Don’t Borrow Your Way to More Entitlements

UPDATE: Holman Jenkins has a concise and insightful follow-up on this story in the WSJ.

The economics and political communities have recently gone bonkers arguing over details of a study that concluded economic growth declines as national debt reaches 90 percent of annual Gross Domestic Product (GDP). An acknowledged math error in the analysis is being used by Keynesians (borrowers and spenders) to undermine the credibility of the study. John Mauldin wrote a useful summary here.

I think something is missing in this supposed controversy, that being both common sense and reality.

Any analysis about the relationship between national debt and GDP is meaningless in the absence of accountability for the use of the debt and the means of paying it off.

If we borrow money to build a bridge that carries freight for 100 years faster than could be done in the absence of the bridge we have a winner. The carrying cost of the debt is expected to be more than offset over time by the efficiency (GDP growth) offered by the bridge. The same argument is made in support of the 1980’s military buildup credited with causing the Soviet Union to evaporate, leading to a very real peace dividend in the 1990’s as military spending contracted while the US economy grew like a daisy in Spring and the nation had annual budget surpluses from 1998 through 2001..

Borrowing money to expand food stamps to 20 million more people (which has been done) has saddled current and future productive citizens with the burden of principle and interest for the term of the borrowing in exchange for current consumption for those 20 million more people without any possibility of long term improvement in economic efficiency (GDP growth). Money borrowed to pay for the expansion of food stamp recipients comes from the private economy (or is created out of thin air and given a fancy name) but needs to be repaid with the product of productive enterprise in the form of future taxes that will be taken out of the private economy later. Any GDP impact of expanded food stamp consumption now is necessarily reversed upon taxation of productive endeavor to pay off the borrowing later.

This reality leaves us with anticipation of the BANG!, that being the point at which the level of debt and its use to fund current consumption on the backs of a dwindling supply of current and future productive citizens undermines the credibility of the currency to the point where the lenders go away, charge higher rates of interest, or simply don’t exist because they have put themselves in the same position.

What is it again that underlies the assured value of sovereign debt? Nothing much.

Regards, Pete Weldon
americanstance.org

Political Terrorist in the White House

Update April 27, 2013 – The political terrorist is exposed and backs off.

Search for “FAA” today and you get a ream of reports claiming airport delays resulting from budget sequestration. Mr. Obama is actually responsible for these delays.

Turns out the FAA 2013 budget is $15.9 billion and that the Department of Transportation that oversees the FAA claims FAA has to cut about $1.0 billion (6.3%) on an annual basis under sequestration rules. The FAA would rather cut air traffic controllers than delay capital funding of some of the $3 billion in Facilities and Equipment and Research, Engineering and Development accounts, as well as trim other accounts. The focus of the cuts selected is clearly engineered for political effect as any responsible manager with any experience would prioritize current customer needs against long term investments in a time of budgetary constraint.

This is all further suspect because Congress offered Mr. Obama the ability to increase the flexibility of budget cuts called for in the original sequestration rules and Mr. Obama declined. The only reason Mr. Obama declined responsibility is so he could blame someone else for the priorities his administration chose to implement.

Mr. Obama is intentionally causing airport delays in an effort to inflict pain. This is nothing less than an act of political terrorism, creating fear and uncertainty with intentional malice and try to harm as many innocent civilians as possible to score political points.

The Wall Street Journal adds some relevant facts to this reality but is less clear than I with regard to the intent.

Regards, Pete Weldon
americanstance.org

The Politics of Money

The world wide focus on banks and related government regulation is only relevant to the extent governments lie, borrow beyond their current income, and print money. This focus results from government fabricated value undermining confidence in value actually earned from work and free exchange.

Understand clearly that bank regulations and government money printing have nothing really to do with human interchange (the fundamental force driving economics) and everything to do with the politics of satisfying constituents dependent on various forms of welfare (from corporate cronyism to food stamps).

Here is a juxtaposition worth consideration.

If you put your life savings in a Cyprus bank in 2008 you would have earned a modest amount of interest, now had at least 40% of your “uninsured” deposits confiscated by a European Union regulator to repay the pain caused by your Cyprus bank “investing” your deposits in supposedly “safe” Greek bonds, whose value was earlier propped up by the fact that the Greek government outright lied about their finances while the European Union regulator now confiscating your money forgot to check. Read that again.

You would have been better off putting your money in LVMH Moet Hennessy Louis Vuitton (MC.PA), a company that sells arguably frivolous and overpriced merchandize to people who value status more than substance. One could argue that LVMH is the most risky of investments because the stuff it sells is not essential or even needed, yet, the common stock of the company has grown from $85 USD per share in April 2007 to over $133 USD per share in April 2013 (an 8% annual return) and currently pays a 2.2% annual dividend. LVMH is not regulated by anything other than its credibility with its customers.

Hmmmm…..

Now, if you live in the United States you can certainly put your savings in a bank, but keep in mind that Mr. Bernanke’s assurances that your money is “insured” is based solely on his ability to inflate the money supply while he pays you nothing for incurring the risk (or is it a certainty?) that he is devaluing your savings by doing so. So where do you put your money when the government prints $85 billion a month in new money (now over $3 trillion in money printing) used to purchase bonds in the open market for the known purpose of manipulating interest rates in an effort to force private savers to take risk? This is a circular game that compounds and delays the consequences of the uncertainty engendered by the policy.

Herein lies the social justification for a strong currency. A currency that has a proven reputation for holding its value exactly because the government issuing the currency does not lie, does not borrow beyond its means, and does not print money stabilizes the value of private savings and increases trust needed to justify private risk taking, thereby creating jobs and opportunity for those willing to work.

Regards, Pete Weldon
americanstance.org

The Road to Cyprus

The European Central Bank, International Monetary Fund and Cyprus announced an immediate and surprise tax of 6.75% to 9.95% on savings accounts that will be withdrawn on Tuesday morning (Monday is a holiday in Cyprus).

Let’s see… supra-state regulators pull a cram down on Cyprus bank depositors without warning in order to get paid for the lax and incompetent actions of the supra-state regulators.

This is extraordinary and foreshadows tactics we can expect from statist economies run not by the interaction of free individuals in free markets but by regulators. In this case regulators are desperate to recover money from innocent bank depositors and crooks alike.

In the face of actual confiscation in Cyprus it cannot be paranoid to fear its presence. Where is your money and what assurances do you have that some state apparatus won’t simply order that 10% of your bank deposits be turned over to them on Tuesday morning?

What circumstances can lead to such over reach and what can we do to assure it does not happen to us?

Regards, Pete Weldon
americanstance.org

A Powerful View on Medicare Expansion

Florida House Speaker Will Weatherford gave a speech today at the opening of the 2013 Florida legislative session. Below are his personal views on the subject of whether Florida should accept the Medicare expansion that is part of Obamacare. His words are both true and painful.

Perhaps one of the most challenging questions we’ll face this Session is whether we should expand Medicaid.

Let me start by saying, I know this is a very difficult issue.

Passions will run high and principles will clash within this chamber.

On the matter of expansion, allow me to depart from the message of the House for a moment, and speak to you about my personal views.

First of all, let me say, I believe in the safety net.

My family has benefited from the safety net.

As many of you know, I grew up in a family of nine children. My father was self-employed and did the best he could to provide for us but we never had health insurance. We could never afford health insurance.

My baby brother Peter was diagnosed with cancer when he was 13 months old. He was in and out of the hospital for seven months.

My Mom and Dad basically lived at the Ronald McDonald House – because they couldn’t afford to stay in a hotel.

After two major surgeries, Peter lost his battle with cancer and my father found himself with a mountain of medical bills that he could never afford to pay.

It was the safety net that picked my father up.

It was the safety net that picked my family up.

I will continue to believe in – and fight for – a strong safety net for Florida.

Because the measure of our state is not how well we take care of the rich, but how well we take care of the sickest and weakest among us.

But Members, I also firmly believe that a government that grows too big, becomes too intrusive, and fosters too much dependency will threaten our liberty, our freedom and our prosperity.

Members — I am opposed to Medicaid expansion because I believe it crosses the line of the proper role of government

I believe it forces Florida to expand a broken system that we have been battling Washington to fix, and I believe it will ultimately drive up the cost of health care.
This inflexible plan, thrust upon us by the federal government, is not aimed at strengthening the safety net.

It pushes a social ideology at the expense of our future.

The trouble with this social experiment is that it is destined for failure.

The notion that we’re going to receive free money from the federal government is laughable.

This is the same federal government that has not passed a budget in nearly four years.

This is the same federal government that spends 1.2 trillion dollars more than it takes in in every year.

Florida is being tempted with empty promises to comply with policies we would never pay for
if we knew the true cost.

They’re trying to buy off states one by one.

I am not buying it. Florida should not buy it.

Because their failure to deliver has such high stakes for Floridians.

If they get this wrong, we are on the hook.

It would be far easier for me, and for us, to simply say yes to the so called “free money,” enjoy the accolades for a few years, and leave office knowing that the true cost will come
due long after we’re gone.

It’s not right, and it’s not what I signed up for.

Florida’s governor disagrees, seeing a moral imperative to provide expanded Medicare so long as it is fully subsidized by the Federal government (borrowing even more against our children’s future).

Mr. Obama and the Democrats are trying to force us all to expand health care subsidies to the exclusion of economic opportunity and growth while we increase dependency and bankrupt the country.

Will Weatherford is right and we need to tell our congressional representatives to de-fund Obamacare now.

You can send Will a thank-you here.

Regards, Pete Weldon
americanstance.org