Free Markets, Free People

Economy

Austrian economics – "It ain’t rocket science"

I‘ll never forget Dale telling me during a phone conversation, "the more I look at the economy and what the Austrians have been saying about it, the more I find their arguments compelling".

He’s not the only one.

"The Austrians", of course, are those economists from the "Austrian school", which is a true free market school. Probably the most famous of the Austrians is Frederic Hayek. Hayek wrote "The Road to Serfdom" and the "Constitution of Liberty". If you don’t mind my saying so, they’re "must have books".

Another "must have" is "Human Action" by Luwig von Mises.

The point, however, is their writings seem more and more valid each day as we watch the policies that are driving this economic debacle play out.

Anyway, the article tells about Prof. Pete Boettke at George Mason University who is leading the charge for the Austrian brand of economics. And, as you might imagine, there’s a increasingly bigger demand for information pertaining to it.

From the article about the concerns of the Austrians:

Economics, they [the Austrians -ed.] feared, was increasingly narrow and technical but not necessarily wise. They also remained skeptical of the Fed’s approach to targeting stability in consumer prices.

That shouldn’t be the Fed’s goal, says Mr. Boettke, who a friend lured back to George Mason a year after he was denied tenure. The Fed, he says, should be to make money "as neutral as possible, like the rule of law, which never favors one party over the other."

That sometimes means letting prices fall. There’s little to fear in deflation, he adds, when it accompanies periods of strong productivity growth. However, "anytime you saw the price level starting to fall, the Fed flooded the economy with cash," he says. "And that resulted in asset-price inflation, which set us up for these crises."

It wasn’t a lack of government oversight that led to the crisis, as some economists argue, but too much of it, Mr. Boettke says. Specifically, low interest rates and policies that subsidized homeownership "gave people the crazy juice," he says.

Boettke also participates in a group blog about Austrian economics if you’re interested.  One of the posts is about the fact that in most cases, economics isn’t “rocket science”. That’s something I’ve been saying for years in various ways – human nature 101, common sense 101, economics 101.

All economics action is based deeply in individual actions of human beings driven by  human nature.  One of the reasons that von Mises named his book “Human Action” is he and the other Austrians recognize that fundamentally all economics is based in just that – human action.  In other words, grassroots up.  Not the other way – top down. 

That’s precisely why you’ll constantly see Austrians claim “it ain’t rocket science” when they explain why central planning never works.  And what we’re going through now is no exception.  Boettke:

I don’t possess a crystal ball, so I cannot forecast the economic future. But I do know that it is not good to expand the monetary base 140% or to run deficits the size we have, or accumulate public debt as we have. See Laurence Kotlikoff in The Economist.  This "ain’t rocket science"!  There will be a day of reckoning due to the monetary mischief and fiscal irresponsibility.

I also know that the problems we are facing are not "market problems" — it is not that actors are all of a sudden ‘irrational’, and it is not that markets are inherently ‘unstable’.  Everything we are seeing in market behavior is a rational response to the environment created by public policy.  This is not a psychological problem we are dealing with, it is a public policy problem.  Bad public policy produce bad incentives which in turn produce bad results.  Ultimately, this is a problem of bad ideas which result in bad public policies.  Again, this ain’t rocket science.  The role of the economists in all of this should be like my Dad when I was a teenager (and truth be told an adult), and grab policy makers by the shoulders star them squarely in the face and state clearly "this isn’t rocket science" and explain clearly the Econ 101 basics of why the decisions we have made so far have not been correct.

Gerald O’Driscoll over at ThinkMarkets does precisely this today.  Nothing that has gone on so far with the housing market would be unpredictable with a little return to the lessons of Econ 101 about incentives and information, and how markets work to coordinate plans through time via relative price adjustments and profit and loss accounting.  Policies produce incentives, when individuals in the system follow the path those incentives lead them to pursue, we should not be surprised (and certainly not disappointed). The policies adopted produced the results we see, not individuals behaving badly or behaving ‘irrationally’.  Unfortunately, in our efforts to be ‘sophisticated’ we often confuse simple economics with simple-minded economics.  But there is nothing simple-minded about returning to simple basics of economic science.  This ain’t rocket science, but individuals respond rationally to incentives and demand curves slope downward and supply curves slope upward.

Read through that carefully and recall how many times here we’ve discussed how humans respond to incentives and why a certain policy seems to ignore that and the "experts" seem "surprised" by the "unexpected" outcome.

It ain’t rocket science, for heaven sake, but like Boettke and the Austrians claim, we’ve decided mathematical models and technical arguments are more persuasive – in the policy making arena – than are human nature and common sense.

I mean, look around you at the shambles the other schools of economics have made this place.

If I had to give the Austrian school of economics another name it would be the common sense school. It is based exactly at the level it should be based, recognizes the fundamental role that individuals play in economics and economies, and the realize, from that fundamental truth – common sense – that top down, central planning is the wrong place to start when devising economic policy.

Unfortunately that’s precisely where our present economic policy is formulated and the result is fairly easy to predict.

The article ends with:

But as much as the Austrian diagnosis may resonate now, it doesn’t provide a playbook for what to do next, which could limit its current resurgence.

Mr. Hayek rightly warned of the dangers of central planning, Mr. Boettke says, but "he didn’t give a prescription for how to move from ‘serfdom’ back."

I disagree.  If “serfdom” is found at the end of the policy road we’re traveling right now, then the prescription for how to move from “serfdom’ back is to reverse the route we’ve traveled.

It ain’t rocket science folks.  We may not like the prescription, and it may include quite a bit of hardship, but there is a road back from the economic serfdom we’re destined for if we don’t do something and do it fairly quickly.

~McQ

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A cold day in Georgia in non-recovery summer

Well, not really, but that pretty much describes metaphorically how often Paul Krugman and I agree on things.  But today, Krugman, wondering what Ben Bernanke of the Fed is going to say today in his big speech believes it will probably be more of the same.  Albeit, we’re in a recovery, more slowly than we’d like and things will soon get better.  Krugman isn’t buying it (and neither am I.  If this is a recovery, I’d hate to see a recession). :

Unfortunately, that’s not true: this isn’t a recovery, in any sense that matters. And policy makers should be doing everything they can to change that fact.

Krugman also zeros in on the main problem that those policy makers should focus on:

The important question is whether growth is fast enough to bring down sky-high unemployment. We need about 2.5 percent growth just to keep unemployment from rising, and much faster growth to bring it significantly down. Yet growth is currently running somewhere between 1 and 2 percent, with a good chance that it will slow even further in the months ahead.

In fact, the GDP number for this past quarter is 1.6%. That’s revised sharply downward from the original 2.4% reported and touted by Democrats recently.  That, as Krugman points out, isn’t a good number when you are looking at unemployment.

Krugman then chastises those who are pumping sunshine up our skirts when the real economic news doesn’t warrant it – like the President and VP.  Bernanke and Geithner:

Why are people who know better sugar-coating economic reality? The answer, I’m sorry to say, is that it’s all about evading responsibility.

Ya think!  Gee wish I’d been saying that for, oh, I don’t know, 18 months.  For 12 of that it was Bush’s fault.  For the past 6, it’s been all sunshine, roses and “recovery summer”.  In effect, although not at all as blatantly, Krugman is validating John Boehner’s call to fire Obama’s economic team.  Because it is clear that the policy makers haven’t a clue of how to fix this mess.

At this point in his op-ed, Krugman reverts to his old self – a hack.  After talking about evading responsibility, he goes for the “obstructive Republicans” canard. 

And when he finally gets around to saying what he’d do, as you might suppose, it is spend more money that we don’t have.

Addressing the Fed he says:

The Fed has a number of options. It can buy more long-term and private debt; it can push down long-term interest rates by announcing its intention to keep short-term rates low; it can raise its medium-term target for inflation, making it less attractive for businesses to simply sit on their cash. Nobody can be sure how well these measures would work, but it’s better to try something that might not work than to make excuses while workers suffer.

In layman’s terms he’s saying let inflation loose and buy more debt (borrow).  He then covers his rear by saying “hey, it may not work, but it is better than doing nothing”. 

I’m not at all sure that’s the case.  In fact, my guess is if you let the inflation dragon out of the cage, you’ll never recapture it until it has ravaged the economy.  All that money that’s been pumped into the economy has to be wrung out at some point.  And there are no painless ways to do that of which I’m aware.

As for the administration his advice is as follows:

The administration has less freedom of action, since it can’t get legislation past the Republican blockade. But it still has options. It can revamp its deeply unsuccessful attempt to aid troubled homeowners. It can use Fannie Mae and Freddie Mac, the government-sponsored lenders, to engineer mortgage refinancing that puts money in the hands of American families — yes, Republicans will howl, but they’re doing that anyway. It can finally get serious about confronting China over its currency manipulation: how many times do the Chinese have to promise to change their policies, then renege, before the administration decides that it’s time to act?

Sure, let’s hand even more money to the two financial black holes – Freddie and Fanny – that have already sucked down half a trillion dollars we don’t have trying to shore up their loses and return them to solvency. Republicans have every reason to howl about Freddie and Fannie.  If Krugman were anything but a hack, he’d have to admit that.

And if he thinks the Chinese – who are actually in a real recovery – are going to stomp on their economic progress to fix ours, he’s dreaming.  Both proposals are absurd on their face.  But then when it comes to actual solutions, I’ve come to expect that from him.

However, at least in the first part of his column, he and I were in pretty much perfect agreement.  I need to go take a bath now.

~McQ

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Destroying “the Iraq war caused the huge deficits” meme

Democrats are particularly fond of that meme because it provides them the opportunity to again shift the blame for something on their arch enemy, George Bush. It is also a convenient way to claim they’re blameless for all of these trillions of dollars in deficit spending that has taken place over the years.

But a funny thing happened on the way to using this convincingly. The real numbers simply don’t support it. In fact, they show us something a lot more believable to be the cause of our new and huge deficits. And it is certainly not anything the Democrats want associated with them.

Randall Hoven at American Thinker does an excellent job of dismantling the myth that the Iraq War and George Bush’s decision to prosecute the war (with the permission of Congress – to include almost every Democrat) are the reason we’re suffering these huge deficits today. And he uses the CBO’s numbers and the Federal government’s own budget figuress to prove that it wasn’t Iraq that put us in the poor house, but the Democrats.

Take a look at this chart:

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According to the CBO’s numbers, the Iraq war has cost $709 billion. Not the wild estimates by some on the left (to include the absurd claims by James Carville and others that the war cost $3 trillion). And look carefully at the added cost of the war on top of the federal deficit spending shown in red.

Notice anything? Now think back – who was in charge of Congress from 2003 – 2007? And what was the trend in overall deficit spending – including the cost of the Iraq war – through 2007. Any impartial observer would point out the trend was downward. The party in charge of Congress at the time was the GOP.

Who took over the Congress in 2008? And what has happened to deficit spending since? Certainly the cost of Iraq has increased the deficit somewhat, but in comparison to the deficit spending since the Democratic Congress has been in session it pales in comparison.

And now, that war is essentially over and we’ve pulled the last combat brigade out, costs will certainly come down and eventually be quite small. But the trillion dollar yearly deficits – the Obama budget for 2011 is $1.4 trillion dollars – aren’t coming down at all, are they?

Be sure to read Hoven’s piece – he shows his work and provides a powerful tool to debunk the left’s “Iraq is why we have a huge deficit” canard. It has, instead, been the spending of the Democrats in Congress. Hoven’s work easily puts lie to the Democrat’s attempt to once again shift the blame for their own profligacy on to George Bush and the Iraq war.

~McQ

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Stimulus spin

This is being pointed to as a validation of the “stimulus” plan:

The oft-criticized stimulus plan boosted the economy in the second quarter by as much as 4.5%, the Congressional Budget Office said on Tuesday.

In a report published the same day as Minority Leader John Boehner’s criticism of President Obama’s economic policy, the CBO said the stimulus law boosted the economy by between 1.7% and 4.5%, lowered the unemployment rate by between 0.7 percentage points and 1.8 percentage points and increased the number of people employed by between 1.4 million and 3.3 million.

Of course it boosted the GDP by a sizeable amount.  When you pour almost a trillion dollars out of the government bucket and that is part of the calculation of GDP, then naturally the GDP is going to be “boosted”.

The question is, what good did it do.  Claims of “increasing the number of people employed” is, as is obvious, a guess cranked out by an economic model. 

But look around you.  When what the bucket has dumped out drains away, what do we have?

9.5% unemployment – at least at an official level – 1.5% higher than what was promised if the “stimulus” wasn’t passed.

A stagnant economy. 

Businesses neither expanding nor hiring.

Car sales – down.

Housing sales – way down.

Consumer confidence – in the tank.

Expanded regulation, increased taxation and a war on business.

Policies that have been described as an “economic Katrina.”

So let the left and the media try their best to make this more than it is – the effect on GDP calculation that absurd levels of governmental deficit spending will have.

Take that out and there isn’t much to shout about, is there?

In practice, that means the stimulus plan is the main reason the U.S. economy grew during the second quarter. The Commerce Department estimates the economy grew 2.4% in the second quarter, a figure most economists expect to be sharply revised lower in a report due Friday.

Uh, no, there isn’t.

One last little point:

The CBO also upwardly raised the cost of the stimulus plan to $814 billion from $787 billion.

Nice.

~McQ

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Administration knew drilling moratorium would cost 23,000 jobs

In the middle of a recession, with joblessness hovering around the 10% mark, the Obama administration made a deliberate decision to impose a drilling moratorium knowing it would cost at least 23,000 jobs. Why?

Senior Obama administration officials concluded the federal moratorium on deepwater oil drilling would cost roughly 23,000 jobs, but went ahead with the ban because they didn’t trust the industry’s safety equipment and the government’s own inspection process, according to previously undisclosed documents.

Never mind the fact that an event like this had never happened before in deep water.   Never mind there were hundreds of deepwater wells functioning properly and well.  Never mind that those jobs were well paying jobs  and that through their elimination would cause ripple-effect unemployment down the supply chain.

Instead, deliberately trash the lives of 23,000 workers – and their families – because of unfounded fears.

Yeah, that’s leadership, isn’t it?

Asked to comment, a White House spokesman said the administration "well understood, and understands, the enormous importance of oil and gas to the region’s economy," but the potential economic risks from another spill to other elements of the Gulf economy—such as fishing and tourism—also informed the administration’s deliberations, "especially as spill-response resources were fully engaged to address the BP Deepwater Horizon spill."

What “potential economic risk”?  What was the “potential” for another such freakish accident?  Well the history of deepwater drilling says not very high at all.  And while I have some sympathy with the “our spill-response resources were fully engaged”, there were certainly ways to ensure that other operations were safe and following approved drilling procedures.

You know, like put freakin’ inspectors on the deepwater drilling rigs full time to ensure those procedures were followed to the letter.  Yeah, a bit of an imposition on the inspectors, but it would have saved 23,000 jobs.  So you tell them to suck it up or you’ll find someone who will.

Wondering: do these jobs go in the negative column of the jobs “created and saved” the Obama administration?

~McQ

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Surprised again – Weekly job loss numbers “unexpectedly” rise

I think I need a special category for this.  The “unexpected surprise of the week”.  Of course, it would mostly be filled with posts about unemployment numbers – although there’d also be plenty about “disappointment” concerning other economic numbers as well.

Apparently the “Recovery Summer” sunshine show is showing it’s tattered edges fairly obviously.

New U.S. claims for unemployment benefits unexpectedly climbed to a nine-month high last week, yet another setback to the frail economic recovery.

Initial claims for state unemployment benefits increased 12,000 to a seasonally adjusted 500,000 in the week ended August 14, the highest since mid-November, the Labor Department said on Thursday.

And last week’s loss was revised upwards another 4,000 lost jobs.

The economy grew at a 2.4 percent annualized rate in the second quarter, much slower than the 3.7 percent pace in the first three months of the year.

Which, politically, means:

The economy’s poor health has handed President Barack Obama a tough challenge and put at risk the Democratic Party’s majorities in the U.S. House of Representatives and Senate in November’s mid-term elections.

Obama’s approval ratings have tumbled to the mid- to lower 40 percent range and Congress’ ratings are hovering at about 20 percent.

Hey, when you’re the loudmouths who stand on the side and blame the other guy for the problem and claim you are the only ones who can “fix” it  – elect me – then you by God better fix it when it is handed to you (even if you haven’t a clue of how to do it).

Irony can be a bitch, can’t she?

~McQ

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Why aren’t Democrats running on their record?

Seriously? If, as the President touted in LA the other day, they’ve passed the most progressive agenda in decades, why in the world aren’t they trumpeting it to the hills?

Instead, as a headline notes in the POLITICO, “White House searches for villain”.  Apparently they’ve finally figured out that they’ve worn the “blame Bush” card out. However, instead of a strategy to remind the public what Congressional Democrats have done in this session of Congress, they’re looking for a bad guy on the other side to vilify instead.

You could write it off to their usual penchant for the politics of personal destruction and blame-shifting.  But it’s hard to blame Republicans for “obstruction” when you had majorities in both houses of Congress that nullified the GOP’s ability to do that.

So what’s up with them ignoring their own record?

Perhaps, as Thomas Sowell points out, it is how they accomplished that record and what that means that they’d rather play down instead of play up:

‘We the people" are the central concern of the Constitution, as well as its opening words, since it is a Constitution for a self-governing nation. But "we the people" are treated as an obstacle to circumvent by the current administration.

One way of circumventing the people is to rush legislation through Congress so fast that no one knows what is buried in it. Did you know that the so-called health care reform bill contained a provision creating a tax on people who buy and sell gold coins?

You might debate whether that tax is a good or a bad idea. But the whole point of burying it in legislation about medical insurance is to make sure "we the people" don’t even know about it, much less have a chance to debate it, before it becomes law.

The health care bill is the most prevalent example of what Sowell is talking about.  So intent were they on passing what liberal Democrats considered one of their most cherished ideological dreams they pulled out all the stops, invented procedures on the fly and essentially rammed this legislation through without even them knowing what all was in it. 

Debate?  There was none.  None. They wouldn’t allow it. And certainly none about what was in the bill and would become law of the land.  So we continue to find little nuggets of crap in the law as we wade through it.  Gold taxes for instance.

But his larger point is the important one here.  It is  what has spawned the Tea Parties and the anger throughout the nation that is now boiling over.  “We the People” – that would be anyone outside of DC – are simply tired of being ignored and having things imposed upon us by out of touch politicians.  And we’re certainly tired of seeing legislation passed as this Congress has done.

Another way we have our freedoms and liberties imposed upon is also been used by this and other Congresses:

Yet another ploy is to pass laws worded in vague generalities, leaving it up to the federal bureaucracies to issue specific regulations based on those laws. "We the people" can’t vote on bureaucrats. And, since it takes time for all the bureaucratic rules to be formulated and then put into practice, we won’t know what either the rules or their effects are prior to this fall’s elections when we vote for (or against) those who passed these clever laws.

Consider the EPA’s attempt to regulate greenhouse gasses by fiat.  If Congress can’t pass a law to regulate them because of popular opposition, well they’ll just reinterpret existing law to their benefit and try to do it anyway.

If you wonder why people think government is out of control, those are two good examples. 

Is it any wonder people see politics today as agenda driven for the benefit of the parties instead of the people?  Is it any wonder that people are feeling more and more like serfs and less like equal citizens?

Not since the Norman conquerors of England published their laws in French, for an English-speaking nation, centuries ago, has there been such contempt for the people’s right to know what laws were being imposed on them.

Until this government is drastically pared back to some basic functions, this is going to continue and get worse.  It is in many areas in which it has no business and it is consuming more and more of our GDP doing things it has no business doing.  If we’re not already bankrupt, runaway government is doing its level best to do so.

There’s a reason the Democrats are searching for a bad guy instead of running on their record.  They can sense something’s wrong, but they really can’t – for whatever reason – put their finger on it. Well, my guess is they can cloak the next villain in Nazi SS regalia and call him the worst thing since Adolph Hitler and it won’t matter a whit in November.

This has got to stop and “the people” have figured it out.  In November, methinks, they’re going to help the politicians figure it out as well.

~McQ

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Obama argues against letting the Bush tax cuts expire

I know, you’re going,” say what!?

A year ago, probably when Obama thought we’d be out of the recessionary woods by now and only 20% of the “stimulus” had been spent, he was questioned while in Elkhart, IN, about the economics of a tax hike during a recession.  The question was submitted by an Elkhart resident (Scott Ferguson) and asked by Chuck Todd of SNBC.  Todd asked, “Explain how raising taxes on anyone during a deep recession is going to help with the economy.”

Obama said it wouldn’t:

“Well—first of all, he’s right. Normally you don’t raise taxes in a recession, which is why we haven’t and why we’ve instead cut taxes. So I guess what I’d say to Scott is—his economics are right. You don’t raise taxes in a recession. We haven’t raised taxes in a recession.”

Absolutely true to that point.  But the larger point is the admission – “you don’t raise taxes in a recession”.

Todd riposted with “But you might for health care. You might for the high—for some of the wealthiest.”

Obama responded very emphatically:

We have not proposed a tax hike for the wealthy that would take effect in the middle of a recession. Even the proposals that have come out of Congress—which by the way, were different from the proposals I put forward—still wouldn’t kick in until after the recession was over. So he’s absolutely right, the last thing you want to do is to raise taxes in the middle of a recession because that would just suck up—take more demand out of the economy and put businesses further in a hole.

Emphasis added, but wow – exactly.  It is “the last thing you want to do” and it will “put businesses further in a hole”.

So that was then and this is now – everyone who is actually having to deal with what is going on know we’re still in a recession.  But technically, we’ve had the “two consecutive quarters of growth” necessary to claim we’re in a recovery.  The fact that the “growth” was pretty much all government spending – borrowed money – doesn’t count.  The technical definition wins out.

That means he can, with a straight face, claim that letting those tax cuts expire is OK because we’re no longer in a recession.

Of course that’s just ludicrous to anyone who has two brain cells to rub together.  It is unwise and economically the wrong thing to do.  But, as Turbo Tax Timmy Geithner has decided, when asked about those expiring tax hikes, “The country can withstand that. The economy can withstand that. I think it’s good policy.”

Is it?  Or is it good “ideology”?

Tax the rich – a liberal mantra for decades.  Take the seed corn and pass it out to those who will eat it instead of plant it.  Ensure that those of the investor class have less to invest. Put businesses in a deeper hole.  Give the money to government which can obviously spend it more wisely than can the private side.

The $787 billion dollar “stimulus”? 

Move along, citizen – nothing to see here.

~McQ

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Dear GOP – don’t get too froggy thinking you’re the “solution”

Because most Americans don’t share your evaluation of yourself.  In fact, because of the dismal performance of the Democrats, you’re only slightly more “acceptable” than they are:

Americans are growing more pessimistic about the economy and the war in Afghanistan, and are losing faith that Democrats have better solutions than Republicans, according to a new Wall Street Journal/NBC News poll.

Underpinning the gloom: Nearly two-thirds of Americans believe the economy has yet to hit bottom, a sharply higher percentage than the 53% who felt that way in January.

The sour national mood appears all-encompassing and is dragging down ratings for the GOP too, suggesting voters above all are disenchanted with the political establishment in Washington.

In fact, just 24% have positive feelings about the GOP, which according to the WSJ, is a new low in the 21 year history of the poll.  In fact, the only reason you’re under any sort of consideration at all is because we’re stuck with a two-party system –something you and the Democrats have been careful to manage – and you’re the only other choice.

If you’re thinking “mandate” in November, I’d change my thinking.  I think it may be better described as “your last chance” … or maybe your “next to last chance”, the last chance coming on the heels of the 2012 presidential elections.

"The Republicans don’t have a message as to why people should vote for them, but it’s pretty clear why you shouldn’t vote for the Democrats," said poll respondent Tim Krsak, 33, a lawyer from Indianapolis and independent who has been unemployed since January. "So by default, you have to vote for the other guy."

Great reason to vote, isn’t it?

You guys better buy a clue (and if you do, use your own money).

~McQ

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Is the US bankrupt?

A good number of voices are beginning to say that technically, if not in fact, the country is bankrupt.

For instance:

America is a "Mickey Mouse economy" that is technically bankrupt, according to Jochen Wermuth, the Chief Investment Officer (CIO) and managing partner at Wermuth Asset Management.

"America today looks like Russia in 1998. Consumers, companies and the government are all highly indebted. America as a result is a bankrupt Mickey Mouse economy," Wermuth told CNBC.

Wermuth goes on to say that if the same IMF team that managed the 1998 Russian financial crisis in Russia were to walk into the US Treasury today, “they would withdraw support for current US policy”.

And don’t forget Mort Zuckerman who called the present policies our “economic Katrina”.

But as bad as present policies are, they aren’t solely the reason we’re in the awful economic shape we’re in.  We have a history of that.

"Even before the (Troubled Asset Relief Program) and the expansion of the Fed’s balance sheet, total US public and private debt as a percentage of GDP in the US stood at 290 percent, that figure is now far higher," Wermuth added.

Laurence Kotlikof explains it in terms of a “fiscal gap”. 

The fiscal gap is the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years.

The IMF pointed out in its last report that the US must close this fiscal gap to “stabilize the debt to GDP ratio”.  The IMF estimates ““closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.”

So what does that mean in dollars?

To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act.

Note the two words – “immediate” and “permanent”.  In order to pay off the huge debt our “betters” in Washington DC have run up over the years, strictly from the revenue side, our taxes would have to see an “immediate” and “permanent” doubling.

Sounds like bankruptcy to me.

Kotlikof also tells us about the shady book keeping Congress has been engaged in for decades and what the books probably really look like:

Based on the CBO’s data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt. This gargantuan discrepancy between our “official” debt and our actual net indebtedness isn’t surprising. It reflects what economists call the labeling problem. Congress has been very careful over the years to label most of its liabilities “unofficial” to keep them off the books and far in the future.

But of course, “official” or “unofficial” it is still debt.  Whether Congress will admit to it doesn’t change the fact that it is future debt that Congress has incurred through its profligate policies.

And what’s going to bring this all crashing down, despite the smooth and reassuring words of politicians without a clue?  Promises made with no fiscal ability to keep them because, in reality, they’re Ponzi schemes:

We have 78 million baby boomers who, when fully retired, will collect benefits from Social Security, Medicare, and Medicaid that, on average, exceed per-capita GDP. The annual costs of these entitlements will total about $4 trillion in today’s dollars. Yes, our economy will be bigger in 20 years, but not big enough to handle this size load year after year.

Got that – government promised $4 trillion a year that it doesn’t have and never has had.  And, thanks to Congressional Democrats, it just expanded that bill under ObamaCare.  The system, much like an engine running at hight RPMs with no oil, is going to stop and stop abruptly:

The first possibility is massive benefit cuts visited on the baby boomers in retirement. The second is astronomical tax increases that leave the young with little incentive to work and save. And the third is the government simply printing vast quantities of money to cover its bills.

The result of any of those, of course, would be economically catastrophic.  And the results among the citizens of this country would be horrible:

Most likely we will see a combination of all three responses with dramatic increases in poverty, tax, interest rates and consumer prices. This is an awful, downhill road to follow, but it’s the one we are on. And bond traders will kick us miles down our road once they wake up and realize the U.S. is in worse fiscal shape than Greece.

For years and years, politicians have claimed all is well with these programs, that we can afford them and that they’ll always be there for those who need them.  None of the above is or has been true since their inception.  If any private business operated as these programs have, the CEOs would be under the jail and wouldn’t see daylight until our sun exploded.

For years, the left and Democrats have made war on corporations and businesses all the while it has been government leading us to financial ruin.  This debt isn’t debt run up by the private side of the economy.  It is purely government’s doing.  Now, given the gravity of the situation, we have very few options and the future does not look bright.

Next time you see your Congressional representative or Senator, thank him or her for the mess they’ve had a hand in creating and ask them how they are going to fix it.  Don’t be surprised by the blank stare you receive in return.  They haven’t a clue.

~McQ

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