Free Markets, Free People

Dale Franks

Dale Franks’ QandO posts

Our major creditor’s name also ends with a vowel

One of the irritating things about being deeply in debt is dealing with your creditors. Happily, if your creditor is, say Wells Fargo, they tend to stay within strict legal bounds when dealing with you. If you’ve been unfortunate enough to seek credit from fellows whose last names end in vowels, they tend to be more…forceful in delivering their messages to you. As it happens one of the United States’ creditors also has a name that ends with a vowel: China.

And they have a message. The more or less official organ of the Chinese Communist Party—which is to say the Chinese Government—is the newspaper People’s Daily. So, it is with much interest that I read an op/ed piece in that fine journal with the title, "China must punish US for Taiwan arm sales with ‘financial weapon’". As messages go, this one’s pretty simple.

Now is the time for China to use its "financial weapon" to teach the United States a lesson if it moves forward with a plan to sale arms to Taiwan. In fact, China has never wanted to use its holdings of U.S. debt as a weapon. It is the United States that is forcing it to do so.

The U.S. House of Representatives just passed a debt ceiling bill on Aug. 1. On the next day, a total of 181 members of the House of Representatives signed a letter sent to U.S. President Barack Obama stating that the federal government should approve the sale of F-16 C/D fighter jets to Taiwan as soon as possible to help ensure peace and stability across the Taiwan Strait…

Despite knowing that major creditor countries, especially China, would be the main buyers of its new debt, certain arrogant and disrespectful U.S. Congress members have totally ignored China’s core interests by pressuring the president to sell advanced jets and even an arms upgrade package to Taiwan.

U.S. treasuries will lose value if China stops or reduces its purchases of them on a large scale, which will also affect the value of China’s U.S. treasury holdings. However,as the situation has gotten out of hand, allowing Washington politicians to continue their game might lead to more losses.

U.S. arms sales to Taiwan can only create more jobs for the United States but cannot improve the ability of Taiwan’s military force to compete with the Chinese mainland. The essence of the problem is that some U.S. Congress members hold a contemptuous attitude toward the core interests of China, which shows that they will never respect China. China-U.S. relations will always be constrained by these people and will continue along a roller coaster pattern if China does not beat them until they feel the pain.

I am mildly amused by the claim that such sales both threaten "China’s core interests", but "cannot improve the ability of Taiwan’s military force to compete with the Chinese mainland." Both of these arguments cannot simultaneously be true.

Less amusing is the common attitude of loan sharks to their creditors displayed here using much the same language that Tony "The Shark" would use: Namely, if creditors don’t do what they’re told, you have to "beat them until they feel the pain."

With the recent rise in bond prices and drop in yields, the Chinese have a number of options. The least damaging to the US would be to sit out a few bond auctions, which would force interest rates up. But they’ve also got the nuclear option of selling off as much paper as the market could bear. Yes, they’d forego some yield payments, but they’d probably make a nice tidy premium over the original purchase price to make up for it. Rising interest rates now, at a time when the economy is weak, and short-term rates are already effectively zero, would slow the US economy. At the same time, a massive repatriation of renminbi to China would cause a steep drop in the value of the dollar in foreign exchange markets. This would raise the price of imports equally steeply. This would cause something very similar to the oil price shocks of the 1970s, that plunged the US into stagflation.

Naturally, the Chinese would be hurt by the reduction in their export capability. The question then becomes, "Which of the two political systems, China or the US, is more concerned about democratic pressure to change policy in order to improve the economy?" Who is more responsive to public pressure: our government, or the government that initiated the Tiananmen Square massacre?

I don’t know about you, but I wouldn’t expect Hu "The Kommissar" Jintao to be the one that blinks first.

Of course, if we weren’t $14 trillion in debt, we wouldn’t be very vulnerable to this sort of thing.

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Dale Franks
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A vertical invasion of barbarians

Children are widely believed to be a blessing, and I suppose, in many ways, they are. But children are also a problem, in that each new generation of kids is a vertical invasion of barbarians. They have to be taught the details of how to behave in civilized society, to be instructed in its standards and norms. Moreover, those norms must be enforced, and violators must face the appropriate penalties for violating those norms.  Doing all of this is an important charge, and you fail in it at your peril. Because, as the London riots show, the result of that failure is this:

The first line of defence against crime, the justice system, is not seen as sufficiently threatening to deter the youths. One of the group says this would be my first offence, "the prisons are over-crowded. What are they going to do? Give me an ASBO? I’ll live with that."

The government has failed to keep order, according to the group. They agree that their motivation is partially that "the government aren’t in control – because if they was we wouldn’t be able to do it could we?".

The low rate of arrest of looters is then also brought up as an incentive to loot, with one youth saying "they failed, innit? How many people have they arrested really, though? Ten." He then says "I’m not really bothered. I’ll keep doing this every day until I get caught."

The incentive to make money from their crime spree is clear: one of the youths says he has been looting because he didn’t want to "miss the opportunity to get free stuff that’s worth, like, loads of money". 

Powerless families are also shown to be a major factor in allowing the looting to take place. One youth admits to warning his family he was going to be present at the riots, and then describes a subsequent telephone conversation with a family member: "He said ‘get home, you’re in trouble’ I said ‘no’ and just put the phone down. They can’t get into town, they can’t get me, and when I get home, nothing’s going to happen to me, I’m not going to get grounded or shouted at. I might get shouted at but that’s it, I’ll live with it and keep doing it."

These youths are not being irrational.  Quite the opposite. They’ve quite fully absorbed the reality of modern life in the UK, a society that has largely abandoned the fundamental norms of civilization, giving them lip service, but without enforcing them.

Think of the very real shortcomings the attitudes above inculcate.

  • The justice system is a farce, and no severe penalties need be feared.
  • The government cannot effectively control lawlessness or protect property.
  • The property of others can be taken without real fear of reprisal.
  • Family discipline is toothless.

The larger society aids and abets these attitudes by defining self-defense as criminal vigilantism, and punishing the victims of crime for having the temerity to defend themselves, and perhaps injuring their assailants if attacked.

These youths in London and Manchester have learned their lessons well. Property owners cannot resist them, the police can’t control them, and if they are unlucky enough to get caught, sanctions will be minimal.  These are not cultural attitudes that promote civilization. Quite the reverse, in fact. They are the attitudes of barbarism, in that they reduce all of society to victims—except for those that choose to be predators. The cultural message these youths have received is that predation pays and is relatively risk free.

They’re acting on that cultural message, in a perfectly understandable and rational manner, while authorities dither for days about whether the use of water cannons or rubber bullets are an appropriate response.

What these rioters need is the type of lesson that armed property owners convey with an immediacy that the police are unable or unwilling to provide. But, of course, in modern "civilized" Britain, that’s literally the last thing they have to fear.

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Dale Franks
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Dems spin Wisconsin

As the great philosopher Monty Python once said, "Always look on the bright side of life". That’s what Democrats are doing today in response to the Wisconsin recall elections.

“The fact of the matter remains that, fighting on Republican turf, we have begun the work of stopping the Scott Walker agenda,” said state Democratic Party Chairman Mike Tate.

Phil Neuenfeldt, president of the Wisconsin State AFL-CIO, said voters sent a message that there is a growing movement to reclaim the middle class.

“Let’s be clear, anyway you slice it, this is an unprecedented victory,” he said.

Well, it certainly appears to have been a moral victory. Which is exactly like a real victory, except that it lacks, you know, victory. Republicans still control both houses of the legislature, as well as the governor’s mansion.  And, with two Democrat senators coming up for recall votes next week, losing either of those two seats—or both of them—will make their moral victory somewhat less relevant than it already is.

At the moment, though, not only does this mean that all of Gov. Walker’s previous reforms will remain intact, the Democrats cannot—except by fleeing the state again, I suppose—prevent further fiscal reforms in the state. At the end of the day, the unions dumped something like $30 million into the recall elections, and they failed to wrest control of the state senate from republicans. The most expensive single effort, the $8 million effort against Alberta Darling, failed.

One of the Democrats "successes" was against a state senator that left his wife for a 25 year-old staffer, then moved out of his district. You really had to be politically sharp to win that one.

But, I have no problems with the unions and their allies enjoying their moral victory. Perhaps Markos Moulitsos said it best: "But let me just say, if tonight was a loss, I hope we have many more such "losses" in 2012."

Me, too, Kos. Me, too.

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Dale Franks
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WI recall elections

Today was the day of the recall elections in Wisconsin that government unions and their allied thugs and lefties set up to wrest control of the state senate from Republicans, in order to keep the taxpayer supported gravy train rolling. Sadly, they were largely successful in their attempt to overturn the last general election, and return reliable union pawns to the statehouse.

Of the six Republican state senators recalled, only three are now projected to defeat the recall, while two democrats are projected to win, and, at the time of this writing, one seat is undecided, but with the Republican with a slight lead. Even if that seat flips to the Democrats unions, the resulting Senate composition will be tied 16-16 between Democrats and Republicans.The most likely result at this point, however, is that it will end up 17-15 Republican in the state Senate.

In either event, that essentially means that Gov. Walker’s reforms will remain in place. As a policy matter, irrespective of the results for the individual senators,  the final result is tons of union money spent to accomplish nothing of substance. I hope that at least spending that $20-30 million felt good. I certainly feel good knowing that the unions no longer have it in their coffers.

It should go without saying that government employee unions are an anathema to a free society, and should be universally banned. Free market unions, of course, are an entirely different story. It’s funny to remember that in my lifetime, both the Left and the Right—and unions, for that matter—were opposed to government employee unions. Of course, that was before government unions became wholly-owned subsidiaries of the Democratic Party.

In the larger sense, of course, this is all pointless posturing, as the welfare state is essentially dead, or will be soon enough. That ride is pulling into the terminal, as I have explained in some detail previously.

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Dale Franks
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The golden nectar (Updated)

Apparently, I’ve been far too depressing. Fine. Forget the collapse of the dollar, hyperinflation, exploding debt, moribund economy, etc., etc. I mean, why be so down?  In the long run, we’re all dead, anyway, right? So why worry? Let’s talk about something we can all enjoy, then: Beer.

Actually, not beer, as such. I generally don’t drink plain old beer.  If you enjoy the watery, bland flavor of of your Michelob Light or Miller Genuine Draft, then knock yourself out.  I wouldn’t touch any of that stuff, though. I like to go deeper into the catalog, and enjoy the stout, the porter, and the fantastic subset of beer known as India Pale Ale, commonly known as IPA.  I’ve actually been on a tasting rotation of several different IPAs in the past few weeks, and I thought I’d jot down a few notes about them. And, living in what is probably the epicenter of craft brewing in the United States, I have lots of choices.

Stone IPA

Stone Brewery, which is conveniently located several blocks from my house, has an excellent reputation, and they have some great products, particularly the Imperial Russian Stout, and the Oatmeal Chocolate stout. and they’re probably best known for their Arrogant Bastard Ale.  You’d expect the Stone IPA to be similarly enjoyable, but…I dunno.  It really seems like a bland and uninspired IPA to me.  It has just enough hoppy bitterness to be an IPA, but considering the premium price, and the quality of Stone’s other offerings, it should be better.  There’s literally nothing about the Stone IPA that sets it apart.

Ballast Point Sculpin IPA

Ballast Point is another San Diego brewery, and the Sculpin IPA is very hard to find.  If you do find it, I suggest you grab all of it you can, as it’s produced in small batches, and anything other than the 22oz singles are hard to find. As are the 22oz singles. This is a very complex IPA. The hoppy bitterness has a hint of pine, and the finish is complex and spicy. This is an recognizable IPA in flavor, but with lots of extra complexity and character at the finish. Highly recommended, if you can find it.

Widmer Brothers X-114 IPA

Widmer is just now getting into IPA brewing, and are starting off a "Rotator Series" IPA which will eventually consist of four different IPAs.  The first release is the X-114 IPA.  I imagine that the primary motive for brewing this was the thought, "You want hops? You want bitterness? Then stand by!"  This is a very bold IPA.  The nose is very redolent of pine, as is the taste. It’s just pure hops. I call it "Christmas Ale" because that’s what it reminds me of.  It’s the smell of a clean house with fresh Christmas tree in the living room. The flavor is similarly crisp. I’d say you really have to love a bitter, hoppy ale to enjoy this, but if you do, this is the one for you. [UPDATE: I had another one after writing this post. This is an enjoyable brew if you’re an IPA fan, but if you’re just starting on IPA, you should stay away from it. It really has a strong character of hops, and newbies will find it far too astringent to enjoy.]

Sierra Nevada Torpedo Double IPA

This is one of the most balanced IPAs I’ve run across.  Everything about it is just good.  It’s not as complex as the Sculpin, and not as bitter as the X-114.  It’s balanced, crisp, and refreshing, without going overboard in any direction. It has a nice, clean nose of hops, and just enough bitterness to bite. There’s no single element of the Torpedo IPA that’s outstanding. Instead, all of the elements are in balance, resulting in a marvelous IPA that’s more bold than, say the Stone IPA, without being overpowering. If you can’t find the Sculpin—and you probably can’t—then the Torpedo Double IPA is equally good.

New Belgium Ranger IPA

Ranger IPA is very close to the Torpedo in fine balance, strong, but not overpowering bitterness, and a clean, hoppy nose.  I’d put it between the Stone IPA and the Torpedo for complexity of taste. At the same time, it seems lighter, crisper, and more refreshing than the Torpedo. It’s like an extra bitter summer ale.

And, finally, not an IPA…

Deschutes Obsidian Stout

This one is hard. Try it back to back with a Guinness (Extra Stout, not Draft), which is a dry stout, and you’ll hate it. Try it by itself, and you’ll love it. It’s an unusual stout, in that it has these flavors of malt and barley sweetness that the bitter hops overcomes at the finish. Lots of dark chocolate and coffee notes as well. It’s a much bolder stout than usual.  I wouldn’t use it as a refreshing summer drink, because it isn’t. This is a sipping stout that’s very robust and substantial. I’d think that you’d really need to be a porter or stout fan to truly enjoy this, as it’s definitely not an introductory brew. Also, it’s available no further east than TX.

New Belgium Summer Ale and New Belgium Fat Tire Ale

Both of these ales are very close in flavor. They are much more lightly hopped than an IPA, and both have a fuller, more malty hint of sweetness in taste.  The Summer Ale, however is a bit lighter, and crisper, and is an excellent, refreshing hot-weather beverage. Both are very good pale ales. I was drinking the Summer Ale a few weeks ago when we were having a heat wave here. You can drink it like water, but I wouldn’t recommend doing that, unless you don’t need to operate heavy machinery. Or stand up.

I went to BevMo this weekend, and picked up a couple of six-packs of some British imports: Fuller’s London Porter and Extra Special Bitter and Samuel Smith’s Oatmeal Stout, so I’ll be trying those out for the next several days. I’ll let you know how that goes. I’m especially keen to try the Samuel Smith’s Oatmeal Stout.  This is the original modern oatmeal stout. First brewed in the 1750’s, Smith’s produced it until after WWII.  They resurrected this type of stout in 1980, and were quickly followed by others in the UK and US.

UPDATE

I put the two different bottles of Fuller’s in the fridge this afternoon, and I couldn’t wait to taste it this evening.

Fuller’s ESB (Extra Special Bitter)

It pours a dark amber, with a thin, tan head. The nose is filled with hints of apricot and dried fruit. The taste comes on with a very slight hint of bitterness that is quickly overcome by a full malt flavor with hints of toffee and caramel, and finishes with a taste of whole-wheat bread sweetness. it’s got slightly more carbonation than I remember from pub draft bitter in the UK, which is only to be expected from the bottle, which dissipates after the glass has been sitting for a few minutes. Other than that, it’s very much in the tradition of a draft pub bitter. Probably a good choice for people that find the bitterness of an IPA is too much, and prefer the milder, sweeter ales. Or people, like me, who just like to try different ales. Even The Lovely Christine, who hates beer, tasted this and pronounced it drinkable. It’s that good, and that mild.

Fuller’s London Porter

Oh. My. God. It pours black with a red flare.  Before you even sip it fills your nostrils with a strong essence of earth and wood smoke. The taste attacks with strong notes of coffee and chocolate and toast. And it finishes with the bitterness of roasted malts, rather than the astringency of hops, followed by sweet toffee aftertaste. It has a thick, substantial mouth feel, and is smooth and creamy. Under it all is this sweet, malty, richness. I’ve had a number of American "Smoked Porters", but nothing like this. The coffee and cocoa notes are so pronounced! It’s lightly carbonated. This is just absolutely fantastic. Rate My Beer gives this a perfect 100. Now I know why.

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Dale Franks
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Style Evolves

More horrific PHP programming of the maddeningly confusing WordPress theme system has produced the magical Google+ button to "+1" each individual post. If you’re a Google+ member, you should probably click that like a crack addicted monkey banging on the dispenser bar for his next fix.

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2012 is gonna be nasty

Mitt Romney is upset that the Obama team is planning to run a negative campaign of personal attacks against him.

Obama has remained personally popular — scoring as high as an 86 percent approval rating in the District of Columbia in a recent Gallup poll. But while he’s personally well-liked, the president’s overall approval rating is 43 percent compared to 48 percent disapproval, according to Gallup.

With that knowledge and the poor economic climate, Politico reported that the Obama campaign has no choice but to give up the 2008 campaign of "hope" and turn negative, portraying the incumbent as "principled" whereas Romney is an "opportunist." 

By the way, going to a DC Poll to prove how well-liked Obama is, seems like a pretty clear case of cherry-picking your polls for a positive result. In any event, there’s more from Politico:

The dramatic and unabashedly negative turn is the product of political reality. Obama remains personally popular, but pluralities in recent polling disapprove of his handling of his job, and Americans fear the country is on the wrong track. His aides are increasingly resigned to running for reelection in a glum nation. And so the candidate who ran on “hope” in 2008 has little choice four years later but to run a slashing, personal campaign aimed at disqualifying his likeliest opponent…

“Unless things change and Obama can run on accomplishments, he will have to kill Romney,” said a prominent Democratic strategist aligned with the White House.

The onslaught would have two aspects. The first is personal: Obama’s reelection campaign will portray the public Romney as inauthentic, unprincipled and, in a word used repeatedly by Obama’s advisers in about a dozen interviews, “weird.”

Bill Clinton’s 1992 campaign focused on a now-famous aphorism: "It’s the economy, stupid." It was the top theme of the campaign that carried the Arkansas governor to the White House. Skip forward 20 years, though, and the Obama administration’s campaign can rightfully be characterized with the slogan "It’s anything but the economy, stupid!" Seeking re-election with 9%+ unemployment and sub 2% GDP growth means that the economy is literally the last thing you want to discuss.

In fact, it’s difficult to figure out what, exactly, the Democrats can push as a positive result of the Obama Administration.  His signature achievement, Health Care Reform, remains deeply unpopular. The debt to GDP ratio has risen to 100%—and no doubt will be higher next year. For all his talk about deficit reduction, the president hasn’t actually put forward a written plan, though he has given a number of speeches.  His signature economic reform at the moment appears to be increasing taxes on "the rich", i.e., any family making more than $250,000 in household income. But beyond that is the deeper fear that the social welfare statism that has been the central tenet of the Democratic party for the last 30 years is simply unsustainable.  Not only is it nearly impossible to financially justify any real expansion of social democracy in the US, it’s difficult to see how even the current levels of welfare state spending can be sustained.

For the last three decades, Republicans have made soothing mouth noises about smaller government, while in actual practice, have continued driving the car off the cliff. The main difference between them and the Democrats, is that the Republican establishment has been firm in their refusal to upshift past third gear. On most occasions, anyway. That hasn’t really been particularly helpful. Both Republicans and Democrats in the political class have embraced a set of assumptions that spending increases are baked into the budget baseline, that any reductions in that baseline increase are "cuts", and that the time for financial rectitude—if it ever came—was at some hazy point in the far future.

Sadly, we’ve learned, as Rams coach George Allen used to tell us, that the future is now.

So, now, there’s the rising threat of the TEA Party, and their explicit argument that the welfare state experiment has been a financially disastrous failure, in that, even if one were to stipulate, arguendo, that the Democratic Party’s policies accomplished everything they wished in terms of creating a compassionate society, it would still be doomed to end due to the unsupportable financial burden it imposes. But, of course, while the latter is true, the former certainly isn’t, so there’s declining enthusiasm for continuing to support expensive programs that simply don’t accomplish their stated objectives.

In such an electoral climate, what remains, in the absence of any solid record of accomplishment, growing distrust of government, and financial/economic failure, is simply the will to power. And to maintain that power, destructive personal attacks are just about the only tool left in the Obama campaign toolbox. After all, we’ve already seen the change, and, so far, it hasn’t offered much hope.

The attacks that have been launched on the TEA Party are instructive.  If you can judge the quality of an opponent’s threat by the response it provokes in his enemies, then the TEA Party is enormously threatening to the entrenched political class. So far, they’ve been subjected to accusations of racism, extremist violence, been blamed for the failure of debt ceiling negotiations and the S&P downgrade of US debt, and derided as cranks and "hobbits".  Nearly every political ill has been ascribed to them by the political class—Democrats and establishment Republicans alike. I can only presume that this is because the political establishment perceives them as a threat.

By the same token, any Republican candidate can now expect withering personal attacks in response to any perceived electoral threat to President Obama. It may come from the Obama Campaign. It may come from media surrogates like Tina Brown’s Newsweek, which intentionally ran a cover picture this week whose sole purpose was, apparently, to make Michelle Bachmann look like a loon. It may come from campaign surrogates like SEIU union goons to heckle and disrupt campaign rallies. 

But, there’s no doubt that we’re in for a high level of personal nastiness and invective. This election is not going to be about some minor adjustment to spending, or some trifling adjustment of tax rates, or some nibbling at the edges of the regulatory state.  What is at stake in the 2012 election is the continuation of a world-view; a political philosophy that sees ever-larger government as the cure to whatever ails us. This next election is the first big battle for the survival of that worldview as the majority view of the political class, or the survival of the insurgent TEA party idea that government has become to large, too intrusive, and too expensive, so therefore must be radically reduced. There is little room to compromise between these two visions of government.  Indeed, in most ways, they are worldviews that are mutually exclusive. Over the next decade or so, we are going to learn which of these two views will prevail, and if the US, as presently composed, will remain a united polity.

We are now at a point where the fabric of the Republic is about to be tested as it hasn’t been since the Civil War, and this election is the first major event in that test.

It’s not going to be pretty.

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The Tea Party downgrade

“Look at the history of this – the fact of the matter is that this is essentially a Tea Party downgrade. The Tea Party brought us to the brink of a default.” –David Axelrod, top political consultant to President Obama, in an appearance on “Face the Nation”, Sunday, 7 August, 2011

Damn those Tea Partiers, and their rigid insistence on slashing the Federal budget. If only they were more flexible on spending and increased taxes, we’d be just fine. Their demand that we substantially cut federal spending, balance the budget, and pay down the debt without significant tax increases has now caused S&P to conclude that we aren’t serious about getting debt under control.

That’s the Democrats’ argument anyway. And they’re sticking to it.

I will defer to Protein Wisdom’s Jeff Goldstein for his response:

For all those — both left and (establishment) right — inclined to excuse their own complicity and try to scapegoat the TEA Party, which remains the one faction who actively pushed for serious, actual debt reduction and a return to fiscal sanity, take note here: we recognize that it’s been your strategy since the downgrade to seize on the warnings against “political gridlock” in order to insist that a failure to “compromise” on the part of the TEA Party supporters is what led to the downgrade. We also recognize the dishonesty and cynicism of such a strategy: as has been noted time and again, Cut Cap and Balance was the compromise, with the vast majority of TEA Party supporters in the House voting for the bill, which gave the President his debt ceiling increase in exchange for both real cuts and a mechanism by which to control future deficit spending and debt.

Who didn’t compromise — and whose political intransigence is at the heart of the downgrade — is the Democrats, who refused to come up with their own plan, and who then refused to even allow CC&B come up for a vote. This faction — along with the go along/get along GOP establishment — is now looking to pass blame for their own willingness to block compromise onto the TEA Party.

It won’t work. 66% of the population backed CC&B; 75% backed a Balanced Budget Amendment. What they got instead was more spending (the single largest increase in history) for more empty promises of future cuts in the rate of spending.

This didn’t come anywhere near to what the credit agencies demanded, and it is not lost on us, no matter how feverishly you wish to spin it, that what is missing from any plan but those pushed by the TEA Party is any “‘stabilization and eventual decline’ of the federal debt as a share of the economy,” something that simply won’t happen without real cuts. Raising taxes on “millionaires and billionaires,” even were you to confiscate all their wealth by taxing them at 100%, would run this government for less than a year. And once you confiscated it all, you’d have to then look elsewhere for new “revenues” to keep the government running.

The political class is unwilling to accept a simple premise: They’ve looted the system.  And they’ve looted it to such an extent that some notional increase in revenues obtained by taxing the "rich" can never make up for the spending.

Blaming the downgrade—or anything else—on the only group in America who are willing to fix the problem, rather than kicking it down the road as far as they can, is just a non-starter.

Or, it would be, if there weren’t so many people who weren’t so desperate to believe the gravy train can roll forever.

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The first post-downgrade business day

The yield on the 10-year note has dropped to 2.44%, down from 2.57% at Friday’s close. I’m thinking this is telling us the economy’s on the way into the toilet, as the standard reaction for a credit downgrade is rising interest rates, to cover the extra risk. The Dow’s long slide, which began on 22 July–and continues with a 250 point loss so far today–is probably telling us the same thing, as earning expectations slide. Since the downgrade was one agency only, and the downgrade only to AA+, economic factors are clearly weighing more on the bonds than the downgrade.  On the other hand, if you’re a gold investor, you’re probably a little happier today, as Gold hit $1,715/oz.

The key takeaway so far today is the continuing decline in yields, which isn’t good news. Thank goodness there’s no economic releases today. I’d hate to see what more bad news would bring.

So, back into recession, it looks like.

One of the more interesting things I’m wondering about, in a horrified kind of way, is what effect the downgrade has on corporate paper.  A number of institutions have investment rules that require they concentrate their investments in AAA-rated securities.  But, one of the general rating rules is that subsidiary corporate and government instruments cannot have a higher rating than their sovereign instruments. So if the US Government doesn’t have a AAA rating, no subsidiary US corporate or government paper should have a AAA rating either.

So, what does this mean for the handful of corporate and government instruments that were rated AAA prior to the downgrade? Do they get downgraded, too?  If so, where do the institutions with a AAA rating requirement go with their money?

I’m not at all sure how this works. As we’ve been saying a lot in the last week or so, we’re in uncharted territory.

END OF DAY WRAP-UP: Well, that could’ve been worse, I suppose.

INDEX Close
Dow 10,810.83 -634.76 (-5.55%)
S&P 500 1,119.46 -79.92 (-6.66%)
NASDAQ 2,357,69 -174.72 (-6.90%)
10-Year Yield 2.34% -0.22%
Comex Gold $1,710.20/oz (+3.7%)

I’m not sure how much worse it could’ve been, though.

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Observations: The QandO Podcast for 07 Aug 11

In this podcast, Bruce, Michael, and Dale discuss concerns about Turkey, and the debt limit.

The direct link to the podcast can be found here.

Observations

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