The Law of Unintended Consequences: 20th Century and Beyond 70 comments
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“The law of unintended consequences is what happens when a simple system tries to regulate a complex system. The political system is simple. It operates with limited information (rational ignorance), short time horizons, low feedback, and poor and misaligned incentives. Society in contrast is a complex, evolving, high-feedback, incentive-driven system. When a simple system tries to regulate a complex system you often get unintended consequences.” (Andrew Gelman)
Andrew Gelman is dead on. He states that the political system is simple. I’d go a step further and say that lifetime politicians and entrenched government bureaucrats are simple. They show no indication of knowledge or expertise in American history or rational financial theory. The President, Congress, Federal Reserve, and Treasury try mightily to direct our economy. It is an impossible task. With a GDP of $14 trillion, there are thousands of inputs and outputs that feed the system. Their hubris leads them to believe that they are in control and can manipulate the gears of capitalism in a way that will produce their desired outcomes. If a desired outcome occurs, it is simply due to dumb luck. The more likely result of their manipulations of our complex system is a set of bigger problems that never occurred to them.
Congress definitely fits Mr. Gelman’s definition of a simple system. I can’t think of a body of people operating with more ignorance than Congress. The information they act upon, is provided by the 17,000 lobbyists that wine and dine them on a daily basis. Corporate lobbyists, PACs, unions, and special interests buy their votes. Their time horizons are less than a few months. They are constantly running for re-election, raising money and handing out goodies to their constituents. The only feedback they care about is their standing in the polls and the amount of money they’ve raised from “donors”. Their incentives are poor and not aligned with the needs of the American people. They are not willing to do what is right for the country because they have no incentive to do so. Their only incentive is to get re-elected by insuring that their district gets as much pork spending as possible. They do this by selling their votes to the highest bidder.
Unintended Consequences of the Last 100 Years
The 20th century is a laundry list of events that led to unintended consequences.
- Assassination of Archduke Ferdinand of Austria
The assassination of Archduke Franz Ferdinand of Austria by anarchists in 1914 was the fuse that set off World War I by causing various Treaties to cause all the countries of Europe to take sides. All sides envisioned a short painless war. The war lasted 4 years and killed 20 million people, with another 20 million casualties. It also lead to the Russian Revolution of 1917 with Lenin and Marxists gaining control of Russia.
- Treaty of Versailles
The harsh terms inflicted upon Germany by the victorious Allies were so ruthless that Germany was unable to meet their reparation obligations without printing currency at tremendous quantities. This eventually led to a hyperinflationary collapse of the German Mark and weakened the Weimer Republic. This eventually led to the rise of Adolph Hitler as dictator and ultimately to the deaths of 70 million people in World War II.
- Creation of Federal Reserve
The Federal Reserve was created in 1913 in order to make bank panics less likely and to manage the nation’s monetary policy. They have created persistent inflation that has caused the U.S. dollar to lose 95% of its value since 1913. Their actions contributed greatly to the Great Depression of the 1930’s. Alan Greenspan’s self serving actions, in the late 1990’s and early 2000’s, led to the recent collapse of the worldwide financial system.
- FDR’s New Deal
The programs created during the Roosevelt administration to combat the Great Depression, particularly Social Security, have been on automatic pilot for eight decades. A program whose purpose was to protect poor old people from starving during a Great Depression has morphed into a perceived right of all Americans and has led to an unfunded future liability of $10 Trillion.
- Appeasement
As Adolph Hitler was beginning to gain power and started to flaunt the Treaty of Versailles, other European countries could have crushed him as early as 1935. His military was not yet powerful. Hitler became emboldened by his early success and took more aggressive actions with the Rhineland, Sudetenland, and Czechoslovakia. The appeasement strategy practiced by British Prime Minister Neville Chamberlain to avoid bloodshed allowed Hitler to gain enough power to bring about the most destructive war in history. Winston Churchill explained the consequences after the war.
I cried out but no one would listen and now Europe is devastated…There never was a war easier to win…Not a single shot needed to be fired…But, no one listened.
- Manhattan Project
Robert Oppenheimer’s project was to create an atomic bomb before the Germans could invent one. The atomic bomb led to the end of the war in the Pacific as the bombs were dropped on Hiroshima and Nagasaki. His response after the successful test was, “Now I am become Death, the destroyer of worlds." It led to the positive development of the nuclear power industry. It also led to an arms race with the Soviet Union which almost led to nuclear war in 1962. The proliferation of nuclear weapons is one of the biggest dangers to world peace today.
- Creation of Military Industrial Complex
The United States had no Defense Industry prior to World War II. The rise of this industry was essential to winning World War II. In his Presidential farewell address, President Eisenhower warned about the increasing power of the defense industry. “In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.” His unheeded words have led to the Defense Industry amassing overwhelming power in Washington DC, with spending on defense in the U.S. exceeding $800 billion per year and representing 50% of all the military spending in the world. The U.S. spends as much as the next 43 countries combined.
- LBJ’s Great Society
President Lyndon B. Johnson stated his goal in 1964.
We are going to assemble the best thought and broadest knowledge from all over the world to find these answers. I intend to establish working groups to prepare a series of conferences and meetings—on the cities, on natural beauty, on the quality of education, and on other emerging challenges. From these studies, we will begin to set our course toward the Great Society.
These noble words led to the creation of Medicare and Medicaid. The unfunded future liability of Medicare is $61 trillion, six times the unfunded liability of Social Security. The programs did not reduce poverty or improve the healthcare system. The Great Society became the Debt Society. Barack Obama’s soaring rhetoric is reminiscent of LBJ’s vision. Beware!
- Semi-Privatization of Fannie Mae & Freddie Mac
Their purpose was to purchase and securitize mortgages in order to ensure that funds were consistently available to the institutions that lend money to home buyers. LBJ moved them off the government books in order to make his government deficits appear better. The two companies have been compromised for decades by the Democratic Party and were pushed to loosen their standards by politicians like Barney Frank and allowed millions of unqualified buyers to get home mortgages they could never pay off. Both companies have lost tens of billions and are now under the conservatorship of the U.S. government. The likely future liability to the U.S. taxpayer is $200 billion.
- Richard Nixon Takes U.S. off Gold Standard
After World War II a Gold Standard was established by the Bretton Woods Agreements. Under this system, many countries fixed their exchange rates relative to the US dollar. The US promised to fix the price of gold at $35 per ounce. Implicitly, then, all currencies pegged to the dollar also had a fixed value in terms of gold. Alan Greenspan argued in 1966 that,
under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth… The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit… In the absence of the gold standard, there is no way to protect savings from confiscation through inflation.
Under the regime of the French President Charles De Gaulle, France reduced its dollar reserves, trading them for gold from the U.S. government, thereby reducing US economic influence abroad. This together with the fiscal strain of the Vietnam War led President Richard Nixon to eliminate the fixed gold price in 1971. The U.S. dollar has lost 93% of its purchasing power since 1971. The welfare statists have confiscated middle class savings through inflation while being aided and abetted by Alan Greenspan and the Federal Reserve.
- China Embraces Capitalism
The process of economic reform began in earnest in 1979, after Chinese leaders concluded that the Soviet-style system that had been in place since the 1950s was making little progress in improving the standard of living for Chinese citizens and also was failing to close the economic gap between China and Western nations. The reforms of the late 1980s and early 1990s focused on creating a pricing system and decreasing the role of the state in resource allocations. The reforms of the late 1990s focused on closing unprofitable enterprises and dealing with insolvency in the banking system.
After the start of the 21st century, increased focus has been placed on narrowing the gap between rich and poor in China. The huge influx of peasants from the countryside to the cities led to a manufacturing boom in China and the gutting of manufacturing in the United States. The feedback loop of Americans borrowing at low rates and spending on Chinese made goods while China kept buying US Treasuries, which kept U.S. interest rates low, has led to an unsustainable boom that has now gone bust. Allowing this unsustainable trend to grow beyond all reasonableness is now leading to social unrest in China.
- Greenspan Put
Alan Greenspan in his role as Federal Reserve Chairman attempted to solve every financial crisis by lowering interest rates and increasing liquidity. It began when he came to the rescue after the stock market crash of 1987. The Fed did the same thing after the Gulf War, the Mexican crisis, the Asian crisis, the LTCM implosion, Y2K, the bursting of the Dot Com bubble, and the 9/11 tragedy. Investors became convinced that Greenspan would always come to the rescue and keep stock prices from falling. This belief caused investors to take much greater risks and led to the colossal overleveraging that took place between 2000 and 2008. The artificial perception of safety led to the worst financial crisis in history. Ben Bernanke is now following in Greenspan’s footsteps.
- U.S. Maintains Military Base in Saudi Arabia after Gulf War
Osama Bin Laden returned to Saudi Arabia in 1990 as a hero of jihad, who along with his Arab legion, "had brought down the mighty superpower" of the Soviet Union in Afghanistan. During this time frame Iraq invaded Kuwait and Bin Laden met the Crown Prince of Saudi Arabia, and told him not to depend on non-Muslim troops and offered to help defend Saudi Arabia. Bin Laden was rebuffed and publicly denounced Saudi Arabia's dependence on the US military.
After the 1st Gulf War, the U.S. with the support of the Saudi rulers allowed a permanent U.S. military base in Saudi Arabia. This presence led Bin Laden to declare a jihad against the U.S. infidels and eventually led to the 9/11 attack and the War on Terror. This has led to mammoth budget deficits, thousands of unnecessary American and Iraqi deaths, and contributed hugely to the financial crisis of 2008.
- 9/11 Attack
The terrorist attack on the World Trade Center killed almost 3,000 Americans and provided President Bush with worldwide support to capture or kill Osama Bin Laden and his supporters. The U.S. successfully defeated the Taliban and cornered Bin Laden in the mountains of Afghanistan. The Bush administration declared a War on Terror, invaded Iraq on false pretenses wasting the lives of 4,500 Americans and damaging the lives of 30,000 Americans who were wounded, wasted $800 billion of borrowed taxpayer money, created the Department of Homeland Security at a cost of $50 billion per year, tortured captives, and has allowed the government to monitor private conversations of Americans without a warrant. An attack by 19 men with knives has led to the decline of the United States stature throughout the world and pushed the U.S. towards bankruptcy. The beacon of freedom has seen its light dim.
- SEC Takes Deregulation to Heart
Alan Greenspan and the free market ideologues in the Bush administration thought that no regulation was the best policy for the financial markets. They believed that markets would regulate themselves. This led to non-enforcement of existing rules and regulations. The SEC waived the 12 to 1 leverage ratios for the five biggest investment banks. Those banks then leveraged 40 to 1 and collapsed the worldwide financial system. The SEC failed to catch the Enron and Worldcom accounting frauds. The SEC was given indisputable proof that Bernie Madoff was conducting a ponzi scheme as far back as 1999. It ignored the facts and allowed a $50 billion fraud to destroy any remaining trust in the U.S. financial system. The SEC is in the back pocket of Wall Street. Its executives leave the SEC and get million dollar jobs on Wall Street. Non-enforcement of rules is not deregulation it is government corruption and incompetence.
Ignorance, Stupidity, and Hubris
Sociologist Robert K. Merton popularized the concept of unintended consequences in a paper written in 1936. Some possible grounds for the unintended consequences are the world’s complexity, human stupidity, self deception, hubris and biases. Merton’s five possible causes were:
- Ignorance (It is impossible to anticipate everything, thereby leading to incomplete analysis)
- Error (Incorrect analysis of the problem or following habits that worked in the past but may not apply to the current situation)
- Immediate interest, which may override long-term interests
- Basic values may require or prohibit certain actions even if the long-term result might be unfavorable (these long-term consequences may eventually cause changes in basic values)
- Self-defeating prophecy (Fear of some consequence drives people to find solutions before the problem occurs, thus the non-occurrence of the problem is unanticipated)
Ignorance, error, and immediate interest sound like a perfect motto for the U.S. Congress, Federal Reserve, and Treasury. When media pundits, pompous economists, self proclaimed “experts”, and corrupted politicians assure you that they have the solutions to all of our problems they are practicing the most evil form of hubris. The arrogance and self importance of these people is an insult to the intelligence of all Americans. They put their unproven theories into practice by committing trillions of taxpayer funds. They are only concerned about the next election cycle and not about the long-term consequences of their ignorance and ignorance of crucial facts. The accumulation of blunders over the decades by government has led to unintended consequences that could bring down our country. Recent developments will have disturbing consequences for all Americans.
Unintended Consequences of Cheap Oil
When oil reached $147 a barrel in the summer of 2008, panic was setting in among the sages in Congress. Windfall profit taxes on oil companies and government intervention to support alternative energy were the mantra of congressmen and Presidential candidates. Government intervention was going to work its magic. Instead, the markets adjusted rapidly to a worldwide decline in demand and the price plummeted to less than $40 a barrel. This drop has put an additional $200 billion of money back into the pockets of Americans. This was a needed relief in the midst of a grinding recession. The law of supply and demand worked without government intervention. The short-term focus of our politicians and many Americans will likely squander this temporary reprieve.
The pundits concluded that oil reaching $147 a barrel was due to speculators. Once the speculators were forced out, oil prices collapsed. Their view is that this temporary crisis has passed and life will go back to normal. American oil demand declined by 13% in September 2008, but Chinese demand grew by 28%. Auto financing at 0% for five years on SUVs will prevail and all will be well. The ignorance of the true facts by our leaders will lead to a future crisis that will make the current financial crisis seem like a walk in the park. The current economic downturn which has temporarily decreased worldwide demand will end. Oil demand will resume its upward slope, while supply has likely reached its peak. The facts based on exhaustive research by Matt Simmons are:
- 60% of the world’s oil is consumed by 10% of the world’s population.
- America represents 5% of the world’s population and consumes 24% of the world’s oil.
- Middle East oil use is growing more rapidly than China’s.
- China now uses 8 million barrels per day versus 3.5 million barrels per day in 1997.
- China now consumes 2 barrels per person versus 24 barrels per person in the U.S.
- The U.S. has 220 million automobiles for 305 million people. China has 32 million cars for 1.3 billion people.
- Peak supply of 86 million barrels of oil per day has been reached. Demand will grow to 115 million to 125 million barrels per day in the next 20 years.
The price of oil is now dangerously low. There are large amounts of untapped resources in non-traditional places. These include oil sands in Canada, oil shale in the Western U.S., and deep water oil. At $40 a barrel, the cost to extract oil from these sources is greater than the revenue that can be generated. Therefore, all projects in these areas will be stopped or delayed indefinitely. Drilling rigs are being shut down, employees are being laid off, and all expensive deep water projects are being abandoned. Supply has topped out at 86 million barrels per day. Mature oil fields throughout the world are in decline. Projects can take decades to bring on-line. Projects not started today will result in supply shortages in the future.
If the U.S. leaders allow today’s low prices to reduce its sense of urgency regarding energy independence, the consequences will be shocking. The existing energy infrastructure is rusting away. The estimates to rebuild the crumbling infrastructure, that is 80% beyond its original design life, run as high as $100 trillion. The Cantarell oil field in Mexico is collapsing and will lead to Mexico becoming an oil importer in the next five years. The U.S. currently gets 11.1% of our supply from Mexico, almost as much as from Saudi Arabia. Another 30% comes from unstable countries such as Venezuela, Iraq, Nigeria, and Russia. We are not in command of our energy future.
By doing nothing today, we ensure that $147 oil will seem like a bargain in the not too distant future. An all out effort to implement the Pickens Plan now is necessary to regain the upper hand regarding our energy future. Converting our country to wind power, natural gas, and nuclear power would decrease our dependence on foreign oil and keep $700 billion in the United States rather than transferring it to the Middle East.
Unintended Consequences of 0% Interest Rates
The Gross Domestic Product of the United States is $14.4 trillion. Consumer spending makes up $10.2 trillion or 71% of GDP. Government spending makes up $2.9 trillion, or 20% of GDP. Domestic investment makes up $2.0 trillion, or 14% of GDP. The trade deficit of $700 billion reduces GDP by 5%. President Obama has quite a dilemma in trying to revive this economy. The American consumer has borrowed from their homes and credit cards to fuel a colossal spending spree in the last twenty years.
The dilemma is that the U.S. economic growth during the entire Bush administration was a debt induced fraud. From 1953 through 1983, consumption as a percentage of GDP ranged between 61% and 64%. Consumers rarely, if ever, borrowed against their houses. Paying off your mortgage was a goal of all families. A normalized level of consumer spending at 65% of GDP will require consumers to spend at least $1 trillion less per year. Less consumer spending will also contribute to reducing the trade deficit. The Federal Reserve and politicians running our country see a $1 trillion reduction in consumer spending as a disaster. Their positions of power would be in jeopardy. They will do everything in their power to not allow this to happen. The unintended consequences will commence shortly.
click to enlarge
From the time Alan Greenspan took over as Federal Reserve Chairman in 1987, consumption and household debt rose at a faster rate than the economy. The Greenspan Put was a major contributor to these developments. Everyone knew that Greenspan would lower rates and inject liquidity into the system whenever an economic bump in the road came along. Greenspan’s reduction of the discount rate to 1% in 2003 led to the greatest debt bubble in history that still threatens to bring down the financial system.
click to enlarge
The entrenched politician rulers of our country who are bought and sold by Big Business lobbyists, the Military Industrial Complex, and Big Media want to preserve the status quo. Their power base depends upon it. Prior to the creation of the Federal Reserve in 1913, depressions were violent and short. Prices for goods and wages adjusted rapidly, which allowed businesses and workers to survive. Having the dollar pegged to gold, limited what the government could do. The Federal Reserve artificially inflated the money supply in the 1920s causing a normal depression to become a Great Depression. Government interference with wage and price controls and government make work projects did not allow the system to fix itself. It took a World War to pull our economy out of the Great Depression.
It’s the End of the World As We Know It
What is required to happen and what will happen, in the next year, will have calamitous consequences for the future of our country. What needs to take place is:
- Consumers need to cut back dramatically on consuming. Spending as a percentage of GDP needs to decline to 65%, or by $1 trillion. This would be approximately $3,000 less spending per household per year.
- Twenty years of consumer debt accumulation must be unwound. This required deleveraging needs to eliminate $2 trillion of household debt. The result will be thousands of retail store closings, mall closings, restaurant closings, and auto dealership closings. The distinction between needs and wants will reveal itself like a sledgehammer.
- The consumer needs to increase their savings rate from 2% to 10%. This would provide more capital for investment.
- People who cannot afford the mortgage on their home need to sell or enter foreclosure. When home prices fall far enough, the market will clear the inventory. Lower prices are the only way to eliminate excess supply.
- Companies that have failed to prepare for this downturn by taking on excessive debt, allowing expenses to soar, and having no clear strategic plan should go bankrupt. Unemployment will reach 9%. New businesses will be created and Americans will be hired.
- The government should make sure that no one starves to death or has to sleep on the streets. The safety net of food stamps and unemployment insurance should be strengthened.
- The government’s purpose is to protect its citizens, enforce the laws and maintain the public infrastructure. Our roads are crumbling, we have 156,000 structurally deficient bridges, millions of miles of pipes under our streets are rusting away, and our power grid is antiquated. The job of government was to maintain these things. They have failed miserably. Why does anyone think a new government infrastructure plan will work? Bridges to nowhere will be everywhere.
- Reducing spending dramatically on our military empire would provide funds to support the social safety net that is required during a depression. Congressmen in the pocket of the Defense industry will never allow it to happen.
What needs to occur would inflict too much pain for our politician leaders to allow. A violent short depression will be traded for a decade long extended depression. A painful deflationary depression will be converted into a hyperinflationary depression that could threaten the very existence of our country. President elect Obama has begun his finely orchestrated marketing plan to spend $775 billion of borrowed taxpayer money. His rationale for the stimulus package is classic Washington politics:
Economists from across the political spectrum agree that if we don't act swiftly and boldly, we could see a much deeper economic downturn. That's why we need an American Recovery and Reinvestment Plan that not only creates jobs in the short-term but spurs economic growth and competitiveness in the long-term.
Not one economist on the face of the earth predicted the events of 2008. None of Obama’s list of blue chip economists saw a crisis coming and they have no idea how long or deep the current downturn will be. They make weather forecasters look highly accurate in comparison. Most economists are either, sellouts (Lawrence Yun), cheerleaders (Larry Kudlow), ideologues, or academic theoreticians. If Barack Obama is depending on economists to determine our future, all is lost. Alan Greenspan was an economist. If we had done the opposite of everything he recommended in the last 20 years, the country would be on the right track. President Obama, with the overwhelming support of a Democratic Congress will double down on the trillions already poured down a rat hole by the Bush administration. The scenario that will play out is:
- The $775 billion plan will grow to at least $1 trillion as Obama will need to buy off various factions within Congress with pork projects.
- Congress will approve the 2nd $350 billion tranche of TARP funds. Barney Frank and Nancy Pelosi will shovel billions to homeowners who should be foreclosed upon. Billions more will be given to the automakers. GMAC will get more funds from the taxpayer at 8% interest so they can then loan it to subprime borrowers at 0%. This doesn’t sound profitable, but they’ll make it up on volume.
- TARP funds will be given to commercial developers who foolishly overleveraged, overbuilt, and overpaid for properties. Credit card companies that handed out credit like candy for the last 20 years will see their write-offs triple to over 10% by 2010. The government will give more of your tax dollars to these incompetent bankers so they can send out another 5 million credit card offers to deadbeats.
- The Federal Reserve will buy mortgage debt and long-term Treasuries to artificially reduce market interest rates. With money market funds paying .25%, senior citizen savers will be forced to take on risk to get a return on their money. Penalizing savers to resuscitate reckless gamblers is the path that Ben Bernanke has chosen. When the markets decline another 20% in 2009, more senior citizens will see their retirements destroyed by Mr. Bernanke.
- Consensus among the talking heads on CNBC is that markets will go up in 2009 because they went down so much in 2008. This is what amounts to analysis by business television. The people they interview have a vested financial interest in the market going up. So despite the fact that earnings will collapse in 2009, these pundits are sure the markets will rise. I’d bet against the consensus.
- Citigroup (C) and JPMorgan (JPM) will require additional enormous injections of capital from the taxpayer due to their looming credit card and commercial loan losses. The top 10 biggest banks are insolvent. They are being kept alive on life support systems provided by the Federal Reserve and Treasury. All the bankers who didn’t bankrupt their banks should be outraged at this misappropriation of taxpayer capital to incompetent, reckless, immoral, politically connected bankers.
- Home prices will drop another 15% in 2009 and will remain depressed until 2015. The market will adjust to its natural equilibrium level despite all government efforts to keep prices artificially elevated. When you can buy a house and rent it out and generate a positive cash flow, houses will be reasonably priced.
- Despite the immense spending, zero interest rates, and propping up bankrupt financial institutions, consumers will not spend. Economists, bureaucrats and politicians are so focused on models and theories that they have failed to realize that the social mood of the country has changed forever. The poor economic conditions are being caused by the mood change, not vice versa. A return to frugality, saving, and simpler lives will keep a cap on spending for at least the next decade.
The sum total of all that has been done and all that will be done will eventually lead to a hyperinflationary bust. The money supply is being expanded too rapidly, fiscal stimulus spending will be borrowed from foreigners, the dollar will fall as foreigners refuse to accept 2% for 10 years, and the Federal Reserve will react too late just like they did when this crisis began.
This overstimulation of the economy will lead to a panic out of dollars and into real assets. The government will attempt to control the situation by confiscating gold as they did in the 1930s and Americans will be forced to surrender more liberties. In periods of economic and social upheaval - war, revolution, or dictatorship become possibilities.
The average American needs to wake up from their materialistic stupor and understand the risks that lie ahead. An educated concerned citizen is our only defense against tyranny. Orwellian governmental policies will be inflicted upon the populous. Seek out those who are telling the truth. David Walker, Boone Pickens, Ron Paul, Mike Shedlock, Doug Casey, and John Mauldin are among the truth tellers.
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This article has 70 comments:
* You make a lot of "assumptions" and present them as "facts" (See 'weasel words')
* No one is 100% correct, or even 50% correct! you draw a straw man argument around the fact that politicians and economists must reach a higher level of competence or accuracy or be discredited entirely! How Rush of you.
* Alan Greenspan is 100% wrong? That's a broad stroke! He did nothing at all right? Even right of Regan left of God Republicans have at least one thing nice to say about him (fixed 13% inflation of 79' anyone?)
* Why do you not suggest that government fund energy exploration? We subsidies food, why not shale improvement or deep sea drilling? That would prevent the "shooting ourselves in the foot" you foresee with the oil supply.
* Are you sure Bin Laden didn't have a sore spot about the U.S. assisting Muslims in the 80's with the Russians then bailed when they won and said "now what do we do?". Bin Laden didn't take out the Jihad card on America because of a Military base alone! (See 'over simplification' FTW)
It seems to me that you're really seeing red now that Obama is the new guy on the block. Your horse didn't come in, and your grand plans for our new economy will now get muddied or won't reach the table. For this, you typed your post way to fast without fully thinking through every point.
I don't agree with all of your conclusions, but most of your logic does make sense and much of what you say seems like it could very well happen. Hopefully, though, as time goes by, course corrections will be made that will lessen some of the dramatic downturns you suggest are inevitable.
Lets hope so.
Thanks again for the great read!
Facts are in the eye of the beholder.
Instead of calling me Rush Limbaugh (how Rachel Madow of you), please provide examples of economists and Politicians being right.
Government shouldn't choose the winners and losers in energy. They've done a bang up job choosing ethanol already.
We provided Bin Laden with the weapons to defeat the Soviet Union. Just like we provided the weapons to Sadaam Hussein to fight Iran. Don't be so naive.
Here we go with Obama walking on water. My horse was neither McCain or Obama. I will call them as I seez them.
On Jan 05 06:47 AM Robert I. wrote:
> Some interesting points you make here. But I have a problem with
> some of your ideas:
>
> * You make a lot of "assumptions"... and present them as "facts"
> (See 'weasel words')
> * No one is 100% correct, or even 50% correct! you draw a straw man
> argument around the fact that politicians and economists must reach
> a higher level of competence or accuracy or be discredited entirely!
> How Rush of you.
> * Alan Greenspan is 100% wrong? That's a broad stroke! He did nothing
> at all right? Even right of Regan left of God Republicans have at
> least one thing nice to say about him (fixed 13% inflation of 79'
> anyone?)
> * Why do you not suggest that government fund energy exploration?
> We subsidies food, why not shale improvement or deep sea drilling?
> That would prevent the "shooting ourselves in the foot" you foresee
> with the oil supply.
> * Are you sure Bin Laden didn't have a sore spot about the U.S. assisting
> Muslims in the 80's with the Russians then bailed when they won and
> said "now what do we do?". Bin Laden didn't take out the Jihad card
> on America because of a Military base alone! (See 'over simplification'
> FTW)
>
> It seems to me that you're really seeing red now that Obama is the
> new guy on the block. Your horse didn't come in, and your grand plans
> for our new economy will now get muddied or won't reach the table.
> For this, you typed your post way to fast without fully thinking
> through every point.
The real question is ... why is it no one pays any attention to these guys? Perhaps Robert Ringer (Looking Out for Number One) was right ... "we don't love the truth but want to make true what we love."
Good Luck in 2009.
What can I do confront the military-industrial complex? I am not fatalistic in any sense of the term - I simply do not know what I can do to turn back the tides. suggestions?
As the author points out, their prior actions are what broke it in the first place. Their incentive structure is such that any future attempts to 'fix' things will only serve to make it worse for the general populace for the benefit of the few with political connections.
I laughed, I cried, I bought more gold, I smiled.
"The ultimate result of shielding man from the effects of folly is to people the world with fools." - Herbert Spencer
"The punishment of wise men who refuse to take part in government, is to be governed by the unwise" -Plato
Thanks for the well written article James!
1) Ban Lobbying. It is blatant bribery. How in the world did our society decide that bribes were acceptable. There is nothing free speech about trading money for political favors at the expense of the public. What did we expect would happen when we made fundraising/corruption a prerequisite for public office? If we publicly financed all campaigns, and banned all gifts to public officials, the investment would yield exponential returns in terms of government integrity and competence.
2) A Balanced Budget Amendment. Make it a crime for Congress to spend more than the government takes in unless a well defined short term state of emergency is declared - by the supreme court. This relatively simple step would practically ensure currency stability, remove an economic doomsday weapon from China's hands, and wipe out the national debt within a generation.
3) Align tax incentives with the changes we desire. Tax hikes on cigarettes and alcohol have been proven to reduce consumption of those products. Why not tax gasoline to reduce our economic dependency on hostile dictatorships? Offset a gas tax with a cut in the income tax. Net results: More incentive to be economically productive and earn income. Less incentive to waste gasoline while funding terrorists. Why tax manufacturing businesses at 35% and hedge fund speculators at 15%? Are we trying to discourage manufacturing and encourage AIG-style speculation? You get more of what you encourage. Duh.
4) Equal Justice for All. Corrupt politicians, lobbyists, and financiers should go to the same prisons as convenience-store robbers and for the same terms. The public should be outraged that there is no justice for people with wealth or connections.
5) End Earmarks. This is where the pork comes from. It's hidden in budget documents thousands of pages long and placed there anonymously by paid-off congresspeople. The opportunity for corruption is obvious.
6) Refuse to Fight Oil Wars. "Spending" tens of thousands of American lives and trillions of dollars spent to secure oilfields in dictatorship nations that support terrorism offers no return on investment for the public, only for oil and defense firms and their lobbyists. The trillions spent on the Gulf War and Iraq have done nothing for the public, except increase the national debt burden on their children, thousands of whom lost a parent in "the sandbox". No "made in China" pseudo-patriotic magnetic bumper ribbon will change that fact.
There you have it. Six relatively minor steps that would lead to a stable currency, the end of the national debt, a more competent government, a less corrupt government, and a more functional society. No crackpot economic theories or radical revolutions needed.
The trick is getting the population to demand these changes - the same population where 60% of people haven't read an actual book since high school.
On Jan 05 09:23 AM gemonk wrote:
> Mr. Quinn: what is your proposal? I agree with you - I think the
> orwellian logic of the ruling class is already well in place, and
> terrible harm has already been done to our civil liberties. I have
> watched it for years. But I dont know how to alter the dynamics.
>
>
> What can I do confront the military-industrial complex? I am not
> fatalistic in any sense of the term - I simply do not know what I
> can do to turn back the tides. suggestions?
As for action there are no easy fixes, but a return to community based education would establish a concrete foundation to build upon. I don't have to, but feel compelled to, reassure everyone that are state funded educational system in its current form is inadequate at best. The high school graduation rate is less than 50% (national average), and the children that do cut the mustard still rank far below even 2nd tier nations. I read an article yesterday that stated metro Indianapolis has a 16% graduation rate! Unbelievable. What a waste of $13,000 per child per year. Ignorance is a blindfold for the masses.
I'd have to agree with all your proposals. I'd also include term limits as a way to reduce the money influence.
I'd also love to see every project that will make up the $775 billion stimulus package listed on a public website so that all taxpayers could see where their money is going.
The real question is how could any of these solutions be implemented without the whole existing system collapsing first.
On Jan 05 10:42 AM Chris B wrote:
> The author doesn't offer remedies (other than advice to invest in
> commodities). His statements that "They are only concerned about
> the next election cycle" has been used by others to claim that democracy
> itself it the problem. I have some far simpler solutions:
>
> 1) Ban Lobbying. It is blatant bribery. How in the world did our
> society decide that bribes were acceptable. There is nothing free
> speech about trading money for political favors at the expense of
> the public. What did we expect would happen when we made fundraising/corruption
> a prerequisite for public office? If we publicly financed all campaigns,
> and banned all gifts to public officials, the investment would yield
> exponential returns in terms of government integrity and competence.
>
>
> 2) A Balanced Budget Amendment. Make it a crime for Congress to spend
> more than the government takes in unless a well defined short term
> state of emergency is declared - by the supreme court. This relatively
> simple step would practically ensure currency stability, remove an
> economic doomsday weapon from China's hands, and wipe out the national
> debt within a generation.
>
> 3) Align tax incentives with the changes we desire. Tax hikes on
> cigarettes and alcohol have been proven to reduce consumption of
> those products. Why not tax gasoline to reduce our economic dependency
> on hostile dictatorships? Offset a gas tax with a cut in the income
> tax. Net results: More incentive to be economically productive and
> earn income. Less incentive to waste gasoline while funding terrorists.
> Why tax manufacturing businesses at 35% and hedge fund speculators
> at 15%? Are we trying to discourage manufacturing and encourage AIG-style
> speculation? You get more of what you encourage. Duh.
>
> 4) Equal Justice for All. Corrupt politicians, lobbyists, and financiers
> should go to the same prisons as convenience-store robbers and for
> the same terms. The public should be outraged that there is no justice
> for people with wealth or connections.
>
> 5) End Earmarks. This is where the pork comes from. It's hidden in
> budget documents thousands of pages long and placed there anonymously
> by paid-off congresspeople. The opportunity for corruption is obvious.
>
>
> 6) Refuse to Fight Oil Wars. "Spending" tens of thousands of American
> lives and trillions of dollars spent to secure oilfields in dictatorship
> nations that support terrorism offers no return on investment for
> the public, only for oil and defense firms and their lobbyists. The
> trillions spent on the Gulf War and Iraq have done nothing for the
> public, except increase the national debt burden on their children,
> thousands of whom lost a parent in "the sandbox". No "made in China"
> pseudo-patriotic magnetic bumper ribbon will change that fact. <br/>
>
> There you have it. Six relatively minor steps that would lead to
> a stable currency, the end of the national debt, a more competent
> government, a less corrupt government, and a more functional society.
> No crackpot economic theories or radical revolutions needed.
>
> The trick is getting the population to demand these changes - the
> same population where 60% of people haven't read an actual book since
> high school.
Chris B.: I'd 'plus' you again if SA would let me. I'd add abolishing the FED as well, but I've been called a "gold bug" before, so that might not carry much weight with some folks.
Mr. Quinn: I'd go even further and suggest very short term limits for the faceless bureaucrats that populate the alphabet soup of federal agencies. Ousting the Congress critters would be a start, but it's the lifelong bureaucrats who run the show. Make gub'mint "service" a chore and not a reward. Let those who wish to operate the levers of power know that in a couple years they will need to find a different job. Think of the savings in retirement pension payments alone.
A secondary proposal would be to mandate all federal employees to participate in Social Security instead of their own taxpayer funded retirement plan. That would include Congress, federal courts, and all Executive branch employees from the President down.
Let's get back to a government of the people, not of the politicians.
If by 'existing system' you mean the bloated, pork laden, wasteful, ineffecient, and corrupt influence peddling racket we call gub'mint, ... ummmm ... what's the problem?
This is a very great article - it greatly represents our attitude in Europe !!!
I do think that the one or other point could need further discussion, e.g.
- the unfunded medicare - it works here in Europe where live expectancy is higher, we always surely need to adopt it to the age pyramid, but this gives us a better future outlook than waiting to have nothing. Cost is approx. 10% of GDP for medical insurance , slightly lower than US what i know, but EVERYBODY is ensured here, whereas in US by some numbers 25% don't have insurance. AND - our medical service is surely the same quality as the US.
- 2% savings - I know many articles that give USA a current NEGATIVE savings rate , US statistics are often faked
- many articles rate the current unemployment to 10%, since many people don't register their unemployment
At base line it is very solid, very good article with many points to think about and take as reference.
congratulations for the great article, best one I have read.
WOW - I am so glad somebody once mentioned this in this detail. Yes that is the reason why we have small cars and high petrol cost in Europe. The bigger you are the harder you fall.
Oil is a limited resource !!!!!!!!!!!!!!!!
Put price on oil mega high, and your problem will be solved. People will think before driving, people will think before buying, get a non gobbler from GM or Ford, try to find a job closer to home, Isolate your homes, invest the money in public transport, generate revenue, fund alternate energy
You see its not that bad - NOW is the time for US to realize that they did it wrong, big IS NOT BETTER, I am from a small country Austria, we live really great here like the Swiss.
I will surely get some negative ratings here :-))
The media, governments, world leaders, and public should focus on this issue.
Global crude oil production had been rising briskly until 2004, then plateaued for four years. Because oil producers were extracting at maximum effort to profit from high oil prices, this plateau is a clear indication of Peak Oil.
Then in July and August of 2008 while oil prices were still very high, global crude oil production fell nearly one million barrels per day, clear evidence of Peak Oil (See Rembrandt Koppelaar, Editor of "Oil Watch Monthly," December 2008, page 1) www.peakoil.nl/wp-cont....
Peak Oil is now.
Credit for accurate Peak Oil predictions (within a few years) goes to the following (projected year for peak given in parentheses):
* Association for the Study of Peak Oil (2007)
* Rembrandt Koppelaar, Editor of “Oil Watch Monthly” (2008)
* Tony Eriksen, Oil stock analyst and Samuel Foucher, oil analyst (2008)
* Matthew Simmons, Energy investment banker, (2007)
* T. Boone Pickens, Oil and gas investor (2007)
* U.S. Army Corps of Engineers (2005)
* Kenneth S. Deffeyes, Princeton professor and retired shell geologist (2005)
* Sam Sam Bakhtiari, Retired Iranian National Oil Company geologist (2005)
* Chris Skrebowski, Editor of “Petroleum Review” (2010)
* Sadad Al Husseini, former head of production and exploration, Saudi Aramco (2008)
* Energy Watch Group in Germany (2006)
* Fredrik Robelius, Oil analyst and author of "Giant Oil Fields" (2008 to 2018)
Oil production will now begin to decline terminally.
Within a year or two, it is likely that oil prices will skyrocket as supply falls below demand. OPEC cuts could exacerbate the gap between supply and demand and drive prices even higher.
Independent studies indicate that global crude oil production will now decline from 74 million barrels per day to 60 million barrels per day by 2015. During the same time, demand will increase. Oil supplies will be even tighter for the U.S. As oil producing nations consume more and more oil domestically they will export less and less. Because demand is high in China, India, the Middle East, and other oil producing nations, once global oil production begins to decline, demand will always be higher than supply. And since the U.S. represents one fourth of global oil demand, whatever oil we conserve will be consumed elsewhere. Thus, conservation in the U.S. will not slow oil depletion rates significantly.
Alternatives will not even begin to fill the gap. There is no plan nor capital for a so-called electric economy. And most alternatives yield electric power, but we need liquid fuels for tractors/combines, 18 wheel trucks, trains, ships, and mining equipment. The independent scientists of the Energy Watch Group conclude in a 2007 report titled: “Peak Oil Could Trigger Meltdown of Society:”
"By 2020, and even more by 2030, global oil supply will be dramatically lower. This will create a supply gap which can hardly be closed by growing contributions from other fossil, nuclear or alternative energy sources in this time frame."
With increasing costs for gasoline and diesel, along with declining taxes and declining gasoline tax revenues, states and local governments will eventually have to cut staff and curtail highway maintenance. Eventually, gasoline stations will close, and state and local highway workers won’t be able to get to work. We are facing the collapse of the highways that depend on diesel and gasoline powered trucks for bridge maintenance, culvert cleaning to avoid road washouts, snow plowing, and roadbed and surface repair. When the highways fail, so will the power grid, as highways carry the parts, large transformers, steel for pylons, and high tension cables from great distances. With the highways out, there will be no food coming from far away, and without the power grid virtually nothing modern works, including home heating, pumping of gasoline and diesel, airports, communications, and automated building systems.
It is time to focus on Peak Oil preparation and surviving Peak Oil.
survivingpeakoil.blogs.../
www.peakoilassociates....
It seems that the authors prospective is based on a sense of absolute, intrinsic "value" regulating prices, rather than prices being based on market supply and demand.
The US system seems rather simple from my prospective. The US has borrowed much, and is badly in debt. It's creditors don't want to see it go bankrupt, and it does have many assets (gov't lands, oil fields, etc) that can work as collateral.
Simple: Let the dollar decline. Home values will reach parity with world market. When you see non-US investors rush in and purchase real-estate, then you'll know prices are near parity.
Long term, the US will need to export things, which they will figure out how to do. The adjustment is inevitable. US consumers will eventually reach parity with Chinese consumers.
Seems nothing to worry about.
On the other hand, if you're concern is preserving US dominance, well that is something that the average american is probably not suitable to help you preserve. Getting 300,000,000 to compete at the highest level every morning is not something that I think they're prepared for... If it was a city of 3,000,000 you might be able to turn it around, but a country of 100x will basically continue on the path that it's on....
'Most economists are either, sellouts (Lawrence Yun), cheerleaders (Larry Kudlow), ideologues, or academic theoreticians. If Barack Obama is depending on economists to determine our future, all is lost. Alan Greenspan was an economist. If we had done the opposite of everything he recommended in the last 20 years, the country would be on the right track.'
Then who could have been better than Alan Greenspan?
A follower of Ayn Rand and an accomplished saxophone player.
Dropped out of the economics program at Columbia and never taught in a university.
1992-2007 stands out as one of the greatest economic jazz riffs of history.
Stan Getz would be proud of his former band member, Alan Greenspan.
You are the master of the big picture and generating a volatile comment stream.
In spite of feeling inferior in doing so, I want to add some comments.
1. You quoted andrew Gelman, "The political system is simple. It operates with limited information (rational ignorance), short time horizons, low feedback, and poor and misaligned incentives." This is very true. Unfortunately, the same quote could be applied to many of our corporate structures and CEOs. I'm surprised that no one has commented on this obvious problem. What can be done if the government has no clue and too many corporate leaders have no clue (or worse, they are abject liars and thieves, rather than dunces)?
2. Obama: you see LBJ; I see elements of FDR, JFK and Reagan (and no LBJ). No one sees what will actually happen. One thing is certain in my mind: Obama represents so many different things to so many people that he will have to be a master consolidator or become very unpopular. Another opinion: if he achieves any sort of consensus among the idiots in Congress, he will be able to avoid some of the worst outcomes that might otherwise happen.
3. You mention Osama bin Laden. No one has expanded on that topic. He is feeling very smug right now. His stated objective is the economic collapse of the U.S. It is his conceit that his actions in Afghanistan brought down the Soviet Union. He might have thought that he could use Afghaniatan in the same way to bring down the U.S. Imagine his delight when we also went into Iraq. He may not have been a very knowledgable student of the American economy when he formulated his plan for collapse, but I would argue he was much more knowledgable than our Congress, soon departing president, Alan Greenspan, and many of our corporate executives. What they have wrought may be exceeding Osama's expectations.
4. I agree with many of your opinions on the next couple of years in the economy. There is still much unravelling to do in the financial markets, commercial real estate is following residential real estate into the tank, with commercial accelerating downward in 2009, and all too many talking heads in the public eye are calling for a recovery in 2009.
James, you have opened too many worm cans for all of us to discuss every aspect you broach. Too bad we can't have a sit down around a table with you and several commenters to develop all the nuances and subtilities surrounding these topics.
We have crossed swords in other comment streams, but please indulge me one more time.
You paint a grim picture of the future for the U.S. in the face of declining oil production and rising prices depleting our capital resources and allowing everything to decay from neglect. If nothing is done, you are correct.
My view is that the very crisis you describe is a generational opportunity, just as the desk top computer was the forerunner of a generational opportunity in 1980. You have chosen to move away. I have chosen to stay and fight another day, to work on the new opportunity.
I find it curious that you chose Mexico, also suffering from declining oil production and facing infrastructure problems and social unrest problems. I question how this is an improvement over what you fear will be the future of the U.S. I am aware that your retirement resources will go farther in Mexico at present, but will that be true 20-30 years from now?
I have read your web site, and blog so I think I understand where your arguments are coming from. If I am misunderstanding, please correct me in another comment.
Seems nothing to worry about." - Ryan in Shanghai
While Ryan's statement may be closer to the truth than not, his conclusion overlooks one important point.
The current standard of living in the US is much higher than that of China. Reaching 'parity' with the Chinese standard of living would likely mean a significant drop in the standard of living for the average American. There is simply no way the standard of living of the average Chinese can climb to the current levels in the US without seeing some drop in US levels, meeting at some point in between.
For the average American, this IS something to worry about. Nobody likes to think of what it really means to have your standard of living drop significantly. A great many US citizens still believe that the gub'mint can give them 'something for nothing' and thereby support current living standards via legislation.
Sadly, a great many Americans will likely be disappointed at what eventually transpires.
I don't disagree with you, but from my perspective we can jump up and down, demand until we are blue in the face, and it won't do any good. Obama's financial stimulus plan involves more government spending, not less, and most people think it's going to work. Our government schools at work, I'm afraid. Personally I wouldn't choose Mexico - Ireland sounds better, or maybe Australia or New Zealand.
FED rate cutting again and again,
At zero rate cuts start ceasing,
Then starts quantitative easing,
'Til the dollar swirls right down the drain.
Is our corporate/federal leadership culture is riddled with corruption, from the very top down, and has been for five decades or so?
Have we allowed venal leaders to manipulate our society into spending foolishly at home, and backing adventures abroad, for the leaders' personal gain?
Did we allow these very same leaders to bail themselves out of a financial crisis when their calculations did not mesh with reality - using our money?
Have we allowed them to plant the seeds of tyranny right here in our yard?
Does this ecdonomic crisis feel somewhat engineered to you?
Hence my earlier question - what do we, whom Jefferson left in charge of protecting freedom, do?
On Jan 05 08:12 AM Jim Quinn wrote:
> Volcker fixed inflation, not Greenspan. Volcker was Fed Chairman
> from 1979 to 1987. Give me an example of something Greenspan did
> right that has benefitted our economy.
>
> Facts are in the eye of the beholder.
>
> Instead of calling me Rush Limbaugh (how Rachel Madow of you), please
> provide examples of economists and Politicians being right.
>
> Government shouldn't choose the winners and losers in energy. They've
> done a bang up job choosing ethanol already.
>
> We provided Bin Laden with the weapons to defeat the Soviet Union.
> Just like we provided the weapons to Sadaam Hussein to fight Iran.
> Don't be so naive.
>
> Here we go with Obama walking on water. My horse was neither McCain
> or Obama. I will call them as I seez them.
On Jan 05 09:16 AM Gone Broke wrote:
> Overall a good article. But there were a few guys out there that
> saw what was about to happen. LIke Schiff in Crash Proof even tho
> he was wrong about how it would all play out, he did see and predict
> that things would fall apart. Others include Leeb, Arnold, Turk,
> and Rubio. One, I forget which, nailed it perfectly about what would
> happen and how to play it (invest in TIPS and get out of stocks till
> they fell 73%).
>
> The real question is ... why is it no one pays any attention to these
> guys? Perhaps Robert Ringer (Looking Out for Number One) was right
> ... "we don't love the truth but want to make true what we love."
>
>
> Good Luck in 2009.
Surprised no one mentioned tax policy as another chief agent for unintended consequences.
No coincidence that 1987 brought income tax law changes that basically created the home equity loan market by eliminating deductibility of other interest expenses.
Another "minor" tax change at the same time created the S&L debacle.
There are often great differences between what should be and what actually happens!
Problem is, among too many to enumerate, is that we are entrapped , as in a chinese finger puzzle wrapped in a gladiator net, by our own inflexible selfserving political system. Do we not remember the Contract with/on America , where the Newt Gingrich revolution virtually guaranteed "TERM LIMITS" if only he and his party were allowed to take over complete power in the congress? Well, what happened? Would any of his party discuss Term Limits ever again, or take even one step to implement it?.
One county in Tenn, controlled completely by the GOP, got a favorable ruling by a GOP partisan judge to disavow Term Limits for 12 years even after it was voted into LAW!. It took 12 years, and a colossal court fight pushed all the way to the state supreme court just to get the written law recognized and followed!
I see no way to overcome such malfeasance and debauchery of our present political system without substantial changes across the board and I can visualize no practical way to implement these changes. So I am afraid that what we see is what we get, except if history is any guide, it will just continue worsening until it completely collapses from within. Evidence to the contrary anyone? I would like to "see the light" and have my mind changed by brilliant logic and oratory, and more importantly EVIDENCE.
Great article Smarty , gemonk , I agree with you ! Yes this crisis was indeed ' engineered ' in 1913 with the creation of the Fed . Congress signed off on it quickly as it was inacted during " holiday recess ". US goverment officials despise the masses . The public blindly believes they actually care about them . The Illuminaty has been waiting for his collapse for decades .Google FEMA concentration camps + see what " they " have planned for you ! America turn off the damned TV + WAKE UP !
,
As you have stated, the Obama team of economic experts do not include any who predicted this mess, and thus are in no position to fix it. Given this dismal record, I would suggest that the best policy would be one based on basic moral and ethical principles, not the advice of discredited economic pundits.
The notion that we have to penalize those who have been prudent and responsible in order to reward inept bankers and irresponsible spendthrifts is morally repugnant, and is being sold by pundits as an economic necessity. Obama would be wise to apply basic common sense rather than accept unethical notions that would destroy the long-term fundamental basis of any economy.
It certainly is a more comfortable discussion to call all the above "unintended." That makes us to a degree still Lords of our Universe as we can list them and dismiss them as such. We can point at them, laugh at those involved, or give a condescending "awwwww...too bad"...and then imply how we'd have seen it, like Churchill, and fixed it before it could have had its "unintended consequences."
But I'm going to be one of those cold water guys and say that that's just "too easy." I don't believe it, and I don't believe the evidence allows that conclusion. I believe that the huge majority, if not all, of these seemingly unrelated and serendipitous occurrences were not so, and that the consequences were anything BUT unintended. I believe the evidence, for those who care to study it, will show an unbelievably wealthy and powerful and connected group of individuals, surrounding a particular historical and still very much alive family dynasty, that have been scheming and brainstorming and doing whatever was necessary, at whatever expense, using whatever means necessary, since the late 1700s (and even earlier), to promote a cause that many just refuse to believe is real, though it remains the Charter statement for perhaps the most powerful group in the US...the CFR. If you want the happenings of the last two hundred plus years to make sense, you need to get a more coherent hypothesis than just "unintended consequences." One might start with this link, which will need to be put together to get you there:
http:// www. iamthewitness. com/DarylBradfordSmith... schild. htm
And may I suggest that you read thru it first before forming any "opinions"...most of which are dangerous at best and blind us consistently to the reality staring us in the face like a lion ready to pounce.
Close all spaces and you have the link.
We survived through a war with the rest of Europe. In the '50's there was still food rationing. In the '60's and until the mid '70's you couldn't take more than £20 out of the UK for a holiday until credit cards cashable abroad put an end to it. Up until the mid '80's you couldn't borrow more than 35% on your house or 2.5 times your salary and it was illegal to borrow on more than one house, and you couldn't buy gold. We had many market setbacks. In 1968-1970;1973-1980;19... In all the while inflation took hold and "prosperity" was brought back by yet another fudge which reduced peoples' savings and gave the State more power, usually Socialist governments who had been kicked out but came back with promises of handouts after the Right had restored some economic balance. Each new fudge requiring even greater inflationary stimulus or mirror trick to recover.
The big Q is if this will be yet another one or has the inevitable moment finally caught up with the spoiled Western populations that can't be postponed yet again? The higher they go the harder they fall and the great majority of countries are only where the West was 40 years ago. With the Internet available it is a surety that in the next two decades the World will equate in time in wages and benefits and that those who work hardest will overtake those who don't. There is no way that pensions in Europe and the US can be paid other than in massively devalued terms as they force uncompetitiveness on to manufacturers. Huge changes will need be made but the baby boomer generation will fight and vote to protect their false expectations against an increasingly angry younger generation who will be told they must expect less and give more.
Civil unrest and crime and trade wars will naturally follow, and most likely war too. WW1 was a trade war and WW2 a result of inflation induced poverty The world has always been one of survival and the appalling educational standards of the UK and the US for the last 30 years will be seen as their greatest failures against the new ambitions of the East who will use the Internet and wireless technologies to expand their knowledge to good use. If there is one massive problem in the world its the elephant in the room everyone in the West wants to ignore. Too many unproductive people taking from the State. Malthusian economics from the industrial revolution are disowned nowadays but Malthus's theory -that a population and its needs increase at a faster rate than its means and that widespread poverty is the inevitable result - is never more than a step behind us. As for Keynes whose theories are now in vogue,
his maxim was that in the long run we are all dead- but since he was gay and had no children why did he care? Do we in the West? or would we rather inflict on our children and grandchildren the painful corrections we should suffer ourselves since we have had it so good for so long? If we manage to postpone it again they will face poverty and crime and depression and war as my parents did. Its time to pull in the reins- not to loosen them or we are on a headlong path to total disaster.
"Creation of Federal Reserve
The Federal Reserve was created in 1913 in order to make bank panics less likely and to manage the nation’s monetary policy. They have created persistent inflation that has caused the U.S. dollar to lose 95% of its value since 1913. Their actions contributed greatly to the Great Depression of the 1930’s. Alan Greenspan’s self serving actions, in the late 1990’s and early 2000’s, led to the recent collapse of the worldwide financial system."
I'd like to think the Fed has for the most part done a fairly decent job - after all, no one is happy, meaning that no one got favored. Your "Greenspan Put" thesis is well argued, so maybe that was an exceptional time. If we were instead to use some sort of stable monetary supply, we would have deflation instead of the 95% loss of purchasing power we have today through inflation. However, there is a flip-side to this as well, more "unintended consequences". Let's say that in such a deflationary environment, gold increased in purchasing power throughout this time by the inversely same 20x as we lost through inflation. This would account for things like population growth and productivity. However, if gold's purchasing power increase this much, while supply remained largely constant, a couple of things would follow: 1) People would not necessarily be richer, as they would hold less gold per capita due to population growth, and 2) People would also earn a lot less gold in wages. Just because gold can buy more due to productivity increases, doesn't mean that labor (80% of our population) would stand to benefit - labor is usually what is marginalized first through productivity increases. Basically, the rich will still get richer, and the poor poorer in a deflationary environment, same as in the inflationary environment we currently have. Whereas the poor get poorer today through inflation, the poor would get poorer through lower paychecks through deflation. These paychecks would have a maximum deflationary rate set by the government of course, so that the lowest rung of our population is not unduly marginalized through productivity. Not a very good scenario for gold either, isn't it?
"China Embraces Capitalism"
I would only change one word in your argument, and it is the very last one:
"Allowing this unsustainable trend to grow beyond all reasonableness is now leading to social unrest in America."
Of course, this social unrest has been largely appeased here through a nearly $10 trillion bailout package, 20x the size of the Chinese stimulus proposal. Had this not gone through, more bank closings, resulting in even tighter lending standards, and more forced foreclosures would probably have led to some picketing or worse in more afflicted parts of the US. Unfortunately, the Chinese have done little wrong - they are increasing productivity, and taking advantage of their pitifully low cost of living by exporting the fruits of their labor. We have been irresponsible by purchasing these fruits using money we did not have. None of this would be much of an issue had we not mortgaged our future to do so. There are many, many reasons why most analysts like Jeremy Grantham are more bullish on emerging markets than the developed world, and this is easily one of them.
Your comment about US military bases abroad is a very complex argument. One would ask "what are they doing there??" Who's paying for them? What possible advantage are we deriving from them?
One point I'd like to illustrate is to ask people to get out a world atlas, and plot down where most of our military bases are. Just off the top of my head, I know we are in Germany, Turkey, Greece, England, Saudi Arabia and smaller emirates surrounding it, Iraq, Afghanistan, Pakistan, the Philippines, Taiwan, South Korea, and Japan. We have a tight alliance with all English-speaking nations - Australia, New Zealand, Canada, and England. India was once a British colony. One can assume the CIA and DEA para-military-style agencies are deeply embedded in South America. What is not covered? Russia, China, Iran, and Africa. Food for thought.
About military bases within the US, just take a look at the most recent BRAC discussions in Congress. Out of the several hundred bases we have in the US, only one district actually lobbied for their base to be closed - all the others fiercely lobbied for the bases to stay open - in many towns across the US, that military base is the sole reason that town can survive. The one city that lobbied for closure? San Francisco, because the land that the base was sitting on was worth far more than the economics of the base could ever provide.
For your section titled "Unintended Consequences of Cheap Oil", I'd ask what the unintended consequences would be for government-subsidized "cheaper non-oil-based energy", or "government mandated oil tariffs"? I'm all for cutting our foreign-oil dependence, but we've already tried the former through ethanol.
I saw Pickens pitch his idea through Congress, and all I'll say is that he's no altruist. His main pitch was on the Deutsche Bank report "Shale to Shining Shale" regarding new natural gas deposits all across the US. When he said that he could turn his head around and look through his office window and see natural gas that he owned, alarms went off in my head. I'm just glad he was honest about it.
Last point:
"Consumers need to cut back dramatically on consuming. Spending as a percentage of GDP needs to decline to 65%, or by $1 trillion. This would be approximately $3,000 less spending per household per year."
First of all, I'm very encouraged that we only need to cut consumption down by less than 10% of GDP to return to historic norms. Second, $3,000 less per household? That's a snap! Let's get even more extreme and say $3,000 per person. At 300 million people, that's less than $1 trillion!! That's only 10% of what the bailout is already costing us through an additional tax break.
Anyway, I'd like to thank you again for preparing this massive amount of information for us to discuss and from which to benefit. Again, I wish you a Happy New Year!
Here is what I told them: That a Tsunami was coming. That although all was rosy things wolud begin to turn bleak and turn quickly once the wave of defaults from all the 100% "fog-the-mirror" loans started going bad. That once people stopped making payments on homes they didn't have to put any money into buying, and began walking away (values that were artifically created by terrible loans sold by New Century, Ameriquest,and others; AND aided by arrogant and greedy real estate people getting 6% of every transaction), would stop rising and then plummit enough to start a panic.
The talking heads kept on insisting nothing was wrong and as we all know, they can never be wrong (lol).
Next I said would be the tsunami wave of foreclosures hitting the market and devestaing it exactly as an ocean tsunami devestates land as related jobs began feeling the impact of new housing starts dropping and that in turn would cause chaos.
Lastly I told them that was not even the half of it yet to come! I told them the major blow will happen as the second and possibly third, albiet smaller tsunamis hit. Why? Because all defenses for any tsunami were wiped out when the first one hit, that's why! So when these came to our econmic shore there was zero left to protect us!
The second was when the three-year arms slammed up against their conctracted adjustemt date. These beauties had some very bad and destructive money-bombs in them, set to go off when the auto-adjustment timer hit zero. Payments doubled and tripled overnight!
Were these people going to be able to make their payments? And even if a small percentage could, that meant that money that was being spent on luxuries was not caught up in the tsunamis tidal wave of chaos. The great majority of the home owners were swept away and foreclosures really exploded.
Guess what people?We aren't done yet!!!
The third wave is coming in on the horizon now! The loans with a five year adjustment are beginning to slam into their due dates! Oh Joy!
I predicted this. I talked about this. I preached this. But since I am not an "expert" not many people got to hear me.
I have vented and I feel better. Let me know how much you like act three of the "Tsunami Chronicles".
All the finger plugging of the dam that is going on will only make it look like things aren't bad, and getting worse.
If you would like to hear more, hey, write me or call me.
Bill@1-800MyMoney.com and 1-800MyMoney (1-800-696-6639).
1. the political system is hardly simply. In fact it is a very subtle complex social system for accomodating as manny views and opinions as possible in order to avoid violence. Its hard to look ata flow chart for the main processes of any of the 3 branches of government and find simplicity. In fact the system is intentionally complex by design, in order to prevent simplicity which leads to rash bold decisionmaking. See: totalitarianism, which when it gets it wrong, is a disaster
2. In fact, chaos theory and complexity theory lead you to develop simple control systems with rapid feedback loops and adaptive cycles precisely to reflect the uncertainty of outcomes.
3. It is confirmation bias and hindsight bias to find"causality" after the fact in a lot of "unintended consequences". Just because things happened chronologically doesnt mean that happened with causality. Because complex adaptive systems have unpredictable consequences, simplicity and flexibility (a=but mostly humility) should be sought.
4. Complexity IS an argument for distributed government and free markets. In fact, free market theory is a powerful argument that simple systems are best at managing/co-existung with complexity (the infinite variety of dynamic human needs, circumstances and resources)
Many of the things that you claim are "unintended consequences" are either policy errors or not logically an "unintended consequence". Did "the harsh terms of Versailles" _cause_ the rise of Adolph Hitler? How do you know that? If the terms of Versailles had been easier, would that have meant "no Hitler"? The terms that the Allies imposed on Germany and Japan in 1945 were scarcely modest: Unconditional Surrender. Allied policy towards Germany and Japan is generally thought to have worked out quite well.
Moreover, I note that on the one hand you fault Versailles for being too harsh on the Germans, but Appeasement for being too soft on them. Well which is it?
Any complex policy will have complex effects, some good, some bad; the job of policymakers is to seek the best possible outcome, not a perfect outcome-- such doesn't exist in this world.
There is no "law of unintended consequences" any more than there's chemotherapy without side effects. The informed calculus is called "cost-benefit analysis":
What is the goal?
What is the strategy to achieve that goal?
What are the costs to pursuing that strategy?
Is the goal being pursued worth the costs?
The appeasement was allowing Germany to rearm and take over sovereign countries after Hitler had gained power. Your arguments don't hold any water.
The terms after WW II were not harsh. McArthur ran Japan and helped them rebuild their society. Ever heard of the Marshall Plan that rebuilt Europe and Japan? Before you spout off, read some history.
And what is your point? Do you have a better idea or a solution?
On Jan 06 11:45 PM Crocodilian wrote:
> This is one of those vague assertions that has little explanatory
> value, its not clear how one can speak of a "Law" of Unintended Consequences,
> unless by that you mean "things we don't expect end up happening".
> Well yes, obviously . . . but so what?
>
> Many of the things that you claim are "unintended consequences" are
> either policy errors or not logically an "unintended consequence".
> Did "the harsh terms of Versailles" _cause_ the rise of Adolph Hitler?
> How do you know that? If the terms of Versailles had been easier,
> would that have meant "no Hitler"? The terms that the Allies imposed
> on Germany and Japan in 1945 were scarcely modest: Unconditional
> Surrender. Allied policy towards Germany and Japan is generally thought
> to have worked out quite well.
>
> Moreover, I note that on the one hand you fault Versailles for being
> too harsh on the Germans, but Appeasement for being too soft on them.
> Well which is it?
>
> Any complex policy will have complex effects, some good, some bad;
> the job of policymakers is to seek the best possible outcome, not
> a perfect outcome-- such doesn't exist in this world.
>
> There is no "law of unintended consequences" any more than there's
> chemotherapy without side effects. The informed calculus is called
> "cost-benefit analysis":
>
> What is the goal?
> What is the strategy to achieve that goal?
> What are the costs to pursuing that strategy?
> Is the goal being pursued worth the costs?
On Jan 05 12:17 PM Vienna wrote:
> - the unfunded medicare - it works here in Europe where live expectancy
> is higher, we always surely need to adopt it to the age pyramid,
> but this gives us a better future outlook than waiting to have nothing.
> Cost is approx. 10% of GDP for medical insurance , slightly lower
> than US what i know, but EVERYBODY is ensured here, >
> >
>A friend in England, in his 50's, waited for five years for a heart bypass under National Health. IUnable to work as his health failed in those years, he lost his house and his son had to drop out of college. 20 years ago another friend, a schoolteacher who had paid in for England's National Health all her life, was knocked down by a car; no bed was available at the public hospital,so she had to pay for treatment for broken bones at a private hospital. National health means national shortages. We don't want this here.
> The harsh reparation terms of Versailles made it impossible for Germany
> to make payments without inflating their currency. The misery, starvation,
> and anger in Germany made them turn to a dictator. Read some history
I've read plenty of history. You've fallen into the fallacy of "overdetermination", familiar to any historian as a methodological error. You see some policy A, and some time later some event B, and you say "aha: A caused B", without considering what else was going on at the time, or what the effects of some other policy, A1 would have been.
Many other forces were at work in Germany after WWI . . . first of all, Germany did quite _well_ in the 1920s, and the Weimar Republic was quite successful. The hyperinflation episode of 1923 was done by 1925, and the new "rentenMark" currency was quite successful.
Hitler's anger was not solely, nor indeed principally over the harsh terms of Versailles-- though he resented them-- it was over defeat in WWI, his hatred of Jews and Bolshevism. The economic misery of Germany at the time of his election had far more to do with the Depression than it did with the Treaty of Versailles.
The popular support for the Nazis had more to do with the fear of Bolshevik Revolution. You might read some time about the history of the Bavarian Soviet Republic to get some understanding of what was going on. The eminent German historian, Ernst Nolte, largely sees fascism as a response to the threat of Bolshevism, and you might start with his "Three Faces of Fascism".
Moreover, you might consider that Fascist movements existed in other countries-- including some of the VICTORS in WWI: Francs ("Action Francaise") and Italy: Mussolini. If we're supposed to blame "the harsh terms of Versailles" for causing Germans "to turn to a dictator" -- what explains why the Italians turned to a dictator? They were victors in WWI.
>
>
> The appeasement was allowing Germany to rearm and take over sovereign
> countries after Hitler had gained power. Your arguments don't hold
> any water.
Unfortunately for your argument, Appeasement was Neville Chamberlain's policy pursued from 1937 to 1939 only. Britain and France could have been more aggressive towards Hitler, surely, but would war against Germany in 1938 have been any better than the war that broke out in 1939? There's no evidence that it would have made much of a difference.
If you read Paul Kennedy (Professor of History at Yale and a well known historian of strategy), his verdict on Appeasement is:
""Each course brought its share of disadvantages: there was only a choice of evils. The crisis in the British global position by this time was such that it was, in the last resort, insoluble, in the sense that there was no good or proper solution."
(Paul Kennedy:Strategy and Diplomacy, 1983)
>
> The terms after WW II were not harsh. McArthur ran Japan and helped
> them rebuild their society. Ever heard of the Marshall Plan that
> rebuilt Europe and Japan? Before you spout off, read some history.
I would say that having your country under military occupation, having foreigners write you a new Constitution, having your Emperor forced to go on the radio and disclaim his divinity, having war crimes trials conducted in your former capital, and you former Prime Minister hanged qualifies as "harsh"
> And what is your point? Do you have a better idea or a solution?
My point is that you've constructed a logically fallacious argument. You look at some policy A . . . and then years later some unhappy event B occurs. You ignore all the problems that policy A was meant to solve, and indeed that it did solve, and say "policy A is bad, because something bad happened later on".
Take the creation of the Federal Reserve. The Federal Reserve was created as a response to banking crises and was given the task of ensuring monetary stability and to serve as a lender of last resort. By and large, its achieved these goals. Has it made errors, some costly? Sure.
But the correct test of whether the Federal Reserve system is not "have they sometimes screwed up?" its "where would we be without a Reserve banking system?" In fact, probably the most successful instance of Reserve Banking saving the day was the rescue of the German system by Hjalmar Schacht (I mention it because you seem interested in Versailles and its aftermath).
Any policy choice has its costs-- but to evaluate a policy ONLY by examining its costs --which is what you're doing-- will lead you to the erroneous conclusion that all policies are bad. The question, which you've not considered, is "what are the policy alternatives at any given point in time"" and "of these policy alternatives, what are the advantages and disadvantages of each of them?"
I'd rather jump in to the fray and try to make people think outside of their box than sit on the sidelines and tell others why their arguments are fallacious.
On Jan 07 10:44 AM Crocodilian wrote:
> On Jan 07 08:12 AM Jim Quinn wrote:
That said, I agree with the Quinns overall POW. And in a Obamaesque spirit I purpose that we all concentrate on fixing rather that pointing fingers.
I am totally at a loss over the following though:
"Not one economist on the face of the earth predicted the events of 2008. "
I think the most scary part is that that's not true, as readers of Bill Fleckenstein on MSN and the Prudent Bear website can attest to. Actually this outcome has been predicted and shouted out from the rooftops of every libertarian economist and market analyst for the last 5 years.
But everyone wants to be Harry Potter and nobody likes the Neville Longbottoms of the world.
Reality bites
On Jan 05 10:37 AM DaveW wrote:
> Speaking of 'speaking of':
>
> "The punishment of wise men who refuse to take part in government,
> is to be governed by the unwise" -Plato
>
> Thanks for the well written article James!
It is also true that all political systems have serious weaknesses of one sort or another and that all politicians are venal to a greater or lesser degree.
It's clear, however, only in hindsight, what relation the former of these trueisms has to the latter. And even then, the conclusions to be drawn are not indisputable.
Mr. Quinn insists that the Fed devalued the money supply after 1929 and that led to a recession becoming a depression. My understanding is rather that the Fed has in recent times been criticized on exactly the opposite ground, that Fed actions after 1929 tightened money supply by raising the interest rate in order to defend the US gold supply to which the currency was pegged. Much of current Fed and Treasury action has been an attempt to avoid that exact mistake and prevent the 1000's of bank failures of the late 20's and early 30's and their resultant devastating effects on ordinary folks and businesses alike.
Mr. Quinn rails against the "military-industrial complex" as a source of our current malaise. Yet military spending in the US supports quite a lot of employment, quite a lot of industrial contribution to GDP, not to mention produces exports which reduce the trade deficite primarilly related to consumer spending.
One might also consider the world-wide impact of reduced US defense spending and the consequent reduction of US defense commitments. The rest of the welfare state democracies all have higher transfer payment requirements that probably preclude them from picking up the slack for any such reduction. What would a revitalized Russian agression do as a result? What impact would it have on an already strapped Japanese economy, or the French and Germans who have grown largely dependant on the US military for their own external defense or on North Korean tendencies toward adverturism to ameliorate domestic insufficencies?
Mr Quinn insists we ought to save more and I agree. He also suggests that household debt should be reduced by $1T and I do not disagree. And yet neither of those actions would tend to help clear the huge inventory of available homes the creation of which has been so key in the current financial system implosion. In fact, one might reasonably argue that more saving and less household spending would have a drag effect there.
One hopes that Mr. Obama and his administration will not make things worse and will provide opportunities for the US economy to work its way out of the current morass. That economy is still very large, very diverse, and (I believe) quite resilient. The American people are still an inventive and imaginative lot and the American political system, with all its flaws, still the best available. I think we'll come out of this eventually, albeit not unscathed, so long as we don't try to force that recovery into too narrow a "planned" structure. Markets will eventually work so long as government regulates THEM and not their component parts.
> So your point is to point out flaws in my arguments but propose no
> alternative policies to get us out of this mess that we have created.
Your essay is about an idea "the Law of Unintended Consequences" with a long list of policies and what you believe to be their bad outcomes. I merely point out that there will always be some bad outcomes-- that's living on Planet Earth.
> I'd rather jump in to the fray and try to make people think outside
> of their box than sit on the sidelines and tell others why their
> arguments are fallacious.
If you want to know how to get out of this mess, ask the question: "What's worked in the past?"
Since you mention post-war Germany, I'd point you again to the estimable Hjalmar Schacht, the guy who "solved" hyperinflation. His "rentenMark" (basically a currency board) brought Germany back to a normal inflation rate by 1926-- that's a huge success. He achieved this by very conventional economic policy.
Today, we have a different problem: far too much leverage, and a deflationary crisis caused by de-leveraging. The solution to it is straightforward (but painful), and Ben Bernancke long ago described it in a Fed paper: the Federal Reserve has the capacity to guarantee access to capital (within some limits)
Why don't you read his recent address to the Economic Club of New York
econclubny.org/files/p...
One of the things that Bernancke has been most outspoken about is the opacity of complex securities:
"Well one of the key issues in this crisis, I was saying earlier there are a lot of similarities and general themes between this crisis and earlier ones, but this crisis also has a number of unique characteristics. And one that I mentioned in my remarks is the opacity and complexity of the financial instruments that many banks and other institutions hold. It’s a problem that those assets do not trade. There is no liquidity, there is no price discovery."
I think that this is right, and I think that the fear of these toxic securities is freezing everyone. So one suggestion that I'd make is that we've got to have a highly visible unwinding of complex derivative securities, so people can look at a financial firm with some confidence that something weird isn't going to blow it up.
That takes time. Our system is going to take some time --years-- to repair itself.
So my preferred "solution" would be:
Fiscal stimulus invested in things which will increase future productivity/wealth and support incomes
Clean up toxic financial instruments and provide better transparency to market participants
Intervene selectively in the markets to mitigate shocks (eg we don't want Citi to go under)
Be patient. Wait 3-5 years and I'd wager that the markets will have recovered. In the meantime, there's going to be some pain. We'll survive it.
Maybe if the capital allocated to weapons and war over the last decade had been allocated to infrastructure, we wouldn't have 156,000 structurally deficient bridges, crumbling water pipes and a power grid that could breakdown at any minute.
One thing will clear the excess of homes on the market. Lower prices.
If the American people are an inventive lot. We are trying to invent a political system that isn't corrupted by money. Either join, or sit idly by waiting for Obama to fix everything.
On Jan 07 12:44 PM gdg wrote:
> Unintended consequences have been with us as long as groups of men
> have collectively tried to address the human condition with planning
> of one sort or another. Human enterprises are way more complex than
> we have intellect or imagination to foresee, so addressing one issue
> with one set of planned actions almost always at least reveals if
> not outright causes another issue or set of issues.
>
> It is also true that all political systems have serious weaknesses
> of one sort or another and that all politicians are venal to a greater
> or lesser degree.
>
> It's clear, however, only in hindsight, what relation the former
> of these trueisms has to the latter. And even then, the conclusions
> to be drawn are not indisputable.
>
> Mr. Quinn insists that the Fed devalued the money supply after 1929
> and that led to a recession becoming a depression. My understanding
> is rather that the Fed has in recent times been criticized on exactly
> the opposite ground, that Fed actions after 1929 tightened money
> supply by raising the interest rate in order to defend the US gold
> supply to which the currency was pegged. Much of current Fed and
> Treasury action has been an attempt to avoid that exact mistake and
> prevent the 1000's of bank failures of the late 20's and early 30's
> and their resultant devastating effects on ordinary folks and businesses
> alike.
>
> Mr. Quinn rails against the "military-industr... complex" as a source
> of our current malaise. Yet military spending in the US supports
> quite a lot of employment, quite a lot of industrial contribution
> to GDP, not to mention produces exports which reduce the trade deficite
> primarilly related to consumer spending.
>
> One might also consider the world-wide impact of reduced US defense
> spending and the consequent reduction of US defense commitments.
> The rest of the welfare state democracies all have higher transfer
> payment requirements that probably preclude them from picking up
> the slack for any such reduction. What would a revitalized Russian
> agression do as a result? What impact would it have on an already
> strapped Japanese economy, or the French and Germans who have grown
> largely dependant on the US military for their own external defense
> or on North Korean tendencies toward adverturism to ameliorate domestic
> insufficencies?
>
> Mr Quinn insists we ought to save more and I agree. He also suggests
> that household debt should be reduced by $1T and I do not disagree.
> And yet neither of those actions would tend to help clear the huge
> inventory of available homes the creation of which has been so key
> in the current financial system implosion. In fact, one might reasonably
> argue that more saving and less household spending would have a drag
> effect there.
>
> One hopes that Mr. Obama and his administration will not make things
> worse and will provide opportunities for the US economy to work its
> way out of the current morass. That economy is still very large,
> very diverse, and (I believe) quite resilient. The American people
> are still an inventive and imaginative lot and the American political
> system, with all its flaws, still the best available. I think we'll
> come out of this eventually, albeit not unscathed, so long as we
> don't try to force that recovery into too narrow a "planned" structure.
> Markets will eventually work so long as government regulates THEM
> and not their component parts.
> had been allocated to infrastructure, we wouldn't have 156,000 structurally
> deficient bridges, crumbling water pipes and a power grid that could
> breakdown at any minute.
This is your best point. Think about the last time we decided to fight a war without raising taxes: Vietnam. Guns & Butter has failed twice in living memory. . . you can't fight an expensive war and consume as you are accustomed to doing, without paying the price. Both LBJ and W pursued this policy, and we've seen the results.
Spending money --even borrowed money-- on things which increase future wealth is an investment, spending money on a war is a dead loss.
For some peculiar reason, the W Republicans were happy to invest billions of dollars in Iraqi infrastructure-- but to let American infrastructure crumble. That's a terrible policy choice, and we can and will do better.
On Jan 05 10:51 AM DamonMc wrote:
> Gonebroke: Leeb??? Are you serious? This guy is a shill that floats
> every opinion published by Barrons. His thought process is about
> as deep as the pint of beer I'm sipping.
>
> As for action there are no easy fixes, but a return to community
> based education would establish a concrete foundation to build upon.
> I don't have to, but feel compelled to, reassure everyone that are
> state funded educational system in its current form is inadequate
> at best. The high school graduation rate is less than 50% (national
> average), and the children that do cut the mustard still rank far
> below even 2nd tier nations. I read an article yesterday that stated
> metro Indianapolis has a 16% graduation rate! Unbelievable. What
> a waste of $13,000 per child per year. Ignorance is a blindfold for
> the masses.
A lot of things are possible if resources had been alocated differently by any number of actors across the last decade although, my guess is you'd need to go back further than that to have saved US infastructure. But neither you nor anyone else can now determine whether the outcomes would have been "better" or "worse", even if we could agree on definitions for those value judgment terms.
And you do manage, in your zeal, to miss the point about the statements about Obama and the US economy and the American people. That being that all I hope for any government action is to not make things worse. I have no expectation that government planned action is ever a particularly good and certainly almost never the best solution for any economic issue. And are we living during a period when politicians seem even more venal and less capable than usual? Sure. Could we use some better folks, lobbyist reform, and a whole revisitiation of political "virtue"? Absolutely. But I still know of no better SYSTEM available, even if our current execution of it leaves much to be desired. Hell, maybe you ought to run for office and directly improve the political gene pool....
That the road not taken would have made all the difference, is a poetic assertion, not a factual one.
Marcus Tullius Cicero 106 BC to 43 BC:
The budget should be balanced. Public debt should be reduced. The arrogance of officialdom should be tempered, and assistance to foreign lands should be curtailed, lest Rome become bankrupt.
Even Rome had politicians with some common sense. Decisions we make in the next decade will determine whether the American Republic follows the path of the Roman Empire or can reverse course and fulfill the noble dream of our Founding Fathers. Thomas Jefferson and George Washington foresaw the hazards ahead.
Thomas Jefferson:
Yes, we did produce a near-perfect republic. But will they keep it? Or will they, in the enjoyment of plenty, lose the memory of freedom? Material abundance without character is the path of destruction.
Thomas Jefferson:
I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.
George Washington, Farewell Address, September 17, 1796:
As a very important source of strength and security, cherish public credit. One method of preserving it is to use it as sparingly as possible.
Our country was founded upon the principles of freedom, responsibility, and opportunity to succeed or fail. Government was supposed to play a limited role in our lives. Government’s function was to defend against foreign invaders, provide basic services, enforce the laws, and maintain the public infrastructure of the country. Over time government has incessantly intervened in the economic system and by successive steps has moved the country toward socialism. Millions of Americans are now totally dependent upon handouts from the government. This policy of government expansion through the use of credit at the expense of taxpayers is detrimental to the rest of society. Interventionist wars, undeclared by Congress, and maintaining military bases in 117 countries were not envisioned by the Founding Fathers. The more we consent to government intervening in our lives, the more freedom that we lose. We are now experiencing the utmost intervention by government in our 222 year history.
On Jan 07 05:01 PM gdg wrote:
> Actually, Mr. Quinn, history suggests that it was perhaps Fed tight
> money defense of the gold standard pre 1929 that prevented a classic
> Mississippi Company, Dutch Tulip , South Seas Corp, dot.com, current
> mtg market bubble. The definitive Friedman/Schwartz study of the
> Great Crash never blames the crash itself on the Fed, but does blame
> it for extending the crisis by a tight money policy that led to over
> 10,000 bank failures over the next several years and wiped out personal
> and business wealth with equal vigor.
>
> A lot of things are possible if resources had been alocated differently
> by any number of actors across the last decade although, my guess
> is you'd need to go back further than that to have saved US infastructure.
> But neither you nor anyone else can now determine whether the outcomes
> would have been "better" or "worse", even if we could agree on definitions
> for those value judgment terms.
>
> And you do manage, in your zeal, to miss the point about the statements
> about Obama and the US economy and the American people. That being
> that all I hope for any government action is to not make things worse.
> I have no expectation that government planned action is ever a particularly
> good and certainly almost never the best solution for any economic
> issue. And are we living during a period when politicians seem even
> more venal and less capable than usual? Sure. Could we use some better
> folks, lobbyist reform, and a whole revisitiation of political "virtue"?
> Absolutely. But I still know of no better SYSTEM available, even
> if our current execution of it leaves much to be desired. Hell, maybe
> you ought to run for office and directly improve the political gene
> pool....
>
> That the road not taken would have made all the difference, is a
> poetic assertion, not a factual one.
>
So, you don't like my hat?!
Comment: Ah, a very good original observation and worthwhile warning.
Mr. Quinn wrote: “The welfare statists have confiscated middle class savings through inflation while being aided and abetted by Alan Greenspan and the Federal Reserve.”
Comment: This is dangerous talk. Beware! You’re liable to bet barred from every blog on the net.
Mr. Quinn wrote: “The Fed [under Alan Greenspan came to the rescue by lowering interest rates and liquidating the economy] after the Gulf War, the Mexican crisis, the Asian crisis, the LTCM implosion, Y2K, the bursting of the Dot Com bubble, and the 9/11 tragedy.
Comment: It’s amazing to me how few in the non-financial media and the public have any idea of these actions. They need to know it, though.
Mr. Quinn wrote: “After the 1st Gulf War, the U.S. with the support of the Saudi rulers allowed a permanent U.S. military base in Saudi Arabia. This presence led Bin Laden to declare a jihad against the U.S. infidels and eventually led to the 9/11 attack and the War on Terror. This has led to mammoth budget deficits, thousands of unnecessary American and Iraqi deaths, and contributed hugely to the financial crisis of 2008.”
Comment: Two more facts hardly anyone knows or understands. Yet, they need to.
Mr. Quinn wrote: “The Bush administration declared a War on Terror, invaded Iraq on false pretenses wasting the lives of 4,500 Americans and damaging the lives of 30,000 Americans who were wounded, wasted $800 billion of borrowed taxpayer money, created the Department of Homeland Security at a cost of $50 billion per year, tortured captives, and has allowed the government to monitor private conversations of Americans without a warrant. An attack by 19 men with knives has led to the decline of the United States stature throughout the world and pushed the U.S. towards bankruptcy. The beacon of freedom has seen its light dim.”
Comment: Certainly, the reaction to 9-11 was gross overkill. Obviously, the mad Muslimics threw everything they could muster at us.
But I disagree with the last sentence: The US long ago stopped being a “beacon of freedom.” Rather, for most of the 20th Century the US has been busy (under every new administration and congress) with building an all-powerful monolithic state that interjects itself into every conflict on every land base and sea, and has burrowed itself so deeply into the lives and actions of the people that you can’t tell one from the other.
The saddest thing of it all is, the people have clamored for this type of statist intervention—you couldn’t pull them away from it now for their lives.
Mr. Quinn wrote: “Ignorance, error, and immediate interest sound like a perfect motto for the U.S. Congress, Federal Reserve, and Treasury.”
Here is a sentence that at first glance I would like to agree with, and in part I do.
Error? Yes.
Immediate interest? Yes.
Ignorance? No.
Most of the statism built over the last century has been purposely carried out, because the bigger the government the more powerful its controllers.
Now, if you had given these reasons, I think you would have been on the money:
Big egos? Yes.
Control freaks? Yes.
Big government ideologues? Yes.
Lusters for power? Yes.
Mr. Quinn wrote: “Converting our country to wind power, natural gas, and nuclear power would decrease our dependence on foreign oil and keep $700 billion in the United States rather than transferring it to the Middle East.”
Now, Mr. Quinn instead of following the title of your article, and continuing to show unintended consequences, you are becoming what you have spent the last 100 paragraphs knocking: a controlling, know-it-all who wants to make the nation (and the world) do what you think is best because you’ve read one article and accepted it as fact. Ta ta.
Mr. Quinn wrote: “The Federal Reserve and politicians running our country see a $1 trillion reduction in consumer spending as a disaster. Their positions of power would be in jeopardy.”
Comment: Exactly. And they’ll do anything to keep their power—no matter how much money it cost, or lives and businesses for that matter.
Mr. Quinn wrote: “If Barack Obama is depending on economists to determine our future, all is lost. Alan Greenspan was an economist.”
Comment: Don’t you know Mr. Quinn that the system we’ve built is a pyramid, and it must collapse. If you don’t you should go back and read your own article over—you’ve pretty much concluded already that the people running the system can’t control it and thus can’t fix it.
The monster the American people have begged for is now full grown, and it stands before us ready to gobble down every living thing.
Thank you for the article—it’s thought-provoking, and out-of-the-norm enough to be accurate. Only a mild bit of repeating the thoughts of others. Good work.
The Dodger
Great article and comments. I would, though, appreciate it if you would recognize when commenters make some valid points. I'm thinking of Crocodilian, who made some good points with excellent references.
Neither Hayek nor von Mises were engaged in predicting market collapses in the US. Both were, I'm sure, more concerned about rampant money supply expansion and it's resultant hyperinflation in the Weimar Republic and elsewhere in Europe than the excesses in asset valuations in the Wall Street Market. And it remains undisputed that tight money policy post crash was primarilly at fault for extending the crash/recession into a ten year long depresssion.
Other than that, I suspect we agee much more than disagree, especially on founding father intentions.
To quote Jefferson back at you "A government big enough to give you what you want is big enough to take all you have."
On Jan 08 11:04 AM rkruse53@yahoo.com wrote:
> Mr. Quinn - - -
>
> Great article and comments. I would, though, appreciate it if you
> would recognize when commenters make some valid points. I'm thinking
> of Crocodilian, who made some good points with excellent references.
I admire your command of History and it's role in helping us frame the current economic crisis. You are one of the few who has taken this tack and I think if more people understood how events of 100 years ago set the stage for things we are grappling with today, we'd have better policy responses and a more educated and concerned public. Pointing toward the assassination of Archduke Ferdinad, the Treaty of Versailles (and collapse of the Weimar republic), the New Deal, the creation of the FRB in 1913, the rise of the Military Industrial Complex in the wake of WWII, and many of the other critical events of the 20th century are indeed critical in understanding why we now sit at the precipice of a massive social and economic catastrophe. That notwithstanding, you take some serious liberties with the Historical events you cite. Your claim that the United States did not have a war machine prior to the build up of our modern military industrial complex in the post-war era is patently false. Firms like the Carnegie Steel Corporation, Bethlehem Steel, and US Steel made millions in profits by supplying the armor plating, axles, shell casings, and other war material in the 15 years prior to World War I. In fact, the resurgence of the Steel industry in Pittsburgh during the 1914 to 1919 period is directly attributable to the role of Pittsburgh's heavy manufacturing industries in supplying the material for World War I.
That said, I think you're correct in framing our current crisis in Historical context. I should call your attention to this article from cnet, describing a speech by Microsoft's Steve Ballmer. I'm truly impressed by Ballmer's command of financial History and its implications for our current crisis. news.cnet.com/8301-135...
Finally, I would add Yves Smith and Peter Schiff to your list of truth tellers and I wouldn't exactly describe Ron Paul as a truth teller--though I can see how his economic policy positions are simpatico with yours. Frankly, I find his isolationist and ideological dogma a little off-putting and I do not think his social policies are very progressive. but that's just me.
Keep up your excellent missives on History and our economy. We need more voices like yours.
Nik