Zombiconomy

Braaaaains. Braaaaains. Our leaders have no braaaaains, and that’s the problem. And the evidence is coming through loud and clear from the economy, which the scurrilous wags as CNBC have declared a Zombie Economy. This is gonna be ugly.

In normal times, an economic recovery following a recession will produce real economic growth of around 4-5% and will restore all the jobs lost plus add a few more. That’s not happening this time. Instead, growth has been an anemic 1-2%, and the economy has come close to dipping back into recession three times now. In effect, the economy is stumbling along at the edge of recession. How bad is it? Well, it’s the weakest recovery since 1948!

Moreover, the jobs numbers are horrid. Just to keep pace with population growth, our economy needs to produce 120,000-125,000 jobs each month. In June, this “recovery” produced only 80,000 jobs. In May, this was 77,000 jobs. In April it was 68,000. All told, only 2.6 million jobs have been created since June 2009, for an average of 72,200 per month. That means for the last three years, 50,000 people have joined the workforce each month without finding a job. And that is on top of the millions of people who lost their jobs when the recession began. Indeed, we still have about 5% fewer jobs than we had before the crash.

And it gets worse. As people are running out of unemployment benefits, they are trying to get onto permanent benefits like disability. Remember how the economy produced 80,000 jobs in June? Well, 85,000 workers left the economy that same month to go on disability. That’s right, and that wasn’t an unusual month. Since June 2009, the economy has produced 2.6 million jobs, but 3.1 million workers have gone on disability! That’s unsustainable.

These problems are going to get worse too. To get a genuine recovery, an economy must reach “escape velocity.” That’s the point where economic conditions become strong enough that the recovery sustains itself. In other words, the point where there is enough production that enough new workers must be hired that their incomes begin to spur demand, which requires more production and creates more jobs: a virtuous circle, where good things lead to more good things. If an economy can’t hit that point, then it will slip back into recession or stumble along at the edge of recession, like Japan has done for the past couple decades.

Right now, there are four things preventing the economy from reaching escape velocity:

1. There’s just not enough good news to make people believe the worst is over. Housing and factory orders are up, yes. BUT they are weak and consumer confidence is falling at the same time. The rental-market has hit an all time high in terms of number of people renting, meaning people aren’t buying. And China has slowed its buying.

2. Uncertainty more than anything keeps people from acting, and right now everything is uncertain. Right now no one knows how much of ObamaCare will ever kick in, and until that’s clarified, people won’t hire. Add in the fact that a business would be foolish to act before the election, and you have a recipe for inaction. Inaction means recession.

3. Business has gotten hooked on handouts from the Fed and the other central banks over the past four years, and they are waiting for their next hit of free junk. Ditto on the continuing “stimulus” bills. Why buy anything when Santa keeps coming back to your house?

4. Finally, those banks Obama fixed. . . the ones who now control so much of the economy. . . well, they aren’t fixed. Dozens of them are being caught up in an interest rate manipulation probe across several countries. JP Morgan lost $2 billion in bad trades. Many of them still hold debt that will never be paid. And Greece and Spain and Italy hang around their necks like an inflated albatross.

This is a recipe for stagnation and collapse before the election, not a recipe for growth and happiness. And that’s really bad for Obama. Now the Republicans need to work to make sure they know how to fix this once they take over. For that, I would recommend:

1. Stopping the continuous stream of handouts through stimulus bills and Fed “quantitative easing.”

2. Repealing unnecessary regulations. But this needs to be done in one shot so business won’t keep waiting for more.

3. Killing ObamaCare with any means possible as quickly as possible.

4. Breaking up the big banks into component parts and keeping people’s savings (the money taxpayers guarantee) from being used for speculation.

Thoughts?


P.S. Don't forget, it's Star Trek Tuesday at the film site.

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Broke? But I Still Have Checks!

When you break into your piggy bank and find it empty, perhaps you should consider that you need a budget. But last week, White House mouthpiece Jay Carney was asked about whether the Senate should pass a budget for the President’s approval or veto. Interestingly enough, Carney’s reply was that the White House has no opinion on the matter.

For a White House that has opinions on what you should eat, where you should shop, and what kind of natural resources you should be using, it seems odd it has no opinion on how your tax money should be spent.

Carney was merely repeating what he had already heard from the Senate itself. Majority Leader Harry Reid (D-Nevada) had earlier said that the Senate had no need to bring a budget to the Senate floor this year. After all, we’ve already gone over a thousand days without one. What’s the big deal about waiting a few months or years longer?

Lurking beneath what Carney and Reid are saying is the simple fact that Democrats don’t understand debt, deficits and economics. It also points out their reliance on quick fixes and government tinkering. Said Carney: “What the president believes is important is that the Budget Control Act that was signed into law by him last year provides the top line spending caps for the coming budget, and he will obviously meet those in the budget proposal he puts forward.”

My first question for Mr. Carney is “exactly when is the president going to put forward those proposals?” Trotting out a list of “vitally important governmental actions” (like Solyndra?) is not a budget proposal. It’s more like a setup for busting those budget caps that Carney just said he will “obviously” not bust. The second question is self-evident: “How can you have budget controls without a budget?”

At a Senate Budget Committee hearing, another issue that is dear to the hearts of conservatives and business investors was raised. Sen. Ron Johnson (R-Wisconsin) asked Fed Chairman Ben Bernanke how harmful the lack of a budget is to economic growth. Bernanke talked about something that his employer never mentions—stability and predictability. Said Bernanke: “Uncertainty about the future of the tax code and government programs has a negative effect on growth. I think it is, because firms like to have certainty—you know like to be able to plan. And again I would take on the same responsibility as the regulator, that we need to make regulations as clear and effective as possible.”

He didn’t exactly say “pass a goddam budget,” but he alluded to it. When asked about Bernanke’s testimony, Carney gave a snarky answer: “The White House has no opinion on Chairman Bernanke’s assessment of how the Senate ought to do its business.” The White House seems to have no opinion on how anybody ought to do business unless it benefits their pals or gets in the way of the administration’s social engineering. In those cases, it has opinions galore. But it still doesn’t have the opinion that if you spend more than you take in, you’re broke.

Since the White House has no opinion on Bernanke’s assessment, or on what Congress is doing for that matter, let’s go straight to the horses’ uh, mouths. Sen. Reid says “we do not need to bring a budget to the floor this year. It’s done, we don’t need to do any more.” Over in the House, Minority Whip Steny Hoyer (D-Maryland) says: “The fact is, you do have a budget. We can adopt appropriations bills [and you can bet they will]. We can adopt authorization policies without a budget. We already have an agreed-upon cap on spending.”

See? If you just make it up as you go along, you don’t need a budget. If you spend trillions more than you take in, well, oops. To the question “who’s in charge here?” the answer is “nobody.”

Since this article was written, the President has proposed a budget. It contains lots of spending, lots of new and improved taxes, and lots of increased deficits. Like the White House earlier, I have no opinion on how Congress, business, and the Fed should react to the proposals.
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That's (Republican) Debatable! With 12% More Players!

There’s another Republican debate tonight. If we ask nicely, perhaps T-Rav, Emperor of Sockpuppets, will do a play by play? If not, we’ll mock him mercilessly. Anyhoo, this debate will be in Florida, and given the outcry surrounding Rick Perry’s description of Social Security as a “Ponzi Scheme,” expect that to be a big issue. Also, welcome a new player! Here's what you need to know.

First, the race has turned into a two man race: Perry and Romney. The others are still technically in it, but the polls are beginning to coalesce around these two: Perry holds a 28% to 24% lead over Romney, with no one else in double digits. That’s not surprising, as that happens once front-runners emerge. What is surprising is that Romney is catching up. Perry's 11% lead is down to 4%.

More surprising, Tea Party people in South Carolina apparently are shifting away from Perry toward Romney. I think there are two primary reasons for this. First, Romney has done an effective job of defusing the RomneyCare issue. Whether his defense is true or not, he presented what sounds like a very credible distinction between RomneyCare and ObamaCare. That makes him less toxic, especially as he promises to repeal ObamaCare.

Secondly, Perry is suffering from an unending assault over cronyism -- and has yet to do a good job explaining this away. Cronyism is an issue that sticks in the craws of most Tea Party people. And with Warren Buffett, Solyndra and LightSquared dominating the right-wing blogosphere, cronyism remains a hot button issue. This hurts Perry, especially as no one has made a cronyism charge against Romney.

Does this mean Perry is finished? Hardly. It means Romney will be a stronger competitor than expected and rather than watching Perry run away with the nomination, either one can win this thing. Romney needs to pound away at the crony issue if he wants to win. Perry needs to disarm that issue and find a way to point out that Romney isn't really proposing conservatism.

The other candidates are probably done at this point unless Romney or Perry slips up and falls out. Alternatively, they need to find a way to shock everyone to such a degree they become “buzz-worthy.” Newt is planning to give the intellectual speech to end all speeches. . . but we’ll see. It’s hard to get traction when people assume you can’t win.

One guy who actually has an outside chance tonight is Gary Johnson. He’s the libertarian-leaning former governor of New Mexico. He will be allowed to participate because he cleared the 1% hurdle in the polls (McCotter didn’t). If he comes across as a sane version of Ron Paul or simply as a genuine conservative, he could literally surge into the race as voters still don’t seem happy with Perry or Romney.

The other issue that is hurting Perry is his description of Social Security as a Ponzi Scheme. It is a Ponzi Scheme, but you can’t say that. Even Mitch Daniels, who is known for being truthful and breaking bad news to the public, described this as “too truthful.” A Ponzi Scheme (named after Charles Ponzi) is a fraud that takes the form of an investment that promises each investor more money than they put in, but which doesn’t earn enough money to pay what it promises. So long as enough new people get suckered in, the fraudster is able to pay what he promised to those already in the investment. But once the flow of new people slows, the whole thing collapses.

That’s exactly how Social Security works -- it pays people more than they paid in and it makes no money on its own. That was fine for decades, but when the baby boomers didn’t have enough kids, they triggered its collapse. Now we face a series of bad choices: cut the promised benefits, raise taxes, add more taxpaying workers (i.e. immigration), or let the system collapse. Unfortunately, voters are unwilling to accept any pain in finding a solution to this pending disaster. That hurts anyone who raises this issue, i.e. Perry.

But the real problem for Perry came when he proposed handing Social Security off to the states. Not only does this set off alarm bells for people who think they are going to get their benefits cut, but it sounds like an accounting gimmick that will crush state budgets. Romney is already pounding away at Perry on it. Indeed, Romney has asked Perry six questions, including how a state-run program would be administered or funded and how people could move from state to state under his plan. Look for this to come up a lot tonight (as the average age in Florida is 107).

Finally, I suspect you'll hear a lot about Israel as well, with Obama making such a mess of it, with Rick Perry using that issue to discuss foreign policy, and with Florida being heavily Jewish. Also, expect Perry to play to Hispanics tonight, who dominate parts of Florida. Perry did a fundraiser with Hispanic businessmen this week and is actively courting them. Other than that, expect a LOT of Bernanke bashing after he broke the stock market yesterday.

Bring your popcorn!

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Audit The Fed? Pros and Cons. . .

There has been a lot of disinformation surrounding the Federal Reserve. In fact, spreading disinformation about the Fed has become a cottage industry. The left originally viewed the Fed as the tool of international bankers bent on enslaving the world. In the 1950s, the John Birchers decided that the Fed was the agent of international communists. Fed-hate continues to run wild today in various groups. The Fed, apparently, is the secret cabal of the Bilderberg Group, the Communist Party, Zionist Bankers, and perhaps even a few extra terrestrials. Let’s cut through the garbage.

What Is The Fed?

The Federal Reserve was created by an Act of Congress on December 23, 1913. The Federal Reserve System consists of twelve Federal Reserve Banks located throughout the United States. These banks are governed by a seven member Board of Governors. The members of that Board are appointed by the President and are confirmed by the Senate. They serve 14-year terms and are term-limited to one term, unless they are appointed to complete an unexpired term, in which event they can be re-appointed to a full term.

Contrary to the rumors, the identity of every member of the Board and every officer and director of every Federal Reserve Bank is known and available to the public. In fact, their names are available online, see. e.g. Officers and Directors of the Federal Reserve Bank of Boston.

This, by the way, is one of the first lies told by anti-Fed people, that "no one knows who is on the Fed." I say lies because even when these people are confronted with the facts, they continue to deny them and simply move to more gullible audiences. Indeed, I had an interesting run in with one at Big Hollywood a few months back. Despite my presentation to him of evidence that he could verify with his own eyes that contradicted every single thing he claimed, he simply insisted on repeating his false claims over and over -- eventually accusing me of being “an agent of the Fed.” This is fairly typical behavior from this group.

What The Fed Does: Monetary Policy

The Federal Reserve has numerous responsibilities, but two are relevant here. The first is to handle “monetary policy” for the United States government. Monetary policy involves adjusting the prime interest rate, buying or selling bonds, and setting reserve requirements at banks to control the amount of money available to the economy and the “velocity” of money within the economy -- velocity means how often money gets spent.

In this regard, the Fed has been statutorily charged with holding inflation in check while also encouraging economic growth. European central banks, by comparison, generally are charged only with fighting inflation -- often leading to anti-growth policies.

Many people are upset that the Fed handles this function, and they argue that the Fed should be abolished. In the 1970s, they complained that the Fed caused inflation. In the 1980s, they complained that the Fed artificially kept the economy in check by overly-restricting the amount of money available in the economy. Now they complain that the Fed has created bubbles by allowing too much easy money to circulate in the economy.

There is some truth to each of these assertions as the Fed is not perfect. But the idea that eliminating the Fed would improve the situation is simply not accurate. The Fed was established to act independently of the political process; they are supposed to make their decisions based on the best available economic thinking. If the Fed was eliminated, the duty to handle monetary policy would fall upon the Treasury.

Unlike the Fed, the Treasury is a political creature. Shifting monetary policy to the Treasury would mean that the President, who is subject to election every four years -- and who seeks campaign contributions from people who could benefit directly from such decisions, would be deciding whether or not interest rates should be raised or lowered and whether or not liquidity (i.e. more money) should be injected into the economy.

Moreover, the Congress, which gets elected every two years -- and which seeks money from the same interests, would likely attempt to force the President’s hand whenever they felt the economy needed a boost. That’s a recipe for economic chaos and corruption.

But the other side of that coin is that the President and Congress are more directly accountable to the voters than the independent Fed. That's the trade off.

Incidentally, one of the arguments made for abolishing the Fed is that inflation has been be “out of control” since the Fed came along. But this is a red herring. First, looking at inflation in a vacuum is misleading because it is the comparison of wages to inflation that matters, not inflation itself. In other words, it doesn’t matter if bread costs 100 times what it cost fifty years ago if your income rose 100 times as well. Moreover, an examination of foreign currency exchange rates (a better measure of the value of the dollar than an examination of inflation) shows that the dollar has nearly doubled in value against all major currencies (and gold) in the past 100 years. Thus, the assertion that the Fed’s actions have hurt the dollar is completely wrong.

What The Fed Does: Discount Lending

The Fed also provides temporary loans to banks that are suffering from liquidity problems, i.e. those that are temporarily short of money. This is what they are talking about when you hear about banks “using the Fed’s discount window.” These loans are made at low rates and in secret to protect the identity of the bank. The fear is that knowledge that a particular bank was short of cash would cause people to try to get their money out of the bank, causing a run on the bank and collapsing an institution that likely only needed a short term loan.

The Audit Issue

This leads us to the audit issue. The conspiracy theorist claim that “the Fed has never been audited.” This too is a lie. The Fed is audited each year by independent accounting firms. For example, here is a link to the 2005-2006 audit conducted by KPMG. This audit is fairly typical of the independent audits normally conducted of banks or large businesses.

Moreover, Congress already has the right to audit the Fed, with one caveat. In 1970, Congress passed a law allowing the General Accounting Office to audit the Fed and all of its functions with the exception of the two mentioned above: the Fed’s decision making process for monetary policy and the Fed’s discount lending practices.

The reason the Congress did not allow the GAO to audit the Fed’s monetary policy decision making process was the fear that allowing such audits would interfere with the Fed’s independence. The thinking was the Congress would use these audits to pressure the Fed.

And even though the GAO cannot currently audit that function, this does not mean the Fed is acting in secret. The Fed releases the meeting minutes for each meeting of the Board of Governors which explain broadly the Fed’s thinking on monetary policy. It also releases reports for each region of the country, called the Fed Beige Book, which outline the Fed’s observations regarding all aspects of the economy in each of the Federal Reserve Bank regions. Finally, the Fed Chairman testifies on Capitol Hill on an on-going basis.

The Congress did not allow the GAO to audit the Fed’s lending practices for fear that this would reveal the banks who needed the Fed’s assistance with liquidity, which could cause runs on those banks.

Now the Congress is looking to pass a bill that would allow it to audit these two functions. The cons are those just identified. The pros are that the Congress, as the maker of our laws, should be able to know the thought processes employed by the Fed to make sure that it is acting in a manner which is consistent with the law and that the Congress can continue to support.

With regard to monetary policy, there certainly is a legitimate fear of a loss of the Fed’s independence. Once Congress starts tinkering, the Congress is unlikely to stop tinkering. Soon the Fed’s independence could disappear and we could end up with Congress directing the Fed to do its bidding. But the possibility that Congress may overreach is a poor excuse for denying Congress the oversight that is its responsibility under the Constitution. Not to mention that Congress could just as easily overreach now.

So perhaps allowing an audit is an excellent idea. It’s only the next step that becomes problematic.

With regard to auditing the discount lending practices, the same arguments apply, as well as the concern about creating runs on banks. If the current bill protects the secrecy of those banks that seek the Fed’s help, then an audit of these practices also should be supported. But if it does not, then the risk to the system, with banks avoiding seeking help to prevent possible bank runs, might be too potentially damaging to the banking system to allow.

In the end, those are the choices. There are no conspiracies, no secrets, no Zionist bankers or evil plots by our alien-masters. It is just the difficult trade-off between a process that is independent of political tinkering, but not responsive to voters, versus a process that would likely be more damaging to the economy but more responsiveness to the people.

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