Prescient words from Uncle Milton Friedman

From chapter five of Milton Friedman’s “Capitalism and Freedom” which was originally published in 1962:

Each recession, however minor, sends a shudder through politically sensitive legislators and administrators with their ever present fear that perhaps it is the harbinger of another 1929-33. They hasten to enact federal spending programs of one kind or another. Many of the programs do not in fact come into effect until after the recession has passed…The haste with which spending programs are approved is not matched by an equal haste to repeal them or to eliminate others when the recession is passed and expansion is under way. On the contrary, it is then argued that a “healthy” expansion must not be “jeopardized” by cuts in governmental expenditures. The chief harm done…is therefore not that it has failed to offset recessions, which it has, and not that it has introduced an inflationary bias into governmental policy, which it has done too, but that it has continuously fostered an expansion in the range of governmental activities at the federal level and prevented a reduction in the burden of federal taxes.

Does any of the above sound familiar? All I read from liberal blogs and Paul Krugman these days is how it would be a bad idea to stop “priming the pump,” cutting government stimulus and spending. To be sure, we can see from the above quote from Mr. Friedman, that this is not a new strategy and it most certainly is not one that has favorable long term results. Anybody want to bet that it will all turn out differently this time?

Deficits, Debts and Unfunded Liabilities

Some the trenchant points in this Center for Freedom and Prosperity video:

1) Federal deficits will average $1 trillion per year from now on.

2) The national debt is 60% of GDP today but is set to rise to 90% of GDP by 2020.

3) The Public Held Debt is how much money the federal government has borrowed from private credit markets to finance deficit spending--this stands at $9.9 trillion!

4) The Gross Federal Debt includes the Public Held Debt plus what the treasury has borrowed from other government accounts--such as the social security trust fund--and this debt stands at $14.5 trillion!!

Is it no wonder why gold has hit a new record high of $1,242.70 an ounce.

Hoping for a rich uncle, part two

From the WSJ:

A sudden drop-off in investor demand for U.S. Treasury notes is raising questions about whether interest rates will finally begin a march higher—a climb that would jack up the government's borrowing costs and spell trouble for the fragile housing market.

For months, investors have focused their attention on the debt crisis in Europe, but there are signs the spotlight is turning to the ability of the U.S. to finance its own budget deficit.

This week, some investors turned up their noses at three big U.S. Treasury offerings. Demand was weak for a $44 billion 2-year note auction on Tuesday, a $42 billion sale of 5-year debt on Wednesday and a $32 billion 7-year note sale Thursday.

The poor demand, especially from foreign investors, sent the bonds' prices sharply lower and yields higher. It lifted the yield on the 10-year note to 3.9%—its highest since last June, and approaching the psychologically important 4% mark. That mark has been pierced only briefly since the financial crisis in 2008.

Investors' response marked a big shift from auctions in recent months in which major foreign buyers, such as central banks, had snapped up Treasurys. It could spell trouble for the U.S. housing market; the rates on many mortgages are linked to the yield on the 10-year note.

The move up in its yield coincides with the impending end of the Federal Reserve's program to support the mortgage market. The Fed has bought $1.25 trillion of mortgage-backed securities, bolstering their prices and thus holding down their yields.

Concerns about the U.S. budget deficit are beginning to hurt the Treasury market, says Steve Rodosky, head of Treasury and derivatives trading at bond giant Pacific Investment Management Co. He says he is increasingly worried about the U.S. fiscal outlook. "The government needs to take real action rather than pay lip service" to addressing the fiscal problems.

In all, the U.S. government is expected to sell $1.6 trillion in debt this year, including the $118 billion sold this week.

VH: Those little green pieces of paper that the government pumps out is looking a lot less attractive nowadays. Helicopter Ben must be thanking his lucky stars that Greece came in to save his arse. BTW, the latest news on Greece is that the responsible E.U. countries and the American taxpayer (surprise!) via the IMF are going to float the spendthrift Greeks some moolah if it fails to pay its debt. This is going to get interesting.

Does spending more on school lunches benefit kids?

Benjamin Burr at The Independent Bloghorn has first hand experience on this matter. Here is the crux of his argument:

...the government spends $2.68 a day per child, while only spending $.93 a day on food. The problem isn’t that the government isn’t spending enough money. $1.75 per meal per day on operations is an absolute pathetic joke that reflects an egregious example of government incompetence. When I was catering school lunches, we charged $2.50 (less then the government pays), spent $1.60-1.75 per meal on average on food, covered our operational costs including labor, and still made a decent profit. Sorry, Chef Ann Cooper, the problem isn’t that we aren’t spending enough money, the problem is that people like you fail to recognize the broken nature of this system, and despite its flaws still advocate that the government should be involved in something that clearly sucks at doing.

You are never going to increase the overall nutritional value of lunches as long as the Department of Agriculture, (a massive, entrenched, worthless government bureaucracy that has worn out its usefulness) uses the National School Lunch program for dumping all the excess commodities that it is responsible for creating through inefficient subsidies.

You want to see the quality of school lunches increase? Privatize the whole thing.

VH: I agree with Benjamin, privatize school lunches. The core mission of schools should be teaching and not running an expensive unionized cafeteria; Mr. Burr runs a school lunch software business that deserves your attention.

Let them fall

While defaults on homes rise (people are now just walking away from mortgages they can't afford), the Obama administration continues to burn through billions of taxpayer dollars to prevent the unavoidable. I say that if the government wants "affordable" housing as they have been telling us for decades, then let housing prices fall and stop blowing through tax payer funds in an attempt to buy votes by looking compassionate. Does anybody else notice that being "compassionate" with other peoples' money is far too easy for politicians?

The Fannie Mae monster needs to burn more cash

OK, hang on to your hat's, dear friends. The vacuum cleaner known as Fannie Mae is about to swallow gobs of taxpayer dollars again---$15 billion worth of it:

Fannie Mae needs another $15.3 billion in federal assistance, bringing its total to more than $75 billion. And worse, the mortgage finance company warned that its losses will continue this year.

The rescue of District-based Fannie Mae and sister company Freddie Mac is turning out to be one of the most expensive after-effects of the financial meltdown. The new request means the total bill for the duo will top $126 billion.

And the pain isn't over. Fannie warned Friday that it will need even more money from the Treasury, as unemployment remains high and millions of Americans lose their homes through foreclosure.

Fannie Mae reported Friday that it lost $74.4 billion, or $13.11 a share, last year, including $2.5 billion in dividends paid to the government. That compares with a loss of $59.8 billion, or $24.04 a share, a year earlier.

Fannie Mae, which was seized by federal regulators in September 2008, has racked up losses totaling $136.8 billion over the past three years.

The WaPo article fails to mention that Fannie Mae debt is NOT added to the federal budget. So it is essentially "off the books." Anyone that is following the financial crisis in Greece knows how dangerous and dishonest it is to have massive government debt hidden away from public view.

BTW, remember how Barney Frank defended Fannie Mae? Now, he wants to eliminate Fannie and Freddie. Incredible.

They are more alike than many would like to know

Bush and Obama---cut from the same cloth? You decide.

Downsizing The Government

The Cato Institute has a new blog dedicated to cutting down the size of government. Lot's of great information, graphs, and data.

Obama's $100 million budget cut

HT: The Bobo Files

Dan Mitchell Slams Obama Budget Plan

When they figure out that they can't pay for all of their bloated programs by taxing "the rich," the middle class tax payer is next in line. You should get ready for it.

Obamanomics and the Dread of Inflation

Greg Mankiw posted the growth forecasts from the Obama administration (in Red) and a competing forecast from a group of private economists (in Blue). It should be no surprise that the Obama administration forecasts are far more optimistic that the "Blue Chip" private forecasters; administrations are notorious for forecasting rosy scenarios when their economic plans are concerned; politics is a strong influence and the Obama regime is no different than other administrations before it.

2009: -1.2% -1.9%
2010: +3.2% +2.1%
2011: +4.0% +2.9%
2012: +4.6% +2.9%
2013: +4.2% +2.8%

Needless to say, I agree with the sober forecast of the private economists. If and when the economy does have some growth, it will be slight and hardly robust due to the massive spending in the public sector. In my opinion, the biggest threat to the economy will be high inflation once there is a return of confidence and some GDP growth. The M2 money supply has been growing at a pace that has never been seen before--the printing presses are working hard printing money in order to pay for all of the bailouts and for Obama's kooky stimulus scheme. This will not end well.

Obama is Bush on Steriods!!

I have always found it quite curious that liberals hated Bush so much yet in many ways he acted (as far as government growth is concerned) like a classic big government liberal---expanding the sheer scope of the federal government and its budget. The size of government grew under his auspices to unprecedented levels. And guess what? The Obama administration is set on making government bigger than even the Bush administration. Watch the video below for Dan Mitchell's explanation:

Lucky you! It's time to file your taxes!!!

The holidays are over and now its time to settle the reckoning for 2008. That's right dear taxpayers; it's the most fun time of the year---TAX TIME!! If you have any "fun" stories or gripes regarding filing your taxes, send a note to Tax Girl since she is running a contest for the most nightmare story regarding filing. Now that the whole country has gone insane and has pretty much accepted more bailouts, stimulus packages, government programs to "help" the economy get back on its feet, we can surely expect to spend more time working to pay taxes than ever before. Yippee!!

Who gets U.S. foreign aid?

If you ever wondered, here is a list from Intelligence Report:

1. Israel $2.4 billion Virtually all of this money is used to buy weapons (up to 75% made in the U.S.). Beginning in 2009, the U.S. plans to give $30 billion over 10 years.

2. Egypt $1.7 billion $1.3 billion to buy weapons; $103 million for education; $74 million for health care; $45 million to promote civic participation and human rights.

3. Pakistan $798 million $330 million for security efforts, including military-equipment upgrades and border security; $20 million for infrastructure.

4. Jordan $688 million $326 million to fight terrorism and promote regional stability through equipment upgrades and training; $163 million cash payment to the Jordanian government.

5. Kenya $586 million $501 million to fight HIV/AIDS through drug treatment and abstinence education and to combat malaria; $15 million for agricultural development; $5.4 million for programs that promote government accountability.

6. South Africa $574 million $557 million to fight TB and HIV/AIDS; $3 million for education.

Government intervention in our economy will not work

Cato Institute's Dan Mitchell explains the fallacy of "priming the pump." Politicians just love to spend our money.

Conference call with API

Yesterday, I participated in a blogger conference call with the American Petroleum Institute. The conference was very informative. One of the issues that stood out in my mind was the issue of ethanol subsidies and the cost incurred by taxpayers particularly now since gasoline prices have plummeted quite a bit over the last several months. Right now the cost of producing ethanol and bringing it to market is simply not cost effective but because of congressional mandates, the American taxpayer basically props up an industry that can't compete with gasoline. The question that always sticks in my mind about ethanol is how long before this bad idea of subsidizing ethanol gets undone by our government? Once a government mandate starts, no matter how bad it is, it takes years to undo it--at a substantial cost to the taxpayer.

Moderator:
Jane Van Ryan, Senior Communications Manager, API

Speakers:
Lou Pugliaresi, President, Energy Policy Research Foundation
Rayola Dougher, Senior Economic Advisor, API
Ron Planting, Manager of Statistics, API

Listen to the conference call below:

Big Government continues to grow...

The U.S. government is set to take an even bigger role in our economy and there is nothing we can do about it:

To kick off Tuesday's expected announcement, the government is set to buy preferred equity stakes in Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. -- including the soon-to-be acquired Merrill Lynch -- Citigroup Inc., Wells Fargo & Co., Bank of New York Mellon and State Street Corp., according to people familiar with the matter.

Some of the big banks were unhappy about the government taking equity stakes, but acquiesced under pressure from Treasury Secretary Henry Paulson in a meeting Monday. During the financial crisis, the government has steadily increased its involvement in financial markets, culminating with a move that rivals the breadth of the government's response to the Great Depression. It intertwines the banking sector with the federal government for years to come and gives taxpayers a direct stake in the future of American finance, including any possible losses.

The popular meme these days is that the free-market failed and that the events that have unfolded over the last several weeks is proof that capitalism is flawed, imperfect, and subject to the weakness of greed. And besides, socialism isn’t a bad word. Such is the trance of the general public that has been bludgeoned with high gasoline prices and higher consumer prices. There is a scramble for answers in the dark and we are getting easy answers with no real depth or foresight of unintentional consequences. The power of government grows and it will never be satisfied; More of our tax dollars to be steered by political appointees with little choice by us. Aside from the institutional bankers, is anyone happy about all of this?

The Bailout Cometh

Oh, it’s gonna cost us, dear taxpayer. We will rue the day that we allowed the government to take hold of the economy to the extent that it has over the last week or so. The bailout will cost roughly $6,500 per family or $2,000 per person. Ho, ho, ho, Merry Christmas to us! The Liberal hounds are howling their tortuous tune of how regulation would have saved us from all this. All I hear all day on lefty talk radio is the Glass-Stegall act and how it was wiped out by the evil free-market conservatives. “Oh, look what it has wrought!” Poor fools. This country is going to go down the wrong road and we will regret it later on with more government intervention. Sorry to break it to liberals but all of this is due to the government and it’s whacked regulatory bureaucracy. With this crisis and the populist call to have the feds take control, we get closer and closer to collectivism and more government control of our lives and economy. Progressives must be so happy.
Despite the bipartisan touchy feely-ness of the last couple of days, it looks like there is going to be a lot more ideological tugging and pushing rearing its ugly head. Does anyone want to doubt that our political class will screw this entire episode up?

The danger of subsidizing renewable energy

Reason.tv has a great video on the fiasco that Bio-fuels made from corn ethanol has brought on the world.

When government ends up subsidizing an industry or a program that ends up having poor unintended consequences, like we have experienced with corn ethanol, my trail test to those that favor deep government subsidies for projects that they deem essential to society is what happens if that program or policy turns out to not work as initially expected? Since Democrats, environmentalists, and even some Republicans continuously call for subsidizing “renewable” energy or “alternative” energy, what happens if government picks a loser and ends up wasting billions of taxpayer funds chasing a viable technology? I find it difficult to imagine that many of these groups would be comfortable with such a waste.

Now that many national and international organizations and government bodies have acknowledged the problems with corn ethanol, how long will it take our government to fix the problem? I bet that it will take at least a decade before subsidies for corn ethanol bio-fuels are reversed.

U.S. spending obligations surge

Don’t let anybody tell you that the 110^th Congress hasn’t done anything lately. Oh, they have and big time. They have managed to create the sort of spending from the creation of Federal programs that would make a spendthrift blush. I hope Americans know what they are getting themselves into when they jaunt into those voting booths in November. Because if we get more massive spending programs from the next administration, there’s going to be a lot of financial pain to spread around and it won’t be just for the “rich.”

From CSM: WASHINGTON--The Democratic-controlled Congress and the Bush administration have presided over a surge in new federal spending obligations that may be the most enduring legacy of the 110th Congress.

From new entitlements such as a GI bill for military veterans to recent federal commitments to shore up a troubled housing market, Washington is taking on obligations with long-term consequences for taxpayers. At the same time, critics say, lawmakers aren't exercising the oversight needed to keep these commitments manageable.

"In the last three or four months, the momentum has really built up for more spending," says Michael Franc, vice president of government relations for the Heritage Foundation, a conservative think tank in Washington. "Congress has moved a whole range of bills that take the problem up another notch."

Here are some of the items.

•A new housing law, signed last week, commits the government to backing some $300 billion in troubled mortgages.

•A higher education bill adds $169 billion over the next five years.

•The GI bill that extends education benefits to veterans or their family members will cost $62 billion over 10 years.

•Congress boosted the statutory debt ceiling by $800 billion to $10.6 trillion. That's $4.8 trillion more than it was at the end of 2001. (Read More Here)