Wednesday, October 30, 2013

Churchill's Gold, Rand Paul, and Janet Yellen

Senator Randal "Rand" Paul has threatened to hold up the confirmation of Barack Obama's nominee for Chair of the Federal Reserve Bank, Janet Yellen.

Rand Paul is suspicious of the Federal Reserve, and I don't blame him for that. The Federal Reserve is not very transparent about what it does, and it is not very accountable to Congress or even the President.

Rand Paul, on the other hand, is pretty transparent. He wants to be President, and he needs the Tea Party to support him in his bid for the Republican Party nomination. Like most Tea Party members, Rand Paul seems to be a primitivist with regard to economics. When the economy fails, that is always blamed on Socialism, even though there was precious little socialism to be had in the United States when the economy failed in 1929.

Rand Paul and other primitivist free-market faithful also tend to believe in the Gold Standard, the idea that only the metal gold is real money. Rand Paul's father, Ron Paul, is a famous proponent of gold. Which is to say, he ignores history when it interferes with his ideology.

Winston Churchill (best known to Americans for his leadership of the British Empire during World War II) was appointed Chancellor of the Exchequer by Conservative Party Prime Minister Stanley Baldwin in late 1924. On April 25, 1925 he proposed that Britain would return to the gold standard, and it did. Unlike many people, Winston was able to learn from experience. In September of 1931, Churchill said:

"I accept my share of the blame for restoring the gold standard in 1925. We were promised reality and stability by our financial experts. We have had neither. The price of gold has increased by 80 per cent. That is as though the foot rule had become twenty-two inches and the pound weight twenty-eight ounces. Think what that means in terms of debt—the extra production demanded to satisfy existing mortgage indebtedness. This financial condition amounts to a hideous oppression." [quoted in A History of England by Goldwin Smith, third edition, page 747]

The Federal Reserve may need better over sight by the public, but nothing, like imposing a gold standard, should be allowed to compromise its historic mission. Modern economies need an elastic money supply. We are long past the era of paper money. Money now consists of electronic accounting book entries.

Even when the Federal Reserve is doing its job, things can go wrong. The main problem with the modern (post-Depression) Fed is that it has been too lenient about asset bubbles. Such bubbles (the Internet stock bubble and the Housing prices bubble) cannot grow to a dangerous size if the Fed keeps the money supply inside of reasonable bounds.

I don't think there is any doubt that the way the Fed is set up favors banks (in particular the banks that it uses for its bond trades), and works on a trickle-down system. As Rand Paul and others (including Democrats and independents like myself) have pointed out, at the very least we deserve transparency.

Holding up Janet Yellen's nomination confirmation as a tactic to pass a particular bill the Federal Reserve Transparency Act is inappropriate. Congress should make sure the act is really about having a full annual public audit of the Fed (changing nothing else) and pass the bill, and Barack Obama should sign it.

The American economy is big and complicated, and many parts of it are rotted to the point that a small-scale collapse should be expected from time to time. The Fed needs to encourage growth while discouraging bubbles. It needs the power and the tools to do that. In my opinion it could use some reforms beyond the Transparency Act. But they should be carefully considered, and should be in the interest of the economic welfare of the citizens as a whole, not the wealthy Wall Street aristocracy.

William Meyer's work in progress is The Accounting: Your Fate is in the Cloud

Wednesday, October 9, 2013

Beyond the Debt Ceiling: the Death Spiral

But if investors lose confidence in the federal government (which they should have by now) and the interest on the debt rose to an average of 10% (admittedly higher than it has been yet), the scenario of the death spiral would occur at $14.5 trillion dollars.

That is right. A death spiral is possible, if enough investors lose confidence, at below the current $16.7 trillion debt limit.

So where the real debt limit lies depends on where real investors, as a group, draw the line.

It would be interesting to ask a few people like Janet Yellen, Ben Bernanke, Lawrence SummersBarack ObamaJacob Lew and John Boehner exactly what they think the real debt limit is.

Even the GAO thinks "Debt held by the public at these high levels could limit the federal government's flexibility to address emerging issues and unforeseen challenges such as another economic downturn or large-scale natural disaster. Furthermore, in both the Baseline Extended and Alternative simulations, debt held by the public continues to grow as a share of GDP in the coming decades, indicating that the federal government remains on an unsustainable long-term fiscal path." [GAO Long Term Outlook]

I predict we are in for stormy fiscal weather. Today the government pays interest at a rate from practically zero on short term notes to 3.75% on 30 year bonds. I believe the Federal Reserve has gone to great lengths to keep interest rates low not just because that encourages an economic recovery, but because it puts off the day of reckoning on the real cost of the national debt.

The Republicans are right, we need to cut spending. But we have to cut spending in a way that minimized the hurt to both people and the economy. That means cutting subsidies to the rich, the upper middle class, and in particular military spending and foreign aid. But the Republicans want to cut payments for seniors and the poor.

The Democrats are right, we need more revenue, which means more taxes. We need a higher tax rate on people earning more than $50 million per year and on large inheritances. We need to close every loophole. We need to legalize and tax "street" drugs. But tax increases do result in less spending and less capital deployment, so they should be reasonable. And the Democrats, too, have been reluctant to cut military spending.

The American economy has been badly hurt by both parties and both branches of Congress and by the President these past few years. By protecting their turfs, including the Pentagon budget, they are weakening the long-term viability of the United States.

Both parties should agree to balance the budget in fiscal 2015 and start paying down the national debt in fiscal 2016. The pain will be shared by everyone, but to the extent it can be targeted by law, it should be dished out to those who have benefited most from the American economy.

Thursday, October 3, 2013

Republicans, Democrats, and Zombies

I am busy with freelance work, but thought I would write a brief note or rant on some topics of the day.

Saw Warm Bodies, the zombie comedy, last night. It only had 2 stars at Netflix, so I was ready for disaster, but actually it was quite good. I'm guessing the low star rating is because either it pissed a key reviewing group off, or it is not genre-specific enough. It is a zombie movie, but without enough gore to satisfy horror movie fans. It is a Romeo and Juliet, but probably repulsive to lovers of romance. It is a political and social allegory, but not strident enough for leftists. It has a happy ending, which is especially disappointing to certain types of people.

Meanwhile the Democrats and Republicans are holding the nation hostage, and why not? They've owned us since the two-party system solidified after the Civil War. While I sympathize with the social concerns with which the Democrats use taxpayer dollars to buy the votes of the people that the Democrats allow the corporations to underpay or underemploy, I agree with the Republicans (who are secretly big spenders, having been born into big-spending families) that the national debt is a problem. I dislike much of the Affordable Care Act, but I am in the under $75,000 per year, over 55 but too young for Medicare crowd that the Act helps so much. My cost for insurance will go down, and the Sickness Industry will continue to overcharge just about everyone for their services.

Will the Republicans force the U.S. to default on its debt? Was a time when cutting back spending or raising taxes would at least allow the U.S. government to muddle through. No longer. The interest on the debt, if combined with the inability to issue new debt to repay old debt, is looking to spiral out of control. And if there is danger of default, interest rates will skyrocket. Only fools hold U.S. federal bonds now. Mostly the same fools who sold all their stock market holdings at the bottom in 2008.

The silver lining would be the rest of the earth would be released from bondage to the U.S. There would probably be a world-wide recession or depression, but at least U.S. imperialism would be over. No pay, no work, even for soldiers. Oh, wait, maybe not, the contract U.S. soldiers sign does not allow them to negotiate for pay. They can be kept until the end of their enlistment even without pay.

The big business guys, as greedy as they are, are (mostly) not entirely irrational. They have been pressuring the non-Tea Party republicans to raise the debt ceiling. Then the budget bickering can continue.

And the new, non-happy ending info I picked up from my freelance work this weekend is that solar and wind energy require massive amounts of copper. The copper is mostly dug out of huge open pit mines and results in major pollution issues. The energy needed to mine the copper comes from mining coal ...

Too much, too many people, too much. But I have a pleasant life, for now, with the apples nicely ripening, the pears all picked, and an apple pie I made last night waiting to feed my face, should the zombie apocalypse cut off food supplies. Or should the politicians hurl us back into the pit of the war of each against all.