American Foreign Policy: The Flow Chart

I know it's difficult at times to wrap your head around the foreign policy decisions that American leadership makes, so I've devised this handy flow chart to help makes some sense of it.  Hopefully this helps to clear up some of the misunderstandings. (Click the image to make it larger)

Quantitative Easing: To Infinity And Beyond

Since the Great Recession started a couple years ago*, the federal reserve has been involved in a process called "Quantitative Easing".  I've discussed this before so I won't go into the process any further.  The second round of Quantitative Easing, QE2, is set to expire at the end of June.  Watch the talking heads on TV and they'll tell you, almost unanimously, that there will be no further rounds of QE.  Their reasoning is that the economy is turning around.  I think the economy only appears to be turning around because of the QE, and the recovery isn't sustainable without it. Either my laymen understanding of our economic condition is terribly wrong, or these guys are grossly stupid.  I have a very healthy ego so I'm going to go with the latter.  Here's why I think that QE3, QE4, QE5, etc will happen.

As I mentioned in the article I linked above, the federal government is running huge deficits, and will be doing so for at least the next decade.  This means that the treasury has to sell bonds to cover the budget deficits.  Since QE2, the federal reserve has been buying 70% of new treasury bonds.  When QE2 ends, and the fed stops buying treasuries, someone has to pick up the slack.  And that's a lot of slack.

You might be thinking that China will come to the rescue again, but I don't think they can continue to do that.  When they buy our treasuries, they have to print money to do so, which causes inflation.  They're already experiencing a high level of inflation, possibly as much as 10% or more.  They're currently importing much of our inflation in order to keep their currency pegged to our dollar.  But the inflation problem in China (and all over the world really) is leading to some civil unrest that The State needs to avoid.  As we've recently seen in the Middle East, citizens will put up with brutal regimes as long as they have a job and can afford food.  By printing money, we're pushing up the price of food all over the world, China included.**  In order to get their inflation under control and calm the citizenry, China is going to have to stop buying our debt with money they print.

So if not China, then who?  That's a very good question.  A better question might be How much interest are these unknown buyers going to charge?  Since the fed represents 70% of bond demand, once they quit buying bonds the demand will drop and interest rates will surge.  If interest rates go up significantly, the federal government is going to have to find more buyers of our debt to cover the higher amount in interest payments plus the new debt we take on.  Finding more buyers of this debt in a market where demand is low will push interest rates up higher, which will cause us to have to find even more buyers who will demand higher interest which will cause us to find even more buyers which will... well, you get the idea.  It's called a Ponzi Scheme, and even Bernie Madoff recognizes that our entire government operates as one.  If there are no buyers of our debt other than the federal reserve, the federal reserve will be forced into filling that gap in order to keep interest rates low.

Another problem is that the economy cannot sustain the "growth" we've experience over the past 6 months or so without the money that the fed is providing through QE2.  On average, the federal reserve has been purchasing 5-8 billion dollars of treasuries a day and injecting that new money into the system.  This has been great news for stocks since the vast majority of that money makes its way to the big guys on Wall Street.  Ever since "Jackson Hole" late last August, when the fed announced their plan for QE2, stocks have almost gone straight up***.  Before that, the economy was in shambles in the vacuum left behind after QE1.  Things aren't much different now than they were last summer.  Many of our problems have not been fixed and most of the ones that matter are even worse today.  Once the fed stops pumping money into the economy, the "recovery" will sputter and there will be a lot of pressure on them to fire up the printing press.

There is a problem though.  The public is becoming more and more nervous about all of the money printing.  Luckily for Washington, the public is also easily manipulated.  If QE3 happ When QE3 happens, they can do it without calling it that officially.  QE2 is written in such a way that it can be expanded upon if the fed chooses to do so.  That means that we do another round of Quantitative Easing but call it a continuation of QE2, or some other goofy name altogether.  It will also be interesting to see what tragedy or crisis they say we are on the brink of in order to convince the public that it is necessary.  I'm of the mindset that we're already on the brink of an economic depression if we stop the QE(insert number).  But as I've said before, that is an inevitability that is only being delayed and intensified by the actions of the federal reserve.  If we continue on this QE/huge deficit spending path, we're almost guaranteeing that we experience hyperinflation and a total economic collapse. The sooner we try to deal with the mess in a real and honest way, the better.  2008 would have been a nice time to start...



*Fun fact: The Great Recession officially ended in September 2010. That's according to Government Data though.  Mark Twain popularized the phrase "There are lies, damned lies, and statistics."  Today that phrase would be "There are lies, damned lies, statistics, and government statistics."

**Because we have the world's reserve currency, food is traded in US dollars in the world markets.  When we print 2 trillion dollars to prop up our economy, we also bring the price of food up across the world.  These Mid-East protests can be directly linked to our inflationary monetary policy.  If it spreads to Saudi Arabia, I hope you can afford $5(probably even more) gas

*** This chart shows the DOW from a couple weeks before the announcement of QE2 (end of August) until now.  Stocks were falling until the minute QE2 was announced.  Wall Street loves free money from the fed.

Defending Evil

"You see, that's the whole point of being the government. If you don't like something you simply make up a new law that makes it illegal"
                            -Minister Dormandy in Pirate Radio

Just today the Supreme Court ruled in favor of a bunch of despicable people at the Westboro Baptist Church.  For anyone living under a rock for the past few years, the people at Westboro do awesome things like protest at soldiers' funerals.  Their logic is this:


1) God hates gays.
2) America is far too tolerant to gays.
3) God wants to punish America for being too tolerant of gays.
4) God kills soldiers as punishment for America's tolerance of gay people.

Yeah, they're juuuuuust a little goofy.

Back to the Supreme Court ruling.  A family member of one of these soldiers sued Westboro and it eventually ended up at the Supreme Court who ruled 8-1 in favor of the protesters.  It's my opinion that the only bad thing about this ruling is that it wasn't unanimous.

In America we like to talk about our "rights" "liberties" and "freedom".  Those are all noble ideas and concepts that we all embrace... when it's easy.  This is one of those cases where it's not easy.  A family in mourning had to bury a man while a group of hateful assholes celebrated it.  But their celebration occurred 1,000 feet away (far enough away that those at the funeral couldn't see them, and in compliance with city ordinance) and on public land.  In my opinion those are all reasonable conditions to limit speech so that it doesn't interfere with the right of other people to be left alone.


But in a case like this it's far too easy to get caught up in the emotion and lunacy of the whole thing and look for ways to keep people from saying things that we disagree with.  Any reasonable person would recognize Westboro's actions as something that is not desirable.  But that should not give us the right to make it illegal or further limit it in some way.  I fear that the opposite ruling of the Supreme Court, had it occurred, would not have elicited much outrage among American's who claim to embrace free speech.  The reason is simple: because it's difficult to defend such horrible speech. Shouldn't the right to speak freely be defended the most when the speech is outside of our comfort zone since that's when it's most likely to be attacked?

If we only defend free speech (or any other "right" for that matter) when it's easy and when we agree with the speech, then we don't really defend speech at all.  We simply defend speech that we agree with, or isn't offensive, or isn't controversial.  Free speech should not have an asterisk next to it.

I think you can tell a lot about a man's character based on whether or not he is willing to, based on principle, defend something with which he fervently disagrees.  I don't think American's would have rushed to the defense of Westboro Baptist if the Court ruled the other way, and hopefully I'm wrong about that.  Thankfully they got this one right.

Optimistic, Unrealistic Budget

President Obama recently released his budget proposal for next year and it is quite fantastic.  It includes revenue increases of 65% and will reduce the deficit from 11% of GDP to 3.2% of GDP.  It's wonderful! Fast track this through congress and start looking for retirement islands in the Caribbean!  OK, maybe I'm being a little too sarcastic.  Instead of caustic hyperbole and snarky rhetoric, I'll use some data and facts to let you know why this budget is a farce.

Here are the specifics of the recently released budget proposal (Source):

FY 2011 Projected Revenue: $2.174 Trillion
FY 2011 Projected Spending: $3.819 Trillion
FY 2011 Projected Deficit: $1.645 Trillion
Spending as % of GDP: 25.3%
Deficit as % of GDP: 10.9%

FY 2012 Projected Revenue: $2.627 Trillion
FY 2012 Projected Spending $3.729 Trillion
FY 2012 Projected Deficit: $1.101 Trillion
Spending as % of GDP: 23.6%
Deficit as % of GDP: 7.0%

FY 2013 Projected Revenue: $3.003 Trillion
FY 2013 Projected Spending: $3.771 Trillion
FY 2013 Projected Deficit: $768 Billion
Spending as % of GDP: 22.5%
Deficit as % of GDP: 4.6%

FY 2014 Projected Revenue: $3.333 Trillion
FY 2014 Projected Spending: $3.977 Trillion
FY 2014 Projected Deficit: $645 Billion
Spending as % of GDP: 22.4%
Deficit as % of GDP: 3.6%

FY 2015 Projected Revenue: $3.583 Trillion
FY 2015 Projected Spending: $4.190 Trillion
FY 2015 Projected Deficit: $607 Billion
Spending as % of GDP: 22.3%
Deficit as % of GDP: 3.2%

First, let's look at the 65% projected increase in revenue.  Has this large of an increase in revenue ever occurred in such a short period of time?  The answer is yes, but it comes with an asterisk or two.

Over the past 60 years there have only been three other years with a similar rate of revenue growth for a 4 year period (where each year is compared to the revenue period four years prior).  They happened in 1979, 1980 and 1981.  Those years also happen to have some of the highest rates of inflation in the 50 or so years of data.  To be specific, 1979 had the 2nd highest inflation (11.3%), 1980 had the 1st highest (13.5%) and 1981 had the 4th highest (10.4%).  Obama's budget doesn't assume those enormous inflation levels.  In fact, it assumes 2% or less inflation, so it's not inflation that will be driving the enormous revenue growth.*

Another reason we could have a 65% increase in revenue would be because of a huge expansion of GDP.  Again, in 1979, 1980 and 1981 we saw extremely high GDP growth of 11.7%, 8.8% and 12.1% respectively.  Out of 65 years of data those are the 4th, 5th and 17th fastest years of economic expansion.  Does the Obama budget expect similar GDP expansion that will be ranked in the top 10 years in recent memory?  Not if you look at their published data.  From the years 2011 - 2015 they expect the following GDP growth: 2.7%, 3.6%, 4.4%, 4.3% and 3.8%. 

So we can't defend the rosy revenue projections based on huge GDP growth or high inflation.

What if we compare the projected increases historically on an inflation-adjusted basis.  If we simply chart each year's federal revenue after correcting for CPI, and use the Obama budget CPI assumptions for the years 2011 - 2015 so everything is in 2010 dollars, we'll see that the budget proposal contains the 3 largest years of inflation adjusted revenue on record (2013, 2014, 2015).

So what do all these boring numbers mean?  Simply put, the revenue assumptions that are in the budget proposal are extremely unlikely.  The chances of them actually happening are close to 0% unless massive tax increases are part of the package, which the president insists will not happen.  Of course, there's the chance that we see rapid growth, low unemployment, substantial increases in wages and low inflation all at once.  Again, the chance of that happening is nearly 0%.  The one things these numbers are good for is talking points and hopeful, optimistic speeches that garner votes by making us feel warm and fuzzy.**  The one thing they are not is honest, and honesty is probably the most important thing we need from our leaders right now.

The truth is that if we don't act boldly right now, and neither party seems to be willing to do so, we will add at least another $5-7 Trillion to our $14 Trillion national debt by 2015.  Unless politicians somehow address the "big four" - Defense, Medicare, Medicaid and Social Security - this budget proposal is little more than a fantasy.  If you hear someone talk about our budget and they don't mention those four areas, it's simply partisan talking points used for positioning in the next election cycle.  By lying to ourselves, we're only ensuring that our debt will grow, our GDP will remain largely flat, and we'll bring on a massive inflationary event that forces the federal reserve to choose between defending the dollar (raising interest rates) or defending the economy.  It can't do both at the same time.




*As I've said before, the government lies about inflation.  Anyone who has gone shopping in the last year knows that we have much higher inflation than what the official numbers show.  We'll also have much higher inflation than what Obama and his administration is predicting.  But that will also bring down his GDP expectations because GDP is inflation-adjusted.

**While our head is firmly planted in the sand.