One of the biggest issues in this mid-term election is the desire to pare the rate of growth in federal government spending. Economically speaking, this is spot on because the real economic cost of government is how much it spends. Bear in mind, the federal government always gets the funds it needs to pay for its expenditures – through taxation, borrowing and/or "printing." The more the federal government spends, the more productive resources it directs, leaving fewer resources at the disposal of the private sector. Because the private sector generally uses productive resources more efficiently because of competitive pressures than does the federal government, the economy’s long-run potential real economic growth rate is adversely affected by increases in federal government spending.
"The Real Economic Cost of Government Is Spending – So, What Do You Want to Cut?" Paul Kasriel, Director of Economic Research, The Northern Trust Company., 23/9/1010.
I think the same way planned economies ended in disaster, central banking as we know it today, will end in disaster. If there was a tribunal whose laws or criteria were sound money, Mr Greenspan would be hanged.
Mark Faber 2/1/2005.
The US government is a debt junkie, and if the trend continues, the doses are eventually going to become lethal………..The party out of power always blames deficits for chronic inflation, while the party in power declares that deficits have nothing to do with inflation……….Make no mistake about it, the Fed is a political institution subject to the pressures of lobbyists and constituencies of Congress and the President. Why? It’s the nature of the beast. Any man who tries to remain aloof from these pressures will lose both his influence and, eventually, his position……. As long as the government controls monetary policy there will be booms and busts. And as long as there are booms and busts, there will be an opportunity for the speculator to make money on both the upside and the downside.
Victor Sperandeo, "Trader Vic – Methods of a Wall Street Master", 1991.
When the US dollar begins to rise, the world will begin to normalise.
Our editor at lunch with an esteemed colleague, an Ecinya confidant, Tuesday 12/10/2010.
If you are playing badly blame your equipment, your playing partners, the weather, the club officials, your mother-in-law. Don’t blame yourself ! The game is too difficult to doubt your own ability.
Peter Thomson, Australian golfing icon and winner of 5 British Opens.
My parents were a little disconnected from me. They always had their own shows to run. Then my mother ran away with my English teacher when I was 14. They met at a parent-teacher night, and in term two my teacher disappeared and so did my mother ! My father had a bit of trouble coping after that. I don’t mean to be critical of of either of my parents – they both had their own troubles – but the result was that I was a bit self-raised as a teenager. I sometimes joke to my friends, "I never really left home, home left me."
Maybe that’s why I’ve spent most of my life celebrating the comedy and love of healthy and happy families. This is a thing a lot of writers aren’t interested in. But I understand it’s such a wonderful, valuable thing, because it’s something I didn’t have myself and found in adulthood.
I often wonder if all the people who create incredibly bleak family dystopias actually had happy, blissful childhoods, so as adult writers they are in search of the opposite.
Richard Glover’s Insight article, Sunday Life, The Sun-Herald 10/10/10.
We all receive our share of good luck and misfortune and neither should be boasted of nor mourned. Rather each should be approached with a positive attitude from which there is much to be learned. In this way good luck can lead to fortunes and misfortune used to advantage.
From Ron Alt, a newsagency proprietor on the central coast over several decades.
Quotes above: The Core Messages (note old journalistic adage – ‘90% of the message is in the head-note’)
Our quotation explanations are somewhat longer than normal. We hope the dots connect.
- Ecinya likes Paul Kasriel because his work has a certain purity and consistency that makes it both balanced and informative. He is not captive to pet theories, dogma or ideology. Government cannot micro manage the economy in a democracy, and it is doubtful in the very long-term that an autocracy can either, but the China model suits China at this rapid development stage and probably will for about another 10 or 15 years. Don’t forget China went to sleep for about 150 years. America’s only been asleep for about 30 years with a brief period of awakening under the Clinton-Gingrich ‘Contract with America’ years.
- Mark Faber is radical and outspoken and writes ‘The Doom and Gloom Report’. Always worth listening to and is frequently interviewed on American television. However, he gives the impression of being a ‘glass half empty’ type of commentator.
- Victor Sperandeo’s book is our most favoured market text and we recommend it to anyone interested in reading about stock-markets and the economy. His view of Alan Greenspan was negative well ahead of the currently negative consensus and alerted Ecinya to the possibility that Mr Greenspan was something of a pretender, almost a charlatan. Our editor had a shared philosophical thread with Sperandeo emanating from reading Ayn Rand’s "The Fountainhead" and "Atlas Shrugged". Mr Greenspan and Ronald Reagan were alleged devotees of Ayn Rand but it appears that she disowned them after they used her philosophical foundations to achieve high office and then abandoned all of her principles in the pursuit of power and position. We should mention that Ms Rand never condoned the concept of fraudulent, and self-serving capitalism. Capitalism in the raw was not part of her conceptual landscape, rather capitalism and self-interest had to be enlightened, principled and rational.
- The world need a resurgent and stable America. Our current belief is that this will emerge over the next 1-2 years. The $US turning up will be an initial sign.
- At the moment America’s principal scapegoats are Islam and China. Rather than complain and exploit fundamental fears, America needs to restructure its economy and restore fundamental values like truth, thrift and modesty. The left needs to move to the centre and the right needs to move to the centre. The arguments at the extremes mitigate constructive introspection and progress.A crazy quilt of crony capitalism, religion, military adventurism and television has developed over the years beginning with Reagan and various myths created to perpetuate the concept of American greatness and exceptionalism. Ecinya is pro the best of America.
- Richard Glover is the ABCs highly rated drive-time announcer and is the author of twelve books, his latest being "Why Men are Necessary". He appears to have overcome adolescent traumas and turned them into extreme positives. At the core, Ecinya believes, that good economic outcomes are shaped by good attitudes. Economic wisdom is shaped by both good and bad experiences and an excess of open discussion. Ecinya often feels that the governing parliamentary parents have left their constituent children. Additionally, as writers and commentators there is a general tendency to say what is wrong and how it can be better or improved. But generally it is couched in such critical tones that it comes across as though it is all a waste of time because things will either get worse or fail to get better. The approach is so often cynical and sometimes invisibly self serving because it may in fact mirror our own personal circumstances, our lack of self esteem, our desire for more of everything, even embracing underlying envy. The writings of the commentariat can be so filled with various forms and combinations of psychological baggage (dystopia we believe means ‘disorder) that we as commentators fail to achieve, or persuade, our readers that many of us have little baggage and are working through our words for the common good. Some of us indeed are a happy lot with not much to complain about.
- Ron Alt was a big fish in a small pond for most of his life, but a great contributor to his community, and especially cognisant of the power of good intentions well executed and the need to share the credit with others of similar bent. He chose his friends wisely and while forceful in his views not given to hubris, but enjoyment of the quiet pleasures and satisfaction of a job well done.
QUANTITATIVE EASING
In a fiat money system money comes from three sources – net earnings abroad, borrowings abroad, or central bank printing. The disadvantage of excess money is that it can lead to inflation of both goods and services, and assets. This is the generally accepted principle. But now the US federal Reserve believes it is fighting deflation and needs to stimulate to achieve a desired level of inflation. Hence it is giving signals that it intends to pump money into the economy by buying existing securities for cash and the recipient institutions will lend that money to producers and consumers to achieve growth in the economy and stability in the financial system. Growth will lead to a reduction over time of America’s large unemployment problem which is officially at 9.6% and unofficially at circa 15% if you count discouraged workers and the under-employed.
Quantitative easing is said to be part of the next stage of the United States of America recovery story. Is it a good idea, or a necessary idea, or both? Europe has gone the ‘squeeze’ route preaching and practising austerity. Who is right and who is wrong? Does it matter? The answer is clearly that what is right for one economy may not be right for another. Many economists candidly admit they are unsure of what drives economies from boom to bust. Mr Greenspan was on the record as saying that ‘bubbles’ are unrecognisable at inception and in their growth phase, and only need to be addressed when they burst.
EASE OR SQUEEZE? The simple answer is you need to ease in some areas at various times and squeeze in others at various times. But ease or squeeze will not work if the STRUCTURES are not in place to get the efficient and desired outcomes and keep the narrative alive so that it becomes self-perpetuating. Sustainability comes in various descriptions – momentum, the multiplier effect etc.. Ease or squeeze will also not work if there is not an underlying narrative built around a plan. There are no silver bullets, just plain hard work and clear thinking. QE2 is not the silver bullet that the market commentariat seems to have attached exaggerated claims to. ‘Wishful thinking is the enemy of hard work’.
THREE MAJOR EVENTS COMING
- Friday 29 October: First cut of third quarter US GDP.
- Monday 2 November: US mid-term elections.
- Tuesday- Wednesday 3-4 November Federal Open Markets Committee meets to discuss interest rates and monetary policy generally.
The consensus number for the initial estimate of third quarter US GDP from the Wall Street Journal panel is 1.9%, having come down from 2.5% in the August survey. Of the 9 economists that we rank as most relevant the consensus is 1.6%. Paul Kasriel is at 1.5% and the lowest forecast is 0.5%, which number is not in our most relevant caculation. Should the number come in at 1.3% or below, doubts about the strength and sustainability of economic growth would come into question and the ‘double-dippers’ would again feature prominently in the ongoing debate.
The mid-term elections are effectively a vote on the presidency and current indications are that the Democrats will lose control of the lower house (House of Representatives) and suffer significant defeats in the upper house, the Senate, but possibly retaining control. There are two interpretations of this projected outcome. Firstly, that political grid-lock is exacerbated and secondly that the Democrats are forced to move from left to centre and that the Republicans are forced to move from right to centre. The latter is the bullish scenario. Much of the heat revolves around The Tea Party which appears to be mainly well-funded radical conservatives.
The Fed is expected to announce a stimulus package built around ‘quantitative easing’. Size is a problem. Will it be $200 billion or $600 billion? Should it even occur? Our guess is that monetary ease will be at the lower end, or delayed until Congressional fiscal squeeze becomes recognisable. But it is difficult for the Chairman of the Fed to openly criticise his congessional masters or the White house and private entreaties are stymied or blocked by entrenched opposition or immovable egos.
ECINYA PRECIS OF SOMETHING CLOSE TO OPTIMAL OUTCOMES
- Congress has to find ways to cut government expenditures.
- Tax reform needs to be developed with an emphasis on expansion of the aspirational middle-class and small business sector. A national sales tax and savings reform should be on the agenda as suggested by Lawrence J Kotlikoff (access link).
- Electoral reform needs to be on the agenda including political donations.
- The Dodd-Hagel National Infrastructure Bank Act has to be accelerated, having been first proposed in 2007.
- Fannie Mae and Freddie Mac has to be re-structured.
- Ways have to be found to restore Wall Street’s moral compass and monitor its behaviours in a constructive way. Excessive regulation is not the way, it requires attitudinal change. Paul Volcker is on track here.
- Begin to raise interest rates.
Larry Summers was the Director of the National Economic Council to the White House. He has just announced his resignation. His replacement need to be announced as soon as possible and should be preferably someone with hands-on business experience, like Paul O’ Neill was before being sacked as Treasury Secretary by President Bush and Dick Cheney for having a mind of his own and refusing to engage in political spin games.
THE THREE ECONOMIES
Within the developed world the economy can be divided into three. Firstly, the real economy – the production of goods and services. The symbol economy – money and credit. And finally the political economy. In America there has been an inexorable shift from the real economy to the symbol and the political economy. Additionally the political economy and money and credit have formed a strong clique determined to wield influence and maintain power. The net impact is that the middle class has been squeezed and production has moved offshore – to Japan, then South Korea, then Taiwan, and now China. It would appear that restoration of the resulting imbalances can only occur initially via the Dodd-Hagel Infrastructure Bank. If the economy grows at under 2% per annum no new jobs will be created.
WILL AMERICA RISE FROM THE ASHES OF THE ‘MADE IN AMERICA’ GLOBAL FINANCIAL CRISIS?
If the mid terms produce some new balanced personalities that can assist and give President Obama some directional stability, the answer is ‘yes it can’. We remain hopeful and optimistic. In the meantime markets will bounce around the fundamentals of interest rates, confidence and earnings (‘ICE’). Confidence is currently the biggest and most vexatious element of ICE. It should be the aim of every Congress to see a president succeed.