Oct 31

Solutions for Everything, Answers to Nothing

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Could one day’s Financial Times be the best £2.50 humanity ever spends…?
 

WEDNESDAY we picked up an issue of the Financial Times, writes Bill Bonner in his Diary of a Rogue Economist – the so-called pink paper due to its distinctive color.
 
We wondered how many wrongheaded, stupid, counterproductive, delusional ideas one edition can have.
 
We were trying to understand how come the entire financial world (with the exception of Germany) seems to be singing from the same off-key, atonal and bizarre hymnbook. All want to cure a debt crisis with more debt.
 
The FT is part of the problem. It is the choirmaster to the economic elite, singing confidently and loudly the bogus chants that now guide public policy.
 
Look on practically any financial desk in any time zone anywhere in the world, and you are likely to find a copy. Walk over to the ministry of finance…or to an investment bank…or to a think tank – there’s the salmon-pink newspaper.
 
Yes, you might also find a copy of the Wall Street Journal or the local financial rag, but it is the FT that has become the true paper of record for the economic world.
 
Too bad…because it has more bad economic ideas per square inch than a Hillary Clinton speech. It is on the pages of the FT that Larry Summers is allowed to hold forth, with no warning of any sort to alert gullible readers. In the latest of his epistles, he put forth the preposterous claim that more government borrowing to pay for infrastructure would have a 6% return.
 
He says it would be a “free lunch” because it would not only put people to work and stimulate the economy, but also the return on investment, in terms of GDP growth, would make the project pay for itself…and yield a profit.
 
Yo, Larry, Earth calling…Have you ever been to New Jersey?
 
It is hard enough for a private investor, with his own money at stake, to get a 6% return. Imagine when bureaucrats are spending someone else’s money…when decisions must pass through multiple levels of committees and commissions made up of people with no business or investment experience – with no interest in controlling costs or making a profit…and no idea what they are doing.
 
Imagine, too, that these people are political appointees with strong, and usually hidden, connections to contractors and unions.
 
What kind of return do you think you would really get? We don’t know, but we’d put a minus sign in front of it.
 
But the fantasy of borrowing for “public investment” soaks the FT.
 
It is part of a mythology based on the crackpot Keynesian idea that when growth rates slow you need to stimulate “demand”.
 
How do you stimulate demand?
 
You try to get people to take on more debt – even though the slowdown was caused by too much debt.
 
On page 9 of Wednesday’s FT its chief economics commentator, Martin Wolf (a man who should be roped off with red-and-white tape, like a toxic spill), gives us the standard line on how to increase Europe’s growth rate:
“The question […] is how to achieve higher demand growth in the Euro zone and creditor countries. [T]he Euro zone lacks a credible strategy for reigniting demand [aka debt].”
It is not enough for people to decide when they want to buy something and when they have the money to pay for it. Governments…and their august advisers on the FT editorial page…need a “strategy”.
 
On its front page, the FT reports – with no sign of guffaw or irony – that the US is developing a “digital divide”.
 
Apparently, people in poor areas are less able to pay $19.99 a month for broadband Internet than people in rich areas. So the poor are less able to go online and check out the restaurant reviews or enjoy the free pornography.
 
This undermines President Obama’s campaign pledge of giving every American “affordable access to robust broadband.”
 
The FT hardly needed to mention it. But it believes the US should make a larger investment in broadband infrastructure – paid for with more debt, of course!
 
Maybe it’s in a part of the Constitution that we haven’t read: the right to broadband. Maybe it’s something they stuck in to replace the rights they took out – such as habeas corpus or privacy. 
 
We don’t know. We only bring it up because it shows how dopey the pink paper – and modern economics – can be.
 
Quantity can be measured. Quality cannot. Broadband subscriptions can be counted. The effect of access to the internet on poor families is unknown.
 
Would they be better off if they had another distraction in the house? Would they be happier? Would they be healthier? Would they be purer of heart or more settled in spirit?
 
Nobody knows. But a serious paper would at least ask.
 
It might also ask whether more “demand” or more GDP really makes people better off. It might consider how you can get real demand by handing out printing-press money. And it might pause to wonder why Zimbabwe is not now the richest country on earth.
 
But the FT does none of that.
 
Over on page 24, columnist John Plender calls corporations on the carpet for having too much money. You’d think corporations could do with their money whatever they damned well pleased.
 
But not in the central planning dreams of the FT. Corporations should use their resources in ways that the newspaper’s economists deem appropriate. And since the world suffers from a lack of demand, “corporate cash hoarding must end in order to drive recovery.”
 
But corporations aren’t the only ones at fault. Plender spares no one – except the economists most responsible for the crisis and slowdown.
“At root,” he says of Japan’s slump (which could apply almost anywhere these days), the problem “results from underconsumption.”
Aha! Consumers are not doing their part either.
 
Summers, Wolf, Plender and the “pink paper” have a solution for everything. Unfortunately, it’s always the same solution and it always doesn’t work.
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Jan 23

Feds Unfettered

Gold Price Comments Off on Feds Unfettered
Hold onto your gold. You’re going to need it…
 

HOW DO YOU like those pols? asks Bill Bonner in his Daily Reckoning.
 
The shackles of sequester were beginning to chafe their ankles. So, what do they do? Get out the files and bolt cutters, of course!
 
Yes, dear reader, we can stop worrying. The feds have no intention of cutting back the zombies. The Fed has no intention of tapering off. And the big crisis that was on the horizon has no intention of going away.
 
So yes, hold onto your gold. You’re going to need it.
 
The problem is too much spending and too much debt. It’s a problem that gets worse every day. The US federal government has made promises to the voters that it can’t keep. If it honors its commitments, spending will outstrip tax receipts from here to kingdom come. Or until lenders come to their senses. Whichever comes first.
 
Then, there will be only one source of funding left – the Fed. The Fed already provides enough to fund the entire US deficit, and more, with the excess pushing up asset prices. If it keeps buying assets at the present rate, by about 2080, it will own everything in America…every house, every bond, every company, every shopping mall, and every baby stroller.
 
In short, the feds are on a crash-course with reality. They can’t spend more than they take in forever. And they can’t fund the deficit with printing press money forever either.
 
Forever is still a long way off. But eventually, someone, somewhere, sometime, somehow will have to come to grips with it.
 
There are two ways to do so. Voluntarily. Or involuntarily. The Fed took a baby step towards a voluntary solution when it began to taper off its QE program. You already know our opinion: it won’t continue.
 
Congress also took a small step in the right direction, when it voted to stop spending so much money by automatically ‘sequestering’ part of its outlays. But last week, the pols got together and made a $1.1 trillion deal that effectively undoes the sequester provisions. Veronique de Rugy of George Mason University reports in the Washington Examiner:
“Celebrated as a bipartisan victory, the omnibus bill Congress approved Thursday is yet another example of lawmakers’ propensity for overspending. The massive $1.1 trillion spending package funnels more money that it should to defense and other domestic projects. Following the outline set by the Ryan-Murray plan, the bill spends above the levels set by the 2011 sequester and wastes loads of money on special interests.
 
“The big winners of this bipartisan spending orgy are the Pentagon and the military-industrial complex. Thanks to Congress’ willingness to renege on its commitment to cut spending through sequestration, the Department of Defense won’t be subjected to the cuts that had been planned for the next two years.
 
“A document prepared by the staff of Sen. Tom Coburn, R-Okla., shows the omnibus bill is also stuffed with funding for weapons not even requested by the Pentagon, including $90 million for Abrams tank upgrades to maintain “critical industrial base capability”, $1.2 billion to the Navy’s request to fully fund a second Virginia-class submarine in fiscal year 2014 (the Navy had requested partial funding), and eight additional MQ-9 Reaper UAVs on top of the 12 the Air Force requested.
 
“The Coburn document also shows that the omnibus funds research not requested by the Pentagon, including $6 million for human, social and culture behavior modeling, $46.7 million for weapons technology, and $70 million for common kill vehicle technology.
 
“But it gets worse, since the military not only scores more spending through its regular budget, but as a bonus it gets a raise through its Overseas Contingency Operations budget (the OCO or “war” budget).
 
“Indeed, although the troop levels have gone down from 60,000 to 30,000 over the past year, the omnibus bill provides more spending for the war effort – $85.2 billion. That’s an almost $5 billion hike over what the spendthrift Pentagon asked for…”
Of course, the zombies at the Pentagon aren’t the only winners:
“The bill, for instance, includes $4 million for alcohol and substance abuse research, $12 million for Alzheimer’s research, $120 million for breast cancer research, $10.5 million for lung cancer research, $20 million for ovarian cancer research, $80 million for prostate cancer research, and more – all of which are nondefense activities and overlap research performed by the National Institute of Health.”
Thank you, dear Congress. You’ve reaffirmed our faith in cronyism.
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Oct 16

Yellen at the Fed!

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The wrong woman got the Fed job. Or rather, the right one did…
 

WE SPENT last week up at the family ranch, high in the Argentine Andes, writes Bill Bonner in his Daily Reckoning.
 
The ranch was meant to be an investment. It has turned into a social welfare project.
 
Meantime, checking the news when we got back to an internet connection on Sunday night, we were thrown into the blackest funk when we found that our bid to head the Federal Reserve was rejected.
 
The phone never rang. The person who never called, of course, was President Obama. So, we missed an opportunity to run the world’s biggest and most powerful central bank. And President Obama missed a chance to put the nation’s monetary house in order.
 
Not that it would have been easy. Not that it would have been painless. Not that people would have liked it.
 
Most likely, our plans would have been thwarted, and we would have been assassinated or committed to an asylum for the insane. That’s why we had planned a quick getaway to our ranch in Argentina, where there is no phone…no TV…and, lately, no internet.
 
The entire system depends on credit. And anything that threatens the flow of credit must be crushed…or ignored. In the event, we were ignored.
 
Instead, the Prez chose Janet Yellen – the first woman to lead the United States’ banking cartel. But she is not the first woman to lead a major government-sponsored banking boondoggle. That honour goes to Christine Lagarde, who heads the IMF…and who knows even less about what she is doing than Ms. Yellen.
 
Still, the markets celebrated – sending stocks substantially higher and gold substantially lower. On both scores, we suspect Mr. Market is pulling a fast one, setting up investors for greater losses later on. Stocks were already on the high side…in an economy which appears to be deflationary, depressive and despondent. Ms. Yellen is committed to sending stock prices even higher – with easier credit policies.
 
We are in risky territory. If monetary stimulus could really make equity more valuable, Zimbabwe would have the most valuable stocks in the world. And here in Argentina, stocks would be moving up nicely too, thanks to a real inflation rate near 30%.
 
In America’s depressive economy, on the other hand, the most recent trend in consumer prices – as reported by the nerds at the Bureau of Labor Statistics – is down.
 
No kidding. The last quarter showed falling prices: a disinflationary trend is surely part of the reason that the gold price is slipping.
 
It’s also the reason that QE, ZIRP et al don’t work. But that’s a long story…for another day.
 
Gold is a defence against inflation…and financial chaos, and uncertainty. Now, the uncertainty appears to be gone. We know that the Fed will keep to the program set up by Ben Bernanke. It will continue funding the feds’ zombie projects with printing-press money – possibly becoming even more aggressive and ambitious.
 
Stocks should benefit – in the short run. Speculators should come out ahead. And the rich should get richer (QE and ZIRP are fundamentally transfer programs, not stimulus programs. For example, they increase the value of anticipated streams of income from stocks by reducing the rate at which future cash flows are discounted.)
 
But if it were that easy to create real wealth, of course, everybody would be doing it. Real wealth – like everything else that is precious – takes time, patience, and forbearance.
 
You don’t get it by using cheap tricks and economic gimmickry. Instead, you have to pay for it. That is, you have to give something up in the present to gain more prosperity in the future.
 
The feds’ programs promise the opposite: Americans will get something now…and pay (dearly) later. Eventually – sooner or later – Mr. Market will come down hard on investors’ heads, like a murderer armed with a claw hammer.
 
But hey…Barack had his chance. And we want dear readers to know that our feelings aren’t hurt. Not in the least. We didn’t really want to be Fed chairman anyway. We just suggested it as a gesture of civic generosity…offering our little mite to help the cause of prosperity and human happiness.
 
And if Barack et al think the nation would be better off with Ms. Yellen, who gives every indication of understanding absolutely nothing about real wealth in any form, we will line up fully in support of his choice.
 
We also want Ms. Yellen to know that we will do whatever we can to help her in this difficult job. They have our number.
 
Really, no hard feelings.
 
The feds now have the Fed chief they prefer…and they’ll get what they deserve. The bastards.
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