Free Markets, Free People
It seems so hard to remember those halcyon days, long ago, when there was some optimism about the country’s economic future. Why, it seems like just last week, when Fed Chairman Ben Bernanke was telling us to be cautiously optimistic about the near future.
In his twice-yearly testimony to Congress, Bernanke conceded the economy was undergoing a “severe contraction”, but held out hope of recovery if the White House’s latest bail-out helped to unblock lending to households and businesses.
“Only if that is the case, in my view there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery,” he told the Senate banking committee, adding that healthier global markets would also be essential if the US economy was to return to health.
Some were willing to go even farther, in those happier days of February, 2009. Some chap named Bernard Baumohl of the Economic Outlook Group who seems really to believe that happier days are just around the corner.
“We are not doomed to a lost decade of the sort experienced by Japan in the 1990s,” Mr. Baumohl says. “Nor are we in a depression. We view the drop in GDP in the last quarter, which we may see repeated in magnitude this quarter, [as] symptomatic of a recession in its final convulsive stages, to be followed by a recovery in the second half of the year.”
Oh, wait. That was last week.
This week started off with the S&P 500 dropping another 4.66% today, closing at 700.82, and the Dow off by 4.24% to close at 6,763.29. Well, you can’t slip something like that past the boys at the Dallas Morning News.
“The number 7,000 is not what is important,” said Hugh Johnson, chairman of Illington Advisors in Albany, N.Y. “What is important to everyone is the message that the market is sending us with these losses.”
And that message is that the current recession probably will be longer and more severe than most people expected. For months, the consensus on Wall Street was that the low of 7,500 that the Dow hit in November 2008 would mark the bear market bottom.
Many market analysts predicted that while the Dow would “retest” that low, it would not break through it. They were wrong. The scary thing now is where the Dow and the broader Standard & Poor’s 500 index will make their next stand.
As I’ve mentioned several times, both on the blog, and on the podcast, the historical long-term trend is for the average P/E ratio to drop back to 15. Well, that implies that our equilibrium point is somewhere in the vicinity now of 6,000 on the Dow, and about 620 or so for the S&P. So we’ve still got a ways to go if that historical trend holds true.
Of course, we also have a tendency to drop below an average P/E of 15 as we pull back off the highs, so a 5,000 Dow doesn ‘t seem like an overly pessimistic prediction.
I know I’ve been consistently downbeat on the economy for the last several months, and nothing I’ve seen since I started writing about this in 2007 has changed my mind. I’m not counting on a recovery in 2009, or even in 2010.
Sometimes, a message has to get out there, so that the people who need to hear it can hear it. Often, however, the message can’t be gotten out by presidents, finance ministers, or Fed officials. But, someone has to make the arguments. Samizdata’s Brian Micklethwait takes up the task today.
It needs to be said that under certain circumstances easily now imaginable, many Western citizens would argue, strongly and vocally, that those idiot foreigners who are now lending money to Western governments should in due course be told: sorry sunshine, you ain’t ever going to get it back. Our governments are bankrupt. Why the hell should we and our descendants in perpetuity be paying tribute to you? You knew that the money to pay you back would have to be stolen from us. You assumed we’d just cough up indefinitely. Well, we damn well won’t. You are now a definite part of our problem, and telling you to take a hike is going to be part of our solution. Our thieving class is now “borrowing” money from your thieving class like there is no tomorrow, and we are not responsible for the actions of either gang. A plague on both your houses.
We want you foreign thieves to stop lending to our thieves, now. And the best way for us to convince you that you should indeed stop lending, is to tell you that you are extremely liable never to see most of your money back.
Which has the added virtue of probably, approximately, being true, already.
The last sentence is the real kicker, because it’s beginning to look more like a question of when, rather than if. And, who of course. Of the Western nations, my favored picks, in no particular order, for winning 1st place in the 21st Century Debt repudiation race are, in no particular order: Hungary, Italy, Ireland, Spain, and Portugal.
Second place will be too close to call.
And you don’t have to couch it in Mr. Micklethwait’s incendiary libertarian rhetoric about their thieves and our thieves. I mean, I agree with it, but the plain fact is that even if you grant that everyone has the best intentions in the world, it still seems that we are very close to a tipping point where it could begin to happen. Bruce wrote about it earlier today.
If one of the Euro Zone nations decide to revert to Lira or Escudos, or whatever, the news that such a deal is in the offing will not only hammer the nation that tries, but anyone else who looks iffy, and, untimately, the Euro itself.
Investors are not going to sit around and wait to have their Euro-denominated paper revalued in Drachma. They’ll immediately start dumping that paper, and moving all the assets they can out of not only the offending nation, but any other country that looks like a weak sister. As the article Bruce quoted notes, “Such a wholesale shift would lead to a collapse in the money supply…” Gee, you think?
Germany, of course, would probably get the lion’s share of that new money, and to avoid a general economic collapse, they’d probably have to dump the Euro, too, and redenominate all that nice cash in Deutschemarks to avoid getting hammered as the rest of the Euro Zone economies collapse. Or, Germany might be the Euro Zone. Maybe France, too. France is more of a hindrance than a help, really, but palling around with the French is the price Germans paid for re-admittance to the human race, after the recent…unpleasantness.
No finance minister can yet say such unpleasant things publicly. But someone needs to to say them, especially since they are starting to sound less and less extreme.
This is the fourth nominee by Obama that has come under scrutiny due to failure to pay taxes.
Need anymore evidence that taxes are too high, the tax code is difficult to understand and the tax system is broken? Look no further than appointees of Barack Obama.
The omnibus budget bill that passed the House last week could destroy school vouchers in Washington, DC and the Washington Post is urging the Senate to restore the funding:
Rep. Davis R. Obey (Wis.) and other congressional Democrats should spare us their phony concern about the children participating in the District’s school voucher program. If they cared for the future of these students, they wouldn’t be so quick as to try to kill the program that affords low-income, minority children a chance at a better education. Their refusal to even give the program a fair hearing makes it critical that D.C. Mayor Adrian M. Fenty (D) seek help from voucher supporters in the Senate and, if need be, President Obama.
Last week, the Democrat-controlled House passed a spending bill that spells the end, after the 2009-10 school year, of the federally funded program that enables poor students to attend private schools with scholarships of up to $7,500. A statement signed by Mr. Obey as Appropriations Committee chairman that accompanied the $410 billion spending package directs D.C. Schools Chancellor Michelle A. Rhee to “promptly take steps to minimize potential disruption and ensure smooth transition” for students forced back into the public schools.
We would like Mr. Obey and his colleagues to talk about possible “disruption” with Deborah Parker, mother of two children who attend Sidwell Friends School because of the D.C. Opportunity Scholarship Program. “The mere thought of returning to public school frightens me,” Ms. Parker told us as she related the opportunities — such as a trip to China for her son — made possible by the program. Tell her, as critics claim, that vouchers don’t work, and she’ll list her children’s improved test scores, feeling of safety and improved motivation.
But the debate unfolding on Capitol Hill isn’t about facts. It’s about politics and the stranglehold the teachers unions have on the Democratic Party. Why else has so much time and effort gone into trying to kill off what, in the grand scheme of government spending, is a tiny program? Why wouldn’t Congress want to get the results of a carefully calibrated scientific study before pulling the plug on a program that has proved to be enormously popular? Could the real fear be that school vouchers might actually be shown to be effective in leveling the academic playing field?
This week, the Senate takes up the omnibus spending bill, and we hope that, with the help of supporters such as Sen. Joseph I. Lieberman (I-Conn.), the program gets the reprieve it deserves. If it doesn’t, someone needs to tell Ms. Parker why a bunch of elected officials who can send their children to any school they choose are taking that option from her.
The vouchers cover up to $7,500 ($6,000 average), the average cost per student in DC is $24,600. So it’s hardly a substantial amount of money in comparison to the amount of money spent on the average student and the vouchers are having a positive impact for students.
Members of Congress and the President have made the choice to send their kids to private school. If they don’t trust the government to educate their kids, why should the residents of the District of Columbia?
You know I’ve been reading all the opinions being tossed around about that statement by Limbaugh, and I’ve thought about it for a while, and I just can’t find anything wrong with it.
Here’s a confession: I’d be lying out of my 3rd point of contact if I said I wanted him to succeed. That’s because “success” would mean the subversion of everything I find important into something I loathe. It would mean the supplanting of free market and capitalistic economic mechanisms with those designed by government. It would mean sanctioning and approving govenment driven market distortions. It would mean approving government picking economic winners and losers. It would mean agreeing that it is the job of government to provide health care, welfare, and retirement. And on and on we go.
So I’d be absolutely full of it if I said, with a smile, “of course I want Mr. Obama to succeed, he’s our President and no patriotic American wants to see a President fail”.
Well, except those patriotic Americans of the left during the last 8 years.
But you know, that doesn’t count. 8 years of claiming to be “in the darkness”, governed by “a loser” and an “incompetent” who was taking us down the road to “totalitarianism” and who had to be stopped wasn’t at all the same as Rush Limbaugh stating he wants Obama to fail.
That was then, this is now. Then it was patriotic dissent. Now it’s an unspeakable outrage.
Well, let me go on record here, not that it counts for much. It’s nothing personal toward Mr. Obama. He’s a nice enough guy for someone who I think has an agenda which will destroy this country and the institutions which have made us the most prosperous and powerful nation in the world. So it’s not personal. It’s political.
It’s about what he represents politically. It’s about his political agenda. And since he’s the driving force behind his political agenda it’s rather hard to separate the man from the movement, wouldn’t you say? I guess I could be real cagey about it and say, “of course I want to see Mr. Obama succeed, but I want his agenda to fail”.
Makes no sense does it?
Nor does saying, “this has nothing to do with Obama, it’s about the agenda, and I want it to fail”. That’s as false as any other statement which tries to separate Obama from his agenda. And that bears saying again – it’s “his agenda”. If Iraq was “Bush’s war”, this spending monstrosity and the plans that go with it are “Obama’s agenda”, aren’t they?
Well, unsurprisingly, I want that agenda to fail.
If you want to interpret that to mean I want Obama to fail, so be it – that’s up to you.
But don’t even try to pretend that this is something new or unique to the right after the last 8 years. And for the record, I wanted much of Bush’s agenda to fail as well – Medicare Part D, NCLB, etc.
So save your self-righteous hypocrisy about Limbaugh’s desire to see Obama fail for someone who cares. To be perfectly clear, I want to see the Obama agenda to go down in flames too. If that happens to take Obama with it – oh well.
Two major points about the budget plan the Obama administration has out there (from the Heritage Foundation):
Spending: Obama’s budget proposes $1.13 trillion in regular discretionary spending for 2010. This is a full 12% increase over the 2009 spending baseline. On top of this the Obama budget increases entitlement spending by another $700 billion. The proposed post-recession spending level of 22% of GDP has been exceeded only 8 times in the post-war era. And these numbers do not include the spending priorities of the unchecked far left in Congress.
The Chicago Tribune reports today “President Barack Obama will break a campaign pledge against congressional earmarks and sign a budget bill laden with millions in lawmakers’ pet projects … Taxpayers for Common Sense, a watchdog group, identified almost 8,600 earmarks totaling $7.7 billion.”
Deficits: The Obama budget claims to cut the deficit in half by 2012, but relies on audaciously optimistic economic forecasts that no one believes in. Adding the “stimulus” bill to a realistic budget baseline yields a projected 2010-2017 cumulative budget deficit of $8.4 trillion – 2.5 times the size of President Bush’s deficits over the same 8-year time period. Before the recession, revenues were 18 percent of GDP and spending was 20 percent. After the recession, President Obama would maintain revenues at 19 percent of GDP, and spending at 22 percent. In other words, all new tax revenues would finance new spending, rather than deficit reduction. President Obama’s structural budget deficit would exceed President Bush’s.
So you have, in the time of economic contraction and massive deficit, a 12% increase over the 2009 spending baseline in discretionary spending. 12%. And entitlement increase of $700 billion. In an 8 year time period (should he be re-elected in 2012) Obama plans to add 8.4 trillion to the debt – a full 2.5 times larger than the huge debt George Bush added. This is a phenomenal and eventually crippling level of borrowing and spending. There is no end in sight. Where the Bush administration spent 2% above the revenue, even with an increase in revenue from increased taxation, the Obama administration plans on maintaining a 3% spending gap of revenue/spending.
Untenable, unsustainable and ultimately, utterly destructive to a market economy.
It is certainly worse abroad than here. As Dale pointed out, if this is a failure of the “free market” why is Europe, which is very tightly regulated, having a worse time than we are? Ambrose Evans-Pritchard has a blog post outlining the woes of Europe. First, the real possibility of repudiation of debt:
Ex-Bundesbank chief Karl Otto Pohl has just said that Ireland and Greece are in danger of defaulting on their sovereign debts and/or may be forced out of the Euro, for those who may not be aware of his Sky interview by my colleague Jeff Randall.
“I think there are countries considering the possibility. It would be very expensive,” he said. “The exchange rate would go down, 50 or 60% and then interest rates would go sky high because the markets would lose all confidence.”
Then we have the possible abandonment of the Euro in order to “re-establish economic competitiveness quickly”:
Laurence Chieze-Devivier from AXA Investment Managers — in “Leaving the Euro?” — says that the rocketing debt costs of Ireland, Greece, Spain, and Italy are taking on a life of their own. (Italy has just revised is public debt forecast from 2010 from 101pc to 111pc. That is a frightening jump. While the CDS default swaps on Irish debt is are at 376 basis pouints. Austria is at 240. This is getting serious).
It is far for clear whether all these countries will accept the sort of drastic retrenchment required to stay in EMU. “By leaving the euro, internal adjustments would become less `painful’. An independent currency would re-establish economic competitiveness quickly, not achieved by a sharp drop in employment or wage cuts”.
The possible death of the “European nation”:
Carsten Brzeski for ING in Brussels said the eurozone laggards were more likely to default than pay the punishing costs of leaving EMU.
“It is difficult to believe that Portugal, Italy, Ireland, Greece, and Spain, would be better off outside the eurozone. While a government could possibly get away with a redenomination of its debt, the private sector would still have to service its foreign debt. We believe any attempts to leave monetary union would lead to the mother of all crises, and total isolation in any future European integration”
Mr Brzeski said the bigger danger is that countries will face a buyers’ strike for their debt as a flood of bond issues across the world saturates the markets.
“A further worsening of the crisis could lead to (partial) sovereign defaults in one or several countries.”
How is that likely to happen?
The country’s parliament could pass a law redenominating debt into the new Lira, Drachma, or whatever. But there would be a pre-emptive run on bank deposits long before then. “Anyone not desirous of losing money would presumably see the writing on the wall and transfer any funds beyond the reach of the state. In other words, close down that account with Monte dei Paschi di Siena and open a new one with Commerzbank in Germany”.
Such a wholesale shift would lead to a collapse in the money supply, perhaps equal to the 38pc contraction in M3 from October 1929 to April 1933 in the US — but concentrated in a much shorter period. “Banks would be forced to call in outstanding loans, bring about a collapse in the country’s business.”
Certainly a bit of a doomsday scenario, but, unfortunately, not at all outside the realm of possibility. In fact, as they are, some are arguing it will happen in the near future. Almost every bit of it the result of market distortions implemented or enabled by government.
A billion dollars of your tax dollars is on its way to Palestine, 300 million of it earmarked for the Gaza Strip where Hamas still rules:
U.S. Secretary of State Hillary Rodham Clinton on Monday will pledge about $300 million in U.S. humanitarian aid for the war-torn Gaza Strip, plus about $600 million in assistance to the Palestinian Authority, a U.S. official said Sunday.
State Department spokesman Robert A. Wood told reporters traveling with Clinton Sunday that she would announce the donations at an international pledging conference at this Red Sea resort. The conference is seeking money for Gaza and the Palestinian economy.
So thanks to your generosity, Hamas doesn’t have to ante up $300 million to support its own people. Yes, your subsidy will allow them to instead purchase some new munitions and rockets with which to attack Israel.
This is the same Secretary of State who recently was peddling our debt bonds to the Chinese, ostensibly so we could borrow more money to, what, fund Hama’s war on Israel?
Isn’t life ironic?