Fixing Fiscal Insanity: 6 Plans

from Solutions Initiative sponsored by the Peterson Foundation

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Save Yourself

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Real Personal Income and GDP

real personal income less transfer payments is still 3.4% below the previous peak.

It appears that GDP bottomed in Q2 2009 and GDI in Q3 2009. Real GDP finally reached the pre-recession peak in Q4 2010, but real GDI is still slightly below the previous peak.

Using GDI, the economy will be back to the pre-recession peak in Q2 2011.

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Home Sales April 2011

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Great Recession Unemployment

This shows the severe job losses during the recent recession - there are currently 6.96 million fewer jobs in the U.S. than when the recession started in 2007.

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DiLorenzo on Central Banking

A Note on the Machiavellian Origins of Central Banking in America
Thomas J. DiLorenzo

ABSTRACT: In The Mystery of Banking, Murray Rothbard explained how the origins of central banking in the U.S. were rooted in a lobbying effort by Robert Morris and other “nationalists” to create a bank modeled after the Bank of England that would subsidize their businesses with cheap credit and other forms of corporate welfare. This paper argues that there was more to it than that, namely, that the chief proponent of a central bank, Alexander Hamilton, wanted the bank to be a more comprehensive engine of political corruption because of his belief that, without such corruption, government would be too small and ineffective. Members of Congress had to be “bought off” if they were to support the nationalists’ economic agenda, Hamilton believed, and a central bank was necessary to achieve that goal.

read the entire paper

Cartoon: Conflicting Economic Data

Free Market Solutions

Mark Thornton writes:

People often ask me, "What do you think the government should do instead of QE inflation?" My stock answer is that the government should not try to fight the depression with government spending and cheap credit. Trying to stop the market from correcting the errors of the past only delays the consequences and makes them much worse.

Government should balance its budget. There should be no new credit expansion by the Federal Reserve. Most importantly, government should not meddle in markets to try to soften the consequences of the correction. Specifically, that means no bailouts, stimulus packages, or new public-works projects. Do not prop up wages. Allow competition to lower the prices of land, labor, and capital. The only positive steps for government to take are implementing tax cuts and spending cuts, eliminating regulations, and allowing free trade.

Now, I have a name for this policy. It's called the "Lehman Bros. plan," after Lehman Brothers, the large financial firm on Wall Street that was allowed to go bankrupt in September 2008. This plan relies on allowing big firms to fail. Had this policy been followed from the beginning, I have little doubt that the crisis would already be over and we would not have added to the debt problem.

read the entire essay

Myth of a Free Market

Joel Bowman writes:

One of the more pervasive myths, perpetuated – either ignorantly or maliciously – by the mainstream media, is that the market tumult witnessed over the past few years is somehow a result of the free market having “run wild.”

The argument, as you are surely familiar with it, goes something like this…

Until recent and heroic intervention by the Feds, the world had been aimlessly bobbing about on a sea of unregulated, laissez-faire capitalism. Adrift in the cold, harsh, dog-eat-dog seascape, where rules were callously discarded and government vigilance eschewed, we clueless individuals simply made our way as best we could. Of course, it wasn’t long before we lost sight of the horizon. Then, the clouds of capitalist deceit obscured our view of the stars, by which we had previously been navigating our way across the perilous oceans. Sensing our vulnerability, the greedy capitalists stealthily moved in under the cover of “free market anarchism” to rock the markets and capsize our tiny, unguarded vessel.

What followed – around 2007-08 – was the painful aftermath of a great era of free market irresponsibility. Lessons were to be learned. Regulators, it was said, had failed to protect us (mostly from ourselves). The markets had been allowed to “run wild,” fleecing all and sundry of their earthly wares. The whole system was in danger of collapsing under the weight of its own free reigns and pundits from every corner of the boat were soon crying out for some form of central guidance, some direction, some calm. This, we were told, and not without a wag of the finger, is what happens to modern, mixed-market economies when they become adulterated by the blinding whims of free market capitalism.

And it would be a nice story, with a presumably easy remedy…if only it were true. Alas…

read the entire essay

Big Oil v. Big Coffee

Mark Perry asks:

What's next? Congressional investigations to determine if coffee speculators are driving up prices? Allegations of "price gouging" at Starbucks? Investigations of "windfall profits" for "Big Coffee"?

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Real Manufacturing Output

The chart above shows the incredible increases in U.S. manufacturing productivity, which has made American manufacturing increasingly more efficient and more competitive, leading to lower prices for manufactured goods. Because the productivity gains for manufacturing have exceeded productivity gains for services-producing industries, the prices for manufactured goods have fallen relative to prices for services, which had led to decreases (increases) in manufacturing's (service's) share of GDP and employment.

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Gouging, Predatory Pricing, or Collusion

Kindle

Amazon has announced that it now sells more Kindle ebooks than all print books – that's hardcover and paperback combined – through the Amazon.com site.

Introduced less than four years ago, the Kindle has quickly become Amazon's top selling product, and now digitised books for the reader have become more popular with its customers than their paper and ink fore-runners.

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Cartoon: Debt Ceiling

It is for that reason I am 100% confident that Congress will do the wrong thing and raise the debt ceiling for the 75th time in 50 years. In the end there will be some kind of phony compromise with each side claiming victory. But while the politicians celebrate another dodged bullet, the U.S. economy will continue to be shot full of holes.

Peter Schiff

Cartoon: IMF Head Arrested

Unemployment and Immigration

Gas 20 Cents a Gallon

The Buffett People Should Listen To

Howard Buffett
U.S. Congressman from Nebraska
The Commercial and Financial Chronicle 5/6/48

Is there a connection between Human Freedom and A Gold Redeemable Money? At first glance it would seem that money belongs to the world of economics and human freedom to the political sphere.

But when you recall that one of the first moves by Lenin, Mussolini and Hitler was to outlaw individual ownership of gold, you begin to sense that there may be some connection between money, redeemable in gold, and the rare prize known as human liberty.

Also, when you find that Lenin declared and demonstrated that a sure way to overturn the existing social order and bring about communism was by printing press paper money, then again you are impressed with the possibility of a relationship between a gold-backed money and human freedom.

In that case then certainly you and I as Americans should know the connection. We must find it even if money is a difficult and tricky subject. I suppose that if most people were asked for their views on money the almost universal answer would be that they didn't have enough of it.

In a free country the monetary unit rests upon a fixed foundation of gold or gold and silver independent of the ruling politicians. Our dollar was that kind of money before 1933. Under that system paper currency is redeemable for a certain weight of gold, at the free option and choice of the holder of paper money...

I warn you that politicians of both parties will oppose the restoration of gold, although they may outwardly seemingly favor it. Also those elements here and abroad who are getting rich from the continued American inflation will oppose a return to sound money. You must be prepared to meet their opposition intelligently and vigorously. They have had 15 years of unbroken victory.

But, unless you are willing to surrender your children and your country to galloping inflation, war and slavery, then this cause demands your support. For if human liberty is to survive in America, we must win the battle to restore honest money.

There is no more important challenge facing us than this issue – the restoration of your freedom to secure gold in exchange for the fruits of your labors.

read the entire article

Richard Ebeling on Monetary Policy and the Debt Ceiling

The following testimony was delivered before the House of Representatives Subcommittee on Domestic Monetary Policy and Technology, chaired by Congressman Ron Paul (R-Texas), on “Monetary Policy and the Debt Ceiling: Examining the Relationship between the Federal Reserve and Government Debt,” in Washington, D.C. on May 11, 2011

“I place economy among the first and most important virtues, and public debt as the greatest of dangers to be feared . . . To preserve our independence, we must not let our rulers load us with public debt . . . we must make our choice between economy and liberty or confusion and servitude . . . If we run into such debts, we must be taxed in our meat and drink, in our necessities and comforts, in our labor and in our amusements . . If we can prevent the government from wasting the labor of the people, under the pretense of caring for them, they will be happy.”

Thomas Jefferson

What is To Be Done?

The bottom line is, government is too big. It spends too much, taxes too heavily, and borrows too much. For a long time, the country has been trending more and more in the direction of increasing political paternalism. Some people argue, when it is proposed to reduce the size and scope of government in our society, that this is breaking some supposed “social contract” between government and “the people.”

The only workable “social contract” for a free society is the one outlined by the American Founding Fathers in the Declaration of Independence and formalized in the Constitution of the United States. This is a social contract that recognizes that all men are created equal, with governmental privileges and favors for none, and which expects government to respect and secure each individual’s right to his life, liberty, and honestly acquired property.

The reform agenda for deficit and debt reduction, therefore, must start from that premise and have as its target a radical “downsizing” of government. That policy should plan to reduce government spending across the board in every line item of the federal budget by 10 to 15 percent each year until government has been reduced in size and scope to a level and a degree that resembles, once again, the Founding Father’s conception of a free and limited government.

A first step in this fiscal reform is to not increase the national debt limit. The government should begin, now, living within its means – that is, the taxes currently collected by the Treasury. In spite of some of the rhetoric in the media, the U.S. need not run the risk of defaulting or losing its international financial credit rating. Any and all interest payments or maturing debt can be paid for out of tax receipts. What will have to be reduced are other expenditures of the government.

But the required reductions and cuts in various existing programs should be considered as the necessary “wake-up call” for everyone in America that we have been living far beyond our means. And as we begin living within those means, priorities will have to be made and trade-offs will have to be accepted as part of the transition to a smaller and more constitutionally limited government.

In addition, the power of monetary discretion must be taken out of the hands of the Federal Reserve. The fact is, central banking is a form of monetary central planning under which it is left in the hands of the members of the Board of Governors of the Federal Reserve to “plan” the quantity of money in the economy, influence the value or purchasing power of the monetary unit, and manipulate interest rates in the loan markets.

The monetary central planners who run the Federal Reserve have no more or greater knowledge, wisdom or ability that those central planners in the old Soviet Union. The periodic recurrence of the boom and bust of the business cycle demonstrates that there is no way for them to get it right – in spite of them saying, again and again, that “next time” they will get it right.

It is what the Nobel Prize-winning, Austrian economist, Friedrich A. Hayek, once called a highly misplaced “pretense of knowledge.” That is why in a wide agenda for reform, the goal should be to move towards a market-based monetary system, the first step in such an institutional change being a commodity-backed monetary order such as a gold standard.

And in the longer-run serious consideration must be given the possibilities of a monetary system completely privatized and competitive, without government control, management, or supervision.

The budgetary and fiscal crisis right now has made many political issues far clearer in people’s minds. The debt dilemma is a challenge and an opportunity to set America on a freer and potentially more prosperous track, if the reality of the situation is looked at foursquare in the eye.

Otherwise, dangerous, destabilizing, and damaging monetary and fiscal times may be ahead.

read the entire speech

Silver Could Eclipse $450, Gold $12,000

With gold over $1,500 and silver around the $35 level, today King World News interviewed one of the top strategists in the world, Robin Griffiths of Cazenove...

When asked if his $350 target was a realistic price level for silver Griffiths stated, “That is absolutely not unrealistic. If you adjust the old all-time high for inflation...that gives you $450 for silver. Then you add in the fact that they are printing money, you can take it higher than that without any difficulty at all.”

When asked about gold specifically Griffiths remarked, “The run-up to the peak in markets like gold is between now and 2015. I think it will all be over by 2015, a lot of it depends on how aggressively paper monies get printed from here on in. I think $3,000 is an absolute minimum target. I can believe in targets certainly above $5,000 and it’s theoretically possible to go to $12,000, that’s dollars an ounce for gold.

If Mr. Bernanke stays on his current agenda I think those higher numbers will be what you will see. We’re looking at the trashing of the dollar. As Marx pointed out, it’s the most assured way of destroying your economy.

There’s a book called ‘The Road to Serfdom’ by Hayek, pointing out that when a country is in debt, getting deeper into debt as Lord Keynes said, ‘Doesn’t work.’ All it does it make the problem worse and it takes longer to solve.

We’re moving away from the dollar being the main reserve currency on the planet...We’re going to move into an era where world trade is done in mixes of renmenbi, rupees and baskets, and the baskets of currencies will need to be weighted by something can’t be printed like gold.”

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Unemployment and Immigration

Trade Deficit March 2011

March exports of $172.7 billion and imports of $220.8 billion resulted in a goods and services deficit of $48.2 billion, up from $45.4 billion in February, revised. March exports were $7.7 billion more than February exports of $165.0 billion. March imports were $10.4 billion more than February imports of $210.4 billion.

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Sacred Cows

Housing Market

Cartoon: Bake Sale

Economic Recovery

April Unemployment: 9%

The current employment recession is by far the worst recession since WWII in percentage terms, and 2nd worst in terms of the unemployment rate (only the early '80s recession with a peak of 10.8 percent was worse).

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Gas Prices

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The Economy

The Dollar's Decline

THE dollar’s recent decline has taken it to new lows. The chart shows the nominal exchange rate, in trade-weighted terms (ie, against the country’s trading partners). The index is now 30% below its level when the Bretton Woods system was abandoned in the early 1970s and the dollar has halved since 1985, when leading nations adopted the Plaza Accord to drive it lower.

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Did bin laden Win?

In 2004, Bin Laden released a tape to Al-Jazeera where the former head of Al Qaeda laid out the purpose of the 9/11 attacks, and the organization’s goals. “We are continuing this policy in bleeding America to the point of bankruptcy. Allah willing, and nothing is too great for Allah,” Bin Laden said.

read the essay

Chicago Fed Economic Activity

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The Great Debt Shift

In January 2001, the Congressional Budget Office (CBO) projected under a current law baseline that the federal government would erase its debt in 2006. By 2011, the U.S. government would
be $2.3 trillion in the black.

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Do the rich pay their fair share?

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