or less than half a trillion, in 2008. The federal deficit for the last budget adopted by a Republican controlled Congress was $161 billion for fiscal year 2007.  But the budget deficits for Obama’s four years were reported in Obama’s own 2013 budget as $1.413 trillion for 2009, $1.293 trillion for 2010, $1.3 trillion for 2011, and $1.327 trillion for 2012, four years in a row of deficits of $1.3 trillion or more, the highest in world history.
President Obama’s own 2013 budget shows that as a result federal debt held by the public will double during Obama’s four years as President.  That means in just one term President Obama will have increased the national debt as much as all prior Presidents, from George Washington to George Bush, combined.
But this 2012 election is defined for the voters by the future, not the past.  And that future is fully revealed by the stark contrast between President Obama’s spending, deficits and debt projected under his proposed 2013 budget, and the projections under House Budget Committee Chairman Paul Ryan’s budget, adopted by the Republican House, and endorsed by presumptive Republican Presidential nominee Mitt Romney.
Despite all the controversy in Washington and in the media over Ryan’s budget, what it all adds up to is just to restore federal spending to its long term, postwar, historical average of 20% of GDP.  That stable level of federal spending, with some modest variance, prevailed for over 60 years after the end of World War II, until 2009.  Ryan’s budget reduces federal spending from an average of 24.4% of GDP during the Obama years to 20.1% after just 3 years, by 2015.
By contrast, under the budget policies supported by President Obama and Congressional Democrats, federal spending soars to 30% of GDP by 2027, 40% by 2040, 50% by 2060, and 80% by 2080.  Obama’s 2013 budget proposes to spend $47 trillion over the next 10 years, the most in world history by far, increasing federal spending by $1.5 trillion above the current CBO baseline.  Ryan’s budget proposes to cut that by $6.8 trillion.  By 2022, Ryan’s budget would be spending nearly a trillion dollars less per year than President Obama’s budget.
Ryan proposes tax reform to consolidate the current 6 individual income tax rates, ranging up to 35%, to just two rates of 10% and 25%.  His budget would otherwise retain the Bush tax rates of 15% for capital gains and 15% for corporate dividends, and repeal the Alternative Minimum Tax.  Ryan also proposes corporate tax reform, closing loopholes and reducing the federal corporate tax rate from 35% to 25%, which is roughly the international average.  CBO scores these reforms, even with the rate cuts, as again restoring federal revenues to their long term, postwar, historical average of 18.3% of GDP by 2015.
Obama’s budget, in sharp contrast, proposes to increase federal taxes by nearly $2 trillion over the next 10 years above the CBO baseline.  The budget projects that under Obama’s tax policies federal income tax revenues will double by 2020, federal corporate tax revenues will double by 2017, and federal payroll taxes will double by 2022.
Next year, under President Obama’s policies, the top tax rates of virtually every major federal tax are already scheduled to increase under current law.  That is because the Obamacare tax increases are scheduled to go into effect, and the Bush tax cuts expire, which President Obama proposes refuses to renew for singles making over $200,000 a year, and couples making over $250,000.  President Obama is now proposing on top of that the Buffett Rule, which would increase tax rates on capital gains and dividends even further.  Counting that, next year the top tax rate for capital gains would increase by 100%, the top tax rate on corporate dividends would increase by 100%, the top two income tax rates would increase by nearly 20%, and the Medicare payroll tax again for singles making over $200,000 and couples making over $250,000 would increase by 62% (under Obamacare).
This is all on top of the corporate income tax rate, which counting state corporate rates is nearly 40%, the highest in the world now, except for the socialist one party state of Cameroon.  Under the Buffett Rule, America’s capital gains tax rate would be the fourth highest in the industrialized world.  Based on historical precedent, these tax rate increases are unlikely to raise anywhere near the revenue projected by CBO, meaning even higher future deficits and debt.
Under Ryan’s budget, even with CBO’s static scoring, the federal deficit in actual nominal dollars would be reduced to $182 billion by 2017, the fifth year of the budget.  That compares to $1,327 billion, or $1.327 trillion, today.  So in just 5 years, the deficit would be reduced by at least 86%.  The deficit under Ryan’s budget would be less than 1% of GDP by 2017, at 0.9%, where it stabilizes for 6 years to the end of the 10 year budget window.  Most importantly, given the sharp tax rate cuts in Ryan’s budget, with dynamic scoring the budget would probably be balanced by 2017.  That is because in the real world the rate cuts will not lose nearly as much revenue as CBO scores.
Under President Obama’s budget, his own projections show the deficit never gets anywhere near balance.  Indeed, the deficit never gets below or anywhere near the former all time record in 2008.  By 2022, his own budget projects the deficit rising over the previous 5 years to $704 billion.  But if Obama’s comprehensive tax rate increases throw the country back into recession next year, the deficits will soar much higher for several years, to new all time records.
Even under CBO’s horse and buggy static scoring, Ryan’s budget does serve to get federal debt under control and avoid any debt crisis, putting federal debt held by the public on a declining path from 77% of GDP in 2013 to 62% by 2022.  That debt continues on a sharp decline from there, as the long term effects of Ryan’s structural entitlement reforms phase in.  Debt held by the public is reduced to 53% of GDP by 2030, 38% by 2040, and 10% by 2050.  That means the national debt is all but paid off by 2050, and would be soon thereafter.  In fact, under dynamic scoring it probably would be paid off by then.
In stark contrast, on our current course, under President Obama’s budget policies, federal debt held by the public rockets to 140% of GDP by 2030, 220%by 2040, and 320% by 2050, on its way to over 700% by 2080.  That would undoubtedly create a Grecian style sovereign debt crisis for America before that point.
So which course will you choose America?

Thursday, June 14, 2012

Stocks Rise On Bad Economic Data

Inflation is down because demand and prices are slumping.

Unemployment claims rose more than expected.

Foreclosures are rising again.

But stocks are higher.

Wall St continues to see the bad data as transitory, temporary!

Tuesday, June 12, 2012

Government Jobs Rise, Private Jobs Plunge

This is why Obama is the Deceiver in Chief!

from Investors Business Daily:
President Obama’s statement Friday that the private sector is “doing fine” drew so much ridicule that he was forced to backtrack hours later. But it’s clear that Obama and many other Democrats see job problems — and solutions — starting and stopping with government employment.
A quick look at payroll stats shows that’s not the case.
Private-sector jobs are still down by 4.6 million, or 4%, from January 2008, when overall employment peaked. Meanwhile government jobs are down just 407,000, or 1.8%. Federal employment actually is 225,000 jobs above its January 2008 level, an 11.4% increase. That’s right, up 11.4%.
Private payrolls have been trending higher in the last couple of years while government has been shedding staff. But that’s because governments did not cut jobs right away. Overall government employment didn’t peak until April 2009, 16 months after the recession started. It didn’t fall below their January 2008 level until September 2010.
The recession was boomtime for federal employment, especially after Obama took office. Federal jobs kept rising (excluding a temporary Census surge in early 2010) until March 2011 — more than three years after overall payrolls peaked.
Obama’s 2009 stimulus did little to revive private jobs, but did funnel massive funding to state and local governments. That, however, only delayed the day of reckoning for states and cities to curb spending. They finally did significantly slash jobs in 2010 and 2011. But those layoffs have slowed to a crawl in recent months — averaging less than 3,500 job cuts a month since November.
It’s easy to argue that Obama’s tunnel vision on government employment reflects his complete lack of experience in the business world. But it’s also mainstream Democratic thinking.
The Wisconsin recall election was about liberals’ zeal to maintain government employees’ privileges far and above those of struggling private sector workers who pay their salaries.
Payroll change since January 2008
Total: -5.01 million  -3.6%
Private: -4.61 million  -4%
Government: -407,000  -1.8%
Federal Government: (excluding post office) +225,000  11.4%
Sources: Labor Department, Datastream
Update: Why does Obama think the private sector is "doing fine"? "We've seen record profits in the corporate sector." And high corporate profits are good for tax revenues to pay for government programs and government jobs. That's the main reason Obama cares about the private sector.

Americans' Wealth Plummets

Monday, June 11, 2012

The Heart of the Matter

John P. Hussman, Ph.D.
All rights reserved and actively enforced.

Reprint Policy

Over the past 13 years, the S&P 500 has underperformed even the depressed return on risk-free Treasury bills. Real U.S. gross domestic investment has not grown at all since 1999, and even as a share of GDP, real investment remains weak.
The ongoing debate about the economy continues along largely partisan lines, with conservatives arguing that taxes just aren't low enough, and the economy should be freed of regulations, while liberals argue that the economy needs larger government programs and grand stimulus initiatives.
Lost in this debate is any recognition of the problem that lies at the heart of the matter: a warped financial system, both in the U.S. and globally, that directs scarce capital to speculative and unproductive uses, and refuses to restructure debt once that debt has gone bad.
Specifically, over the past 15 years, the global financial system - encouraged by misguided policy and short-sighted monetary interventions - has lost its function of directing scarce capital toward projects that enhance the world's standard of living. Instead, the financial system has been transformed into a self-serving, grotesque casino that misallocates scarce savings, begs for and encourages speculative bubbles, refuses to restructure bad debt, and demands that the most reckless stewards of capital should be rewarded through bailouts that transfer bad debt from private balance sheets to the public balance sheet.
What is central here is that the government policy environment has encouraged this result. This environment includes financial sector deregulation that was coupled with a government backstop, repeated monetary distortions, refusal to restructure bad debt, and a preference for policy cowardice that included bailouts and opaque accounting. Deregulation and lower taxes will not fix this problem, nor will larger "stimulus packages." The right solutions are to encourage debt restructuring (and to impose it when necessary), to strengthen capital requirements and regulation of risk taken by traditional lending institutions that benefit from fiscal and monetary backstops, to remove fiscal and monetary backstops and ensure resolution authority over institutions engaging in more speculative financial activities, and to discontinue reckless monetary interventions that encourage financial speculation and transitory "wealth" effects without any meaningful link to lending or economic activity.
By our analysis, the U.S. economy is presently entering a recession. Not next year; not later this year; but now. We expect this to become increasingly evident in the coming months, but through a constant process of denial in which every deterioration is dismissed as transitory, and every positive outlier is celebrated as a resumption of growth. To a large extent, this downturn is a "boomerang" from the credit crisis we experienced several years ago. The chain of events is as follows:
Financial deregulation and monetary negligence -> Housing bubble -> Credit crisis marked by failure to restructure bad debt -> Global recession -> Government deficits in U.S. and globally -> Conflict between single currency and disparate fiscal policies in Europe -> Austerity -> European recession and credit strains -> Global recession.
In effect, we're going into another recession because we never effectively addressed the problems that produced the first one, leaving us unusually vulnerable to aftershocks. Our economic malaise is the result of a whole chain of bad decisions that have distorted the financial markets in ways that make recurring crisis inevitable.
Once we abandoned Glass-Steagall, removing the firewall between traditional banking and more speculative activities, and allowing those activities to have the effective protection of the U.S. government, it was only a matter of time until a credit crisis would unfold. My 2003 piece Freight Trains and Steep Curves detailed the problem: "So the real question is this: why is anybody willing to hold this low interest rate paper if the borrowers issuing it are so vulnerable to default risk? That's the secret. The borrowers don't actually issue it directly. Instead, much of the worst credit risk in the U.S. financial system is actually swapped into instruments that end up being partially backed by the U.S. government. These are held by investors precisely because they piggyback on the good faith and credit of Uncle Sam."
The ability to use the Federal government as a backstop for risk-taking was the central element in creating the housing bubble. As long as a borrower was physically breathing, you could make a mortgage loan without really worrying about whether the loan could be paid back. By the time it was packaged up, tranched out, and securitized either by a bank or by Fannie and Freddie, all of which had the government backstop, the loan was somebody else's problem. When the bubble crashed, our policy makers made their crucial mistake - first through the Bush Administration, and then continued by the Obama Administration - they failed to require bondholders to take losses on bad loans.
Every major bank is funded partially by depositors, but those deposits typically represent only about 60% of the funding. The rest is debt to the bank's own bondholders, and equity of its stockholders. When a country like Spain goes in to save a failing bank like Bankia - and does so by buying stock in the bank - the government is putting its citizens in a "first loss" position that protects the bondholders at public expense. This has been called "nationalization" because Spain now owns most of the stock, but the rescue has no element of restructuring at all. All of the bank's liabilities - even to its own bondholders - are protected at public expense. So in order to defend bank bondholders, Spain is increasing the public debt burden of its own citizens. This approach is madness, because Spain's citizens will ultimately suffer the consequences by eventual budget austerity or risk of government debt default.
The way to restructure a bank is to take it into receivership, write down the bad assets, wipe out the stockholders and much of the subordinated debt, and then recapitalize the remaining entity by selling it back into the private market. Depositors don't lose a dime. While the U.S. appropriately restructured General Motors - wiping out stock, renegotiating contracts, and subjecting bondholders to haircuts - the banking system was largely untouched.
The failure of our policy makers to restructure debt resulted in the worst of both worlds - an economy where banks were relieved of the need for transparency (thanks to accounting changes by the FASB), and yet homeowners strapped with bubble-sized mortgage obligations saw very little in terms of debt restructuring. The reason we never got any economic traction in this "recovery" is that these debt burdens remain in place. While we certainly don't advocate "freebie" principal writedowns - which would almost surely result in a tsunami of strategic defaults, we've long proposed what we've called Property Appreciation Rights as a way to partially substitute mortgage principal for a marketable claim on future appreciation. Failing any meaningful debt restructuring, however, we've got a financial system that continues to operate with a confident government backstop for risk taking, while aggregate demand remains suppressed by a burden of existing debt.
Economists define a standard of living as the amount of goods and services that people in the economy can consume as a result of the work they do. They define productivity as the amount of goods and services that people in the economy can produce as the result of the work they do. In the long run, a rising standard of living requires rising productivity, which in turn requires the economy to accumulate a stock of productive investments - factories, machines, inventions, education, and so forth. In the short run, the benefits of productivity growth can be retained through profits in a way that prevents those benefits from being enjoyed by workers, but even then, redistributing wealth can only achieve limited improvements in living standards. Over time, an economy that squanders its scarce savings will predictably suffer for it.
Tragically, nobody seems to have learned a thing from the dot-com crash, or the tech crash, or the housing crash. Wall Street continues to beg for monetary interventions to reward speculative trading, even though these rewards have repeatedly proved to be short-lived. What investors don't seem to appreciate is how much of our nation's scarce savings have been burned to ashes as a result.
I really don't mean to pick on Facebook. It's a neat company, a neat platform, and I respect Mark Zuckerberg's charitable initiatives. But the example is too instructive to miss, so let's think about it as a business and as a major recipient of investment capital. If you go on Amazon or Ebay, you want to stay in order to buy something. That's a fine business model, and network effects work in your favor because there are a lot of sellers on the other side. If you go on Google, you want to find what you're looking for and then leave, which is a situation where advertising is welcome, and has also worked as a business model (though with a surprising lack of competition given that the business is based largely on a single eigenvector calculation). But consider Facebook. If you go on Facebook, your whole intention is to stay on Facebook for a while, but not to buy something. Here, network effects work against advertising because responding to the ad pulls you away from the network. On that platform, advertising is a nuisance, and if you're forced to tolerate advertising, you'll eventually migrate to a platform without it, so retention will be challenging. And yet, somehow the investment bankers were able to price the company at $100 billion on offering day. Perhaps the IPO proceeds will bring us more games, more  photo apps, and more ways our kids can pass their time online, instead of developing some useful knowledge or skill. I'm all for down-time and social networks in moderation, but it's discouraging when this is the stuff that historic IPOs are made of - that this is where massive amounts of savings are allocated on the basis of a "wait and see" business model. Thanks to speculative hype, coupled with intentionally suppressed returns on less speculative but better understood investment choices, we continue to allocate the nation's scarce savings in ways that are ultimately unproductive, and that error will return to bite us over time.
How do we change course? To restore the economy to the path of long-term growth, we need to allocate capital better. This requires the willingness to allow bad investments to work out badly, without being bailed out or otherwise rescued. It would also help to detach the global economy from the burden of bad loans that can't be serviced. The first order of business is to restructure debt burdens. This requires lenders and bondholders to take partial losses (rather than transferring those losses to the public through bailouts) and requires debt repayments to be restructured - ideally swapping part of the principal for some form of equity claim. A return to growth will require regulatory structures that protect depositors but fully remove government protection from investment banking and trading activities. A return to growth will require monetary policy that stops distorting financial markets by simultaneously suppressing the incentive to save and encouraging speculative investment.
Over the long run, economic growth really means the introduction of new products and services, new methods and technologies, and indeed whole new industries. These aren't the result of stimulus programs, but are instead the result of productive investment, education, creativity, and frankly time. Of course, stimulus programs can have important short-term effects, but even here, we can't talk meaningfully about "stimulating aggregate demand" unless we also restructure the debt burdens on individuals, primarily on the mortgage side. Next to nothing has been done in on this front in recent years. A sharp "fiscal cliff" would be very disruptive here, but we shouldn't overestimate the ability of deficit spending to produce meaningful or sustained economic progress, however "enlightened" a given stimulus package seems to be.
Meanwhile, we can't imagine that the European crisis can be addressed by piling up excessive government debt to bail out troubled banks, and then relying on troubled banks to buy the excessive government debt. Unless we want a world where public services are cut to the bone in order to make bank bondholders whole, and where recession (or in some countries depression) is forced onto citizens in order to make government bondholders whole, the world's leaders will eventually have to wake up and recognize that bad debt requires bondholders who willingly took the risk to also take the loss.
The latest item in the ongoing European crisis is the news that Spain has been promised loans from the EU in order to bail out its banking system. The promise to bail out Spain may provide a burst of positive market sentiment, though I suspect there are some wrinkles ahead before any of that funding will actually be forthcoming. It's a little depressing to reflect on the fact that Spain is one of the four largest European nations, so it's effectively being called on to lend to itself. Somehow, this is seen as Europe "doing the right thing." But what is really happening is that a continent that is already excessively in debt is promising funds so that Spain can increase its government debt, and then needlessly protect the bondholders of Spanish banks, who should be subject to orderly restructuring instead. This is interesting because the new debt will be senior to existing Spanish bonds, much to the chagrin of existing Spanish bondholders, and the bailouts will put the claims of Spanish bank bondholders ahead of the claims of the Spanish citizens who are funding the "recapitalizations." The only way Spain could make a more explicit gift to bank bondholders would be to include wrapping paper and a bow.
If it seems as if the global economy has learned nothing, it is because evidently the global economy has learned nothing. The right thing to do, again, is to take receivership of insolvent banks and wipe out the stock and subordinated debt, using the borrowed funds to protect depositors in the event that the losses run deep enough to eat through the intervening layers of liabilities (which is doubtful), and otherwise using the borrowed funds to stimulate the economy after the restructuring occurs. We're going to keep having crises until global leaders recognize that short of creating hyperinflation (which also subordinates the public, in this case by destroying the value of currency), there is no substitute for debt restructuring.
Finally, on the subject of a Greek exit, bank runs, and general Euro-area stress, the always observant guys at ZeroHedge noted the following news item last week:
VANCOUVER, BRITISH COLUMBIA--(Marketwire - June 7, 2012) - Fortress Paper Ltd. ("Fortress Paper" or the "Corporation") (TSX:FTP), announces that its wholly-owned subsidiary, Landqart AG, a leading manufacturer of banknote and security papers, has had a material banknote order reinstated. This order was unexpectedly suspended in the fourth quarter of 2011 which negatively impacted the financial results of Landqart's operations in the first half of 2012. The Company operates its security paper products business at the Landqart Mill located in Switzerland, where it produces banknote, passport, visa and other brand protection and security papers, and at its Fortress Optical Facility located in Canada, where it manufacturers optically variable thin film material.
We'll add that De La Rue PLC, a British company involved in the design and production of over 150 national currencies, registered a new 52-week high last week, despite steep recent losses elsewhere in foreign stock markets.

Economic Wizardry

Once upon a time (today), in a land not so far away (USA), there lived a trio of economic wizards (economists), whose names shall remain anonymous (Paul Krugman, Greg Mankiw, Ben Bernanke).

A fourth wizard, Murry Rothbard, is no longer among the living but resides in the netherworld.

The above wizards seldom agree with each other because they come from competing schools of wizardry.

Three Schools of Economic Wizardry

  1. Keynesian School of Fiscal Voodoo and Witchcraft
  2. Monetarist School of Monetary Voodoo and Witchcraft
  3. Austrian School of Sound Money, Sound Economic Principles and Common Sense.

"Dark Arts" Wizardry

The first two wizardry schools belong to a class of wizardry promoted to aspiring wizards as the "Dark Arts".

Philosophical Beliefs

  • Keynesian wizards believe governments can spend their way to economic health and although fiscal deficits may matter at some point in time, they never matter now, in practice.
  • Monetarist wizards believe money will cure any and every problem if enough is dropped from helicopters and interest rates held low.
  • Austrian wizards believe that economic problems are created by unsound money, haphazard loans, excessive debts, and government manipulations.
  • Keynesian and Monetarist wizards believe in the voodoo principle "the problem is the solution if only you do more of it". The former relies primarily on fiscal voodoo, the latter relies primarily on monetary voodoo.
  • Austrian wizards do not believe "the problem is the solution", no matter how many times it is repeated.

Grand Poobahs

  1. Paul Krugman is the economic "Grand Poobah" of the Keynesian wizards.
  2. The "Grand Poobah" of Monetarist Voodoo is Fed chairman Ben Bernanke.
  3. Murray Rothbard, no longer alive, was the last great proponent of  school of Sound Money, Sound Economic Principles, and Common Sense.

"Dark Arts" Schools Overflowing With Students

The "Dark Arts" are very enticing to modern day wizards-in-training because nearly everyone likes money from helicopters and deficit spending (even when they claim they don't).

In response to demand for voodoo economists, the "Dark Arts" schools for voodoo economics are overflowing with young wizards all hoping to win a Nobel Prize in Voodooism with "fresh thinking" and new voodoo proposals.

Voodoo Proposal Example - Purposely Make Money Go Worthless

Aspiring Grand Poobah Greg Mankiw (Professor of Economic Wizardry at Harvard University) put forth a proposal that caused a stir in both the real world and the world of wizards.

Mankiw proposed that purposely making money go worthless money over time would be of great economic benefit.

No Demand for Common Sense

The average non-wizard, living in the real world, with an education level beyond 2nd grade, would quickly see the ridiculousness of making money go worthless.

However, at the highest political levels, there is virtually no demand for common sense, and shockingly high demand for voodoo wizardry.

For example, if you ever expect to make chairman of the president's Council of Economic Advisers or become an economic adviser to Mitt Romney (Wizard Mankiw did both), then common sense must go out the window.

Aspiring wizards hoping for careers in politics better quickly learn that politicians never want to hear they cannot spend money. Instead, politicians want to hear economic voodoo.

"Dark Arts" Feuds

Given Keynesian and Monetarist wizards both believe in voodoo, one might think the two schools would get along reasonably well. One would be wrong.

There have been numerous public squabbles between Mankiw and Krugman but the mother of all verbal wizardry battles came when Krugman went so deep into fiscal voodoo theory that Bernanke Called Krugman "Reckless"

Ivory Towers and Academic Wonderland

Unlike non-wizards, modern-day economic wizards do not live in the real world, in real cities. Instead, they live in ivory towers in secret villages for wizards only, typically tucked away in obscure corners of major U.S. universities.

Collectively, these secret villages are known as "Academic Wonderland".

"Academic Wonderland" is strictly off limits to non-wizards with the exception of "Dark Arts" wizards-in-training. It is even off limits to those few aspiring wizards who believe in Sound Money, Sound Economic Principles, and Common Sense.

Real World Experience

"Dark Arts" wizards of the Keynesian and Monetarist schools generally have never worked in the real world. Instead, they sit in their ivory towers and devise empirical formulas as to how they expect the real world to behave.

Occasionally the "Dark Arts" wizards surface in the real world, primarily to explain their mathematical formulas as to how the world functions.

It is seldom of concern to economic wizards if the real world does not follow their mathematical formulas.

Decision Making at Night

"Dark Arts" wizards are very concerned about such nebulous concepts as the "Decision Making at Night". Here is set of equations from an aspiring wizard-in-training.

"Decision making at night" is of course different from "decision making in the day". Both are distinctly different than "decision making with no news".

Voodoo Wizards Like Secrecy

The voodoo wizard-in-training making the above proposal is big proponent of secrecy, believing that Grand Poobahs need to keep what they are doing a big secret lest it change real-world decision making process of non-wizards during the day or night.


Non-wizards understand that "austerity" is a very bad word to both Keynesian and Monetarist wizards. No "Dark Arts" wizard worth his weight in salt would ever propose that any country live within its means.

For a recent example, Paul Krugman, the Grand Poobah of the Keynesian School of Fiscal Voodoo and Witchcraft writes about Estonian Rhapsody.
Since Estonia has suddenly become the poster child for austerity defenders — they’re on the euro and they’re booming! — I thought it might be useful to have a picture of what we’re talking about. Here’s real GDP, from Eurostat:

So, a terrible — Depression-level — slump, followed by a significant but still incomplete recovery. Better than no recovery at all, obviously — but this is what passes for economic triumph?
Left Unsaid

Here's what Grand Poobah Krugman failed to say about the Booming Estonia Economy.
Sixteen months after it joined the struggling currency bloc, Estonia is booming. The economy grew 7.6 percent last year, five times the euro-zone average.

Estonia is the only euro-zone country with a budget surplus. National debt is just 6 percent of GDP, compared to 81 percent in virtuous Germany, or 165 percent in Greece.

Shoppers throng Nordic design shops and cool new restaurants in Tallinn, the medieval capital, and cutting-edge tech firms complain they can’t find people to fill their job vacancies.

Estonia’s achievement is all the more remarkable when you consider that it was one of the countries hardest hit by the global financial crisis. In 2008-2009, its economy shrank by 18 percent. That’s a bigger contraction than Greece has suffered over the past five years.

How did they bounce back? “I can answer in one word: austerity. Austerity, austerity, austerity,” says Peeter Koppel, investment strategist at the SEB Bank.
Estonia vs. Fantasyland

Estonia is not Nirvana. Estonia is not "Academic Wonderland" either.

In contrast, Krugman is in "Academic Wonderland". The Grand Poobah clearly believes Estonia would be in better shape with helicopter drops of fiscal stimulus than a very nice partial recovery and no debt, in spite of the fact the eurozone in general is going to hell in hand basket.

Debt Never a Problem

In modern-day ivory towers, with voodoo economics, debt is never a problem. The only thing that matters is GDP.

One might think that a Nobel prize winner would figure out that government spending will make GDP rise by definition (government spending is part of the equation) and the debt must be paid back. However, one would be wrong.

Bear in mind, Japan has tried both Keynesian voodoo and Monetarist voodoo for over 20 years. The result is a nearly unfathomable debt-to-GDP ratio of 220% and rising. Krugman would have you believe still more spending is the answer. Monetarists like Mankiw would propose making the Yen worthless.

Remember the Voodoo Motto!

Please remember the voodoo motto: If it doesn't work, keep doing more of it, even if that is what got you in trouble in the first place!

Anyone with an ounce of common sense would realize that artificial stimulus will always end, but the debt will remain, hanging like the Sword of Damocles over the economy.

Sadly, these modern-day economic wizards do not have the common sense of the average 6th grader who inherently knows that you cannot keep spending what you do not have.

Invalid Comparisons

No doubt Krugman will point to the misery in Spain and Greece. The comparison is invalid. Estonia is booming not solely because of austerity but rather because it did a number of common-sense things that Spain and Greece did not fully do.

  1. Slashed public sector wages
  2. Raised the pension age
  3. Reduced job protection
  4. Made it more difficult to claim health benefits

Keynesian wizards would be against all those things!

Was Krugman a Housing Bubble Proponent?

In a 2002 New York Times editorial Krugman said "To fight this recession the Fed needs…soaring household spending to offset moribund business investment. [So] Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble."

Krugman claims "that wasn't a piece of policy advocacy, it was just economic analysis."

For further discussion please see Krugman's Intellectual Waterloo

When wizards get into trouble they claim they were misquoted, someone did too much, someone did not do enough or any number of other excuses.

No, it was not "policy advocacy", it was simply economic voodoo that that Krugman condoned.

Krugman a Panderer to Public Unions

One of the reasons Estonia is recovering is it had the common sense to slash public sector wages.

In contrast, Krugman is a strong backer of public unions as noted in Wisconsin Power Play.

The reasons Krugman supports unions should be obvious:

  1. Krugman wants to waste as much money as possible (because that is what Keynesian voodoo economics is all about).
  2. There is no better way to waste taxpayer money than overpay for services from public unions.
Wizards in ivory towers have not completely figured out that money to pay public unions has to come from somewhere (namely taxpayers in general). Of course liberal Keynesian wizards (the worst kind) have an answer for that as well: take from productive members of society and slosh it around to public unions.

Never mind that public unions have bankrupted numerous cities and even in economic la-la land (otherwise known as California), backlash against unions is justifiably high and rising.

Moral of the Story

The average non-wizard non-union employee has long ago figured out the moral of this story. Those in ivory towers in "Academic Wonderland" have not, so I need to spell it out.

It is indeed possible to have a genuine economic debt-free recovery, along with austerity, as long as other sound economic measures are incorporated at the same time.

Yes, there will be some short-term pain. However, any attempt to avoid pain via heaps of fiscal and monetary stimulus is nothing but voodoo economics and can-kicking witchcraft.