Lagniappe - October 2009

Virology Meets Jurisprudence – Speaking from the floor of Congress this week, Rep. Sheila Jackson Lee of Houston said, “I listened to some challenge to the Constitution about the right to health care. I frankly believe that the Bill of Rights does embrace this concept because the Fifth Amendment suggests the question of due process. And one does not have due process under the Constitution if your neighbor can have health insurance and save his children from the scourge of H1N1, not losing their lives because they might have vulnerabilities as a child, and you cannot.” I don’t think there’s any doubt that the swine flu is a very serious problem for those who contract it, but to my knowledge the virus has not yet mutated into a strain that is capable of denying citizens due process. Until it does, we’ll continue to rely on Congress for that.

Dallas Police Can’t Even Protect Themselves From Thieves – Dallas SWAT was burglarized again this week. Thieves entered the unmarked SWAT SUV and then broke into a heavy-duty safe, taking weapons, body armor, uniforms and a badge. This is the third SWAT vehicle to be burglarized in six months.

Would You Spend $24,000 For A Clunker? – Back in August, Cato’s Chris Edwards suggested that the government’s Cash for Clunkers was the dumbest program ever – and that was based solely on the $4,500 incentive being offered. Edmunds.com now reports that the program cost $3 billion and only generated 125,000 incremental sales, putting the cost per clunker at $24,000. No word yet from Edmunds on whether the Cash for Golf Carts or Cash for Appliances programs were any more effective.

Macro for Dummies

Note: I’m a big fan of The Daily Reckoning, and they have been kind enough to allow me to reprint some of their material here. The following piece was written by Bill Bonner. If you like this article, be sure to check out their site – there’s a lot more where this came from.

“He who goes a-borrowing, goes a-sorrowing.”

The quote comes from Ben Franklin. But it was recalled to us neither by America’s president, nor Britain’s Prime Minister. Instead, the Telegraph in London reported it from the mouth of Cheng Siwei, a “top member of the Communist hierarchy.”

What goes around comes around. The Anglo-Saxons have forgotten what makes a successful economy. The Chinese have remembered.

Just look up Warren Harding on Wikipedia. The first entry you will find is not the 29th president of the United States of America, but a rock climber with the same name. But what do you expect? History is nothing but a long list of disasters in chronological order. Historians love calamity. And they reserve their highest accolades for those who cause them. The same is true in financial history. Those who make it big are those who make it worse.

It is safe to assume that no one working at the Federal Reserve or at the White House has a picture of Warren Gamaliel Harding over his desk. Yet, if American presidents were ranked on the basis of how well they faced up to financial disaster, Warren G. Harding might be somebody. His handsome face would be carved on Rushmore. His likeness would grace the $100 bill. Harding was the last American president to deal honestly with a major financial crisis. Every president since has tried to scam his way out of it.

By the time Harding took office in ’21 the Panic of 1920 was taking the unemployment rate from 4% to nearly 12%. GDP fell 17%. Then, as now, the president’s subordinates urged him to intervene. Secretary of Commerce Herbert Hoover wanted to meddle – as he would 10 years later. But Harding resisted. No bailouts. No stimulus. No monetary policy. No fiscal policy. Harding had a better approach; he cut government spending and went out to play poker:

“We will attempt intelligent and courageous deflation, and strike at government borrowing which enlarges the evil, and we will attack high cost of government with every energy and facility which attend Republican capacity…it will be an example to stimulate thrift and economy in private life.

“Let us call…for a nationwide drive against extravagance and luxury, to a recommittal to simplicity of living, to that prudent and normal plan of life which is the health of the republic.”

Within a decade, Harding’s views were collectibles. But in 1921, he still saw the economic world as a moral world ordered not by man, but by God. This was not the result of long study or deep reflection on his part. He was probably the dummy everybody said he was. As Keynes pointed out, politicians are always in thrall of some dead economist. At least Harding was in thrall to the good ones.

“No statute enacted by man can repeal the inexorable laws of nature,” he announced. “Our most dangerous tendency is to expect too much of government…”

Harding was not the first to see the economy as a ‘natural’ order…one that you disturbed at your peril. A Taoist named Zhuangzi, who lived about the same time as Alexander, observed: “Good order results spontaneously when things are let alone.”

Later, economists of the Scottish enlightenment, notably Adam Smith and Adam Ferguson elaborated. Smith, like Harding, saw the economy ordered by the invisible hand of God. Ferguson saw markets as a ‘spontaneous order,’ which were the “result of human action, but not the execution of any human design”.

The same basic insight led Irving Fisher – the greatest economist of the 1920s – to come up with his debt-deflation theory of depressions. After people had borrowed, they needed to pay back. Busts followed booms; there was no getting around it.

Warren Harding may never have been the brightest bulb on the White House porch, but intuitively he understood that proper macro-economic policies were more the product of virtue than of genius. Debt led to trouble; that’s all he needed to know.

Keynes came along a few years later. Keynes was a genius; everybody said so. And he had an answer for everything. Nature? Government could do better. Debt? Don’t worry about it, he said. Why not just let capitalism sort itself out? Without government intervention, it will only get worse, said Keynes.

But Harding had already proved him wrong. Harding did the very opposite of what Keynes recommended. Instead of increasing government spending, he reduced it. He cut the budget almost in half. He slashed taxes too…and cut the national debt by a third.

Japan at the time struggled with the same downturn. But it had no Harding at the helm. Instead, its masters prefigured Keynes, trying to stay the correction using price controls and other interventions. The result was a long-drawn-out affair that lasted until 1927 and ended in a bank crisis. In America, meanwhile, by 1922 unemployment was back down to 6.7%. By 1923 it was down further – to 2.4%.

This lesson was entirely lost on the world’s economists. When the next crisis hit a decade later, they turned to Keynes. Of course, it turned out to be a moral world after all. They got what they deserved.

Regards,
Bill Bonner,The Daily Reckoning


Macro for Dummies originally appeared in the Daily Reckoning. Reprinted with permission.

Tooth Fairy Heralds Dollar's Demise

My daughter is bouncing up and down with excitement. This afternoon she lost another baby tooth (her third to date) and she knows that the tooth fairy will visit her tonight and leave her some money. I remember the feeling. As a kid, whenever I lost a tooth I could look forward to finding a shiny new quarter under my pillow the next morning.

Times have changed.

These days the tooth fairy is a dollar skeptic. I know this because instead of putting a quarter under the pillow, the tooth fairy now leaves an American Eagle for each tooth lost. By the time my daughter’s adult teeth have all come in, she’ll be sitting on two pounds of silver (and unlike her father, she won’t be able to blow all her tooth fairy loot on Donkey Kong).

Perhaps the tooth fairy has been reading the recent financial news. The Independent reports that Japan, France, Russia, China, and the Gulf Arab states have realized that the American dollar really is backed by the full faith and credit of the US government, and they’d prefer a reliable guarantee instead. The US government’s debt is expected to reach 100% of GDP within the next two years, and “Helicopter” Ben Bernanke has created trillions of new dollars in the past year alone. Given the astronomical amounts of money some of these foreign central banks have loaned the Feds to cover their wild-eyed bipartisan spending spree, one can understand why they might not appreciate being paid back with a rapidly depreciating currency like the US greenback. This may explain in part the recent uptick in the price of gold, which has been mentioned as a possible replacement for the dollar in international transactions.

It’s as if foreign central banks (and the rest of us, for that matter) are locked in an international game of musical chairs. When the music stops, the last one holding dollars loses. It won’t be easy for the countries that are sitting on trillions of US dollar reserves to divest themselves of their holdings without accelerating the currency’s demise, but for my part I hope they figure it out soon - and that they let me know how to do it, too. I think I hear the music winding down, and I’m all out of baby teeth to leave under the pillow.













(Tooth Fairy painting by Jenedy Paige).

They're the Kids in America

I have been stuck in Washington, D.C. for the past three days listening to a bunch of bureaucrats attempt to justify their existence while simultaneously threatening me and a thousand other people with fines and/or imprisonment if we don’t do exactly what they say. For someone with my political leanings, it’s a lot like having a 72-hour root canal without all the Novocain-fueled fun.

Once my conference finally ended, I decided to do a little sightseeing in our nation’s capital. I had hoped to take a few decent photos, but the afternoon sky had turned a dull, washed-out gray, leaving me with little chance of getting a shot worth printing. I was about to return to my hotel when I suddenly heard the unmistakable chanting of a protest march coming my way. As I turned to identify the source of the commotion, I caught sight of the George Washington University College Democrats moving down 17th Street. One would think that young adults working toward an undergraduate degree would simply name their group the George Washington University Democrats and leave it at that, but evidently redundancy is as popular with the college crowd as the Dave Matthews Band, so they named themselves the George Washington University College Democrats instead.








During the short trip from their campus to the White House, the kids were chanting, “What do we want? A PUBLIC OPTION! When do we want it? NOW!” Not terribly creative, but it’s nice to see that the youth today still have a healthy respect for tradition – I just wish the tradition they respected was that of individual freedom. Oh well.

I have to admit, though, this was the politest protest I’ve ever seen, if not the most effective. They obeyed all of the traffic signs, stayed on the sidewalks, and not a single one of them threw a rock through the plate glass window of a multinational corporation en route to the demonstration site. And these kids were so good-looking that for a moment I thought the public option was actually being demanded by an Abercrombie and Fitch catalog.

The march came to a halt once the crowd reached Lafayette Square, just in front of the White House. At that point one of the student leaders took charge of the gathering. Using a portable speaker, she explained why a public option is so vital.

“How many of you have insurance because you’re on your parents’ plan?” (Most of the crowd yelled out).

“How many of you think you’re going to graduate with a job in this economy?” (No one, apparently).

The young lady continued, saying “I’m a senior, and when I graduate this year I won’t be covered on my parents’ plan anymore. That means that if I get sick and need an operation, I’ll have to pay for it with my own money!” (Angry shouts expressing outrage over such a rank injustice).

Another one of the student leaders then took control of the mike, and laid down some statistics.

“The US ranks just above Slovakia in public health care. In the richest country in the world, is that acceptable?” (The crowd didn’t think so. I, on the other hand, wondered where they’d rather get sick – the US or Slovakia?)

He continued, highlighting the crowd’s might-makes-right philosophy:

“We voted for the Democrats last year. Because of us, they now control the Congress and THIS HOUSE!” (Pointing behind him to the White House). “And we’re not going to let a minority tell the majority what to do! We demand A PUBLIC OPTION! AND OBAMA’S GOING TO GIVE IT TO US!” (Raucous cheering).

George Washington University is a well-respected school. And judging by the caliber of the protestors, I can see why. Some of the demonstrators clearly have some first-rate ideas for improving health care in this country:

Make sickness not be costly. Genius. That’s exactly the kind of innovative thinking and piercing intellect that we need in Washington. Why didn’t anyone think of that before? This kid’s going to go places.

As illuminating as this glimpse into our nation’s future was, I do have some constructive criticism that I’d like to offer the leaders of tomorrow. If you really want to get the attention of the power elite in this country, don’t go to Lafayette Square on a Friday afternoon. Our Senators and Representatives aren’t out taking snapshots with the tourists. If you want to get visibility, you have to go where they are. So consider staging your next protest at a bar, or possibly a whorehouse. That way you can be sure that your message will be heard by the politicians. Otherwise, the only coverage you get will be a snarky blog post.

And what good would that do?