Debt Ceiling Debacle

Yay! We reached a debt ceiling agreement! And it cuts $2.1 trillion from the federal budget!

Let's take a closer look at what really happened.

First of all, there are guaranteed budget cuts of $2.1 trillion. Sounds great until you realize that those cuts are spread out over 10 years. What's worse is that those cuts are extremely back-end loaded, meaning that much of that money isn't cut until many years down the road. In fact, only about 20 or 25 billion dollars in cuts take effect in fiscal year 2012. As far as I'm concerned, those are the only cuts that matter because any future congress doesn't have to abide by the guidelines set out in this bill. (If you're curious, 2013 cuts amount to only $47 billion, but the new 2012 congress will likely change that.) This is why politicians love 10 year budgets. They can make seemingly huge cuts that only take place in the last 3 or 4 years, never actually follow through with those cuts 6 or 7 years later and claim victory in order to help their reelection chances.  Oh, and those cuts aren't really cuts in any literal sense of the word. In Washington, if you plan to increase spending by 10% but only increase it by 6% they say they made a 4% budget cut, even though spending increases by 6%.  These cuts are no different. They're only budget increases that are less than the larger budget increases that were already in place.  Maybe that explains why so many politicians have a weight problem. "I only ate 7,000 calories today instead of the 10,000 I planned on eating! I cut my calorie intake by 30% and only gained 5 pounds instead of 8! This diet is a huge success!"

Now to the debt ceiling. I'm not entirely certain how much it is raised by. Initially it's $400 billion with another $500 billion increase later this year. And I also saw that the total increase would somehow end up being about $2.1 trillion.  That's the largest number I've seen so I'll just assume that is true. This number is very important because it's the amount of money that the Treasury says they need in order to make it through the next election cycle and into 2013.  In fact, Vice President Biden said that the deal has one overwhelming redeeming feature: postponing the next debt limit battle until 2013 and leaving the current fight behind.  This is crucial because Obama, and anybody in congress for that matter, don't want to have to duke it out over the debt ceiling again before they have to hit the campaign trail.

But I'm not so sure that $2.1 trillion dollars is enough to get us by that long. In August of 2009 the White House predicted the 2011 GDP to increase by 3.8%. In July of 2010 the White House projected 2011 GDP to increase by 4%.  Now that we have 2 quarters of data for 2011 let's see how accurate they were. The 1st quarter GDP was originally stated to be 1.9% but was recently revised down to 0.4%. Currently the 2nd quarter GDP increase is said to be 1.3% and who knows how much that will be revised down to.* But even if we have 0.4% Q1 GDP and 1.3% Q2 GDP, that still only gives us an annualized rate of 0.8%. That is just slightly more than a long fucking way from the 4% projected just one year ago (If you're keeping score at home, the White House was off by 400% IN JUST ONE YEAR**). And with an economy that looks more and more likely to slip into the double-dip recession*** that I've been expecting for over a year now (and I'm certain it is inevitable), I wouldn't be surprised if the real revenues fall far short of the projections and the deficit ends up being much larger than expected.  If that happens, and it's very likely that it will****, the Treasury could burn through their $2.1 trillion ceiling hike much sooner than anyone believes. Reaching the debt limit again, before the 2012 election, would pretty much be the nail in Obama's coffin. Then we will elect a Republican that is just as ineffective. Yay!



*Q1 GDP was revised down by 1.5%. If Q2 is revised down that much we will officially be in negative growth territory. Just a reminder, back in August 2010 I predicted GDP to enter negative growth by Q2 2011. In a few months, when the official Q2 GDP numbers are revised, that could prove to be amazingly accurate. Either way, the fact that some dumb fuck with no formal economics education who can read and objectively take in information has made predictions much more accurate than the President from Harvard speaks volumes.

**If they can be off by so much in just one year, why does anyone expect them to make budget and revenue forecasts that go out 10 years? Am I the only one who thinks this is insanity?

***In this case the term "double dip recession" is somewhat of a misnomer. It's my belief that we're currently in a depression that's been going on since 2007. The only reason the GDP numbers are positive is because the government is manipulating CPI to make inflation seem much lower than it is. Remember, official GDP is the increase in nominal GDP minus the inflation rate. If we had an accurate inflation rate, it would be high enough to push official GDP into negative territory.

****Since we'll probably have QE3 in the next couple months, and almost certainly will by the end of the year, that could help keep the economy afloat even though the effects of QE will be less and less with each round. But remember, when The Fed does QE, they print money to purchase Treasuries, so the QE money will go towards the national debt and, obviously, the debt ceiling.

No Love For Democracy

Pretty much every day you'll hear, in some for or another, the virtues of democracy being espoused.  Most notably, this sentiment is expressed when we justify our overseas wars.  "We are making the world safe for democracy" is a phrase that's been thrown at us for decades now.  It's accepted that governments have the ability to enslave and restrict freedoms to their citizens, the only variable being the degree to which they do those things. Enough dictators and despots throughout history have certainly proven this fact. It is also accepted that simply having a democratic form of government is enough to ward off these evil tendencies of governments and ensure that people remain free. It's why we fight wars that “bring freedom and democracy to a nation.” But very little discussion is actually had on the virtues and implications of democracy.

It is generally accepted that with democracy comes freedom.  This is something we all seem to understand without even giving it any thought.  In a democratic society, the will of the people will prevail and surly that is emblematic of freedom itself.  So long as democracy is allowed, it will ensure that freedom is upheld.  Majority rule is clearly the most moral form of government one can aspire to.  Perhaps these are the generally accepted beliefs, but those beliefs are wrong.  In fact, I'll go one step further and posit that the only difference between a totalitarian government and a democratic government is that a dictator is simply replaced with a majority.  More specifically, a voting majority.

When you get down to the basics of democracy, it's clear that it is nothing more than a system whereby the majority is legally able to impose their will on the minority.  Not only does this not guarantee freedom, but it almost ensures that freedom will not exist.  The only question is to what extent will freedom be forbidden.  

One needs not look further than present day America to see the immoral effects of democracy.  We have laws that forbid the use of recreational drugs because the majority has voted politicians into office that made that behavior illegal.  Does freedom enter into this decision at all?  Certainly not.  If 55% of the population doesn't approve of the use of certain drugs, they can simply use the democratic process and summon the coercive power of government to impose their will on the other 45%.  While there is nothing undemocratic about this, there certainly is, in my opinion, something extremely immoral with it.

There are a whole host of issues where, simply because something is not popular, it is made illegal and therefor limits the freedom of individuals to engage in certain behavior.  Personally, I feel that prostitution is abhorrent behavior.  But my personal opinion on the matter should not give me the ability to use government to prevent others, people who might not hold the same opinion as I do, from engaging in that activity. Why should I have the ability to use the power of government to impose my will on those who disagree with me?  Why should the legality of certain behavior depend on popular opinion? Why should anyone's freedom to engage in behavior that causes no direct harm to others be restricted simply because most of his neighbors voted to do so?  Why should someone be forced to give up half of their earnings to a man with a gun and a cage simply because The Majority approves of it?  The answer is simple: Because we have democracy, and restricting the behavior of others can be done whenever a majority supports it.

And yet most of us hoist democracy onto a pedestal.  Even worse, we put freedom right next to it.  It seems to me that freedom and democracy are not inherently compatible.  And why should they be?  Democracy is the will of the majority.  But that's only the first half of the definition.  If we're being honest, democracy is the will of the majority imposed on the minority with force and the threat of violence.  That has nothing to do with freedom.  Freedom is something that everyone espouses, few people understand, and even fewer people desire.  The proof lies in our democratic government, our willingness and ability to vote ourselves other people's money and our incessant need to use the democratic process to restrict behavior simply because We The Majority don't approve of it.

Forgive me if I retain the pedestal for something more deserving.

Deflation, Oh No!

So it's starting to happen. A few weeks ago commodities got pounded, oil and silver especially. And now stocks are falling rather sharply.  It looks like the market is starting to price in the end of QE2 as $6 billion of cash flooding the system every day courtesy of the Federal Reserve will be ending in just over a month.  Without this economic life support, we can expect to see deflation rear its ugly head again over the summer as the market desperately tries to cure itself of government created disease.  Of course, once people start to see the value of their 401k fall through the floor, housing double dips to new lows, interest rates rise to unacceptable levels and our pathetic job creation ability comes to an end everyone will beg Ben Bernanke to start QE3.  And why not? The first two rounds worked so wonderfully, right?  As Jim Rogers said, "The money printer will print money."  We won't be twisting Bernanke's arm a whole lot before he obliges us.

Expect to see the S&P drop about 20% before Ben is justified in unleashing his Helicopter full of cash.  September.  Maybe October.

Helping The Unemployed While Growing The Economy (An Easy Solution To Our Predicament)

I still find it fascinating that politicians can't seem to grow the economy.  Even though many of them realize how it works, political theater and partisan politics always seems to get in the way.  For anyone who doesn't yet understand it, I'll take some time to explain it so you can see how easy it is.

Let's say Bob is unemployed.  All we need to do is have the government give Bob some money, say $150.  Now Bob can take that $150 and buy a TV from Mike.  Mike, being a wealthy businessman, will then pay $100 in taxes and he can be allowed to add the other $50 to his vast fortune.  Now, since Bob bought an energy efficient TV, the government can give him a $50 rebate for making a wise choice.  Add that $50 to the $100 in taxes that Mike paid and the government can then give Bob another $150 for his unemployment check the next week.

Bob can then take that $150 and buy a bike from Jack.  Again, Jack is a wealthy man so he will pay $100 in taxes and get to keep $50 to add to his wealth.  Since Bob is making the correct decision in riding a bike instead of driving a gas powered vehicle, he will receive another $50 rebate so he can get another $150 for his unemployment check the following week.

Now Bob has a TV, a bike and $150 having started out with nothing.  So what does he do?  Well, he takes that $150 and he buys a radio from Sam and a week later he gets another $150 unemployment check from the government.  So now he has a TV, a bike, a radio and $150 after starting out with nothing.  And because of this process, Sam, Jack and Mike all saw an increase in demand for their products and the economy grew as a result.  This is just a win-win-win situation all around and it's exactly how we need to grow ourselves out of this mess we're in.

And hopefully at some point Sam, Jack and Mike can all go broke on their investments so that they can be unemployed as well and start collecting unemployment checks so the economy can grow even faster with all the extra aggregate demand the government would be producing.

Hopefully everyone reading this recognized the satire and sarcasm, but it is almost exactly the way many of our politicians understand economics.