Wednesday, September 1, 2010
Manufactures of poverty....and immigrants
Manufacturers of poverty….and immigrants
Ricardo Valenzuela
A few months ago my friend Pablo Kleinman, invited me to do a radio interview at Univision in Los Angeles. Pablo is someone who was educated in Europe and the USA so, I immediately accepted knowing that the event would be a real interesting experience.
The goal of the interview was to explore the reasons why the southwest states of the USA, which use to be part of Mexico, are so rich and Mexico so poor and underdeveloped. It was a real tough job to find answers to an unquestionable reality: the states of California, Arizona, Colorado, Nevada, New Mexico, Texas etc report a GNP close to 4 trillion dollars while my country of Mexico can only show less than a trillion.
I received another invitation from Pablo for a new interview. It took me some time to decide whether to participate because of the complexity of the subject now suggested by Pablo: the new immigration law approved by Arizona.
This law is controversial for many reasons. Perhaps the most important one can be found in the appearance of the attorney general before congress to explain why he was about to file a suit against Arizona to block this new law. When one of the senators asked him if he had already read the text of the law, in an unbelievable and shameful way he answered that he had not.
In other words, the attorney general of the USA was about to file a law suit against a law in which he did not know its content.
Well, I have read the law so I know what is in it, but besides that, I want to share other credentials I have which I feel give me the right to express a responsible opinion about it. I was born and grew up in Sonora—the Mexican state border with Arizona—I have been legally residing in Arizona for years and I have always interacted between Sonora and Arizona. For five years I attended college at Tec of Monterrey in a city 100 miles south of Laredo Texas. During college vacations we use to drive Monterrey, Laredo, Del Rio, Eagle Pass, El Paso, Las Cruces, Nogales and then to my home town of Hermosillo. So, I know the border.
I married an Arizonan and I have 3 daughters who were born in Arizona. They married kids from Arizona and it is where they now live. For five generations my family has been a cattle exporter and we have crossed our cattle through all the Arizona—Sonora ports of entrance for more than 100 years. In a partnership with my friend from Sinaloa, Adolfo Clouthier, I participated in a company marketing Mexican produce all over the USA headquartered it in Nogales, Arizona. I was governor Bours’ representative in the US residing in Phoenix with big responsibilities about all kind of relations between Sonora and Arizona.
I am not a lawyer but, in my intellectual formation I had a big influence from a couple of real bright jurists. My father who had a degree of international law from the University of Brussels and my uncle Gilberto Valenzuela, who was jurist of the Mexican Supreme Court and also a jurist of the International Court at Holland. Someone whose life is described in a book title: “Gilberto Valenzuela, a life devoted to the principle of legality.” So, I strongly believe that countries with no rule of law are condemned to failure.
As a free market economist I believe that supply and demand will always meet, legally or illegally. And the most dramatic example of it, is the insane war that my country is fighting against an enemy which they will never subdue; the war against drugs. However, I also think, like my good friend Alberto Mansueti say in his book; ‘The Bad Laws’; some countries have only real bad laws. But my purpose is not to analyze the legal aspect of the problem; we have another one much more grave and important.
A few weeks ago the Mexican Secretary of State made a real irresponsible affirmation. “The only root of this problem is the refusal of the USA to approve a new immigration reform.” Oh, that sounds very simple. What about the one implemented in 1986? Through that process the USA legalized more than 10 million people and was the problem solved, no? Twenty years later the USA has another 20 million undocumented people who, running away from their countries, entered the US illegally and some experts say, in the background are another few million waiting, making this situation a very profitably business for international mafias
The real problem is not to come up with a new immigration reform to document those millions of people. We can find the real problem just asking a question. Why in the last 30 years 40 million people left their countries to, illegally, enter the USA?
A few years ago Tony Blair said something really wise. You can measure the greatness of countries by keeping track of the people leaving them, or people arriving in them. If that is the case, we can affirm that we come from midget countries. We come from countries where they don’t want to build the conditions to make their economies grow, the conditions to create jobs because, when people don’t find them, they are pushed to go to the USA. We are manufacturers of poverty and misery.
But we have political leaders showing up in Washington scolding congress, because they are not opening the doors for the people we are expelling from our countries because of our corruption, ineptitude and insecurity.
Blind with fear and irresponsibility we charge against bad gringos, racists, bullies, unjust. But we don’t see that we are the ones providing those miserable human beings as the raw material to build this tragedy. I can’t understand those masses of people, from all over Latin America, wearing the war paint to, without respecting the rule of law, demand some imaginary rights when in their countries never had the freedom to do the same thing against the tyrants who expelled them. I can’t understand why the whole Latin America’s GNP is less than 20% of the USA, and the only solution we have is to demand aggressively that the gringos take the many poor people we manufacture and expel.
We Mexicans will never get it. The new Arizona law doesn’t penalize immigration. The law only authorizes and gives the tools to the police force to secure the rule of law. If people enter the USA without the kind of requirements the law demands, they became outlaws and should be prosecuted.
The only thing that Arizona has done, is to approved the laws they consider necessary to promote a civilize way of living for their societies. The only difference with Mexico is that they do enforce the rule of law and we don’t know the meaning of those words.
The political correct people in Mexico City went so far, in the middle of their ignorance, to glorify delinquents who penetrate the USA breaking the law, they are just that, criminals.
Why don’t we abandon that role of beggars armed with big sticks? Why don’t we take down that flag of imaginary racism and stop barking to the moon on the water? If we want to find the causes and solutions to this sad and painful problem, we just have to take a look of our faces in the mirror, then make an act of contrition and stop manufacturing poor people and a lot of migrants invading the USA out of desperation.
The Fed's Biggest Bubble
The Fed's Biggest Bubble
While Wall Street and Washington are petrified of the deflation boogieman, the real menace lurking in the shadows is the Fed's bond bubble.
I've made a living out of exposing economic fallacies, but there's one whale that I can't seem to harpoon. Even top-flight Wall Street analysts seem to believe that the Fed's doubling of the monetary base after the credit crunch has not had an inflationary impact on our economy. Their logic can be summed up like so: "The money the Fed created and dropped from helicopters has all been caught in the trees." In other words, the Fed is creating money, but it is just being held as excess reserves by the banking system instead of being loaned to the public. Therefore, the money supply hasn't truly increased, there is no money multiplier effect, and aggregate price levels are behaving themselves.
But this is only a half-truth. Yes, most of the money created by the Fed has been kept by commercial banks as excess reserves. However, the Fed doesn't conjure reserves by magic. It first creates an electronic credit by fiat, then purchases an asset held by a financial institution. Those primary dealers then deposit that Federal Reserve check into their reserves. The act of creating money from nothing and buying an asset -- be it a Treasury bond or Mortgage Backed Security (MBS) -- drives up the price of that asset in the open market. Those price distortions send erroneous signals to private buyers and sellers, eventually creating gross economic imbalances.
Therefore, the inflation created by the Fed first gets concentrated in whatever asset it has chosen to purchase - before spreading throughout the economy.
In the latest example of the Fed's monetary manipulations, Bernanke & Co. purchased $1.25 trillion in MBS. The prices of MBS were therefore driven up (and yields down). Before that, the Fed forced the entire yield curve lower by purchasing not only Treasury bills but also $300 billion in notes and bonds. The Fed has also recently indicated that it will be swapping maturing MBS for longer-dated Treasury securities in an effort to keep its balance sheet from shrinking.
While it is true that -- for now at least -- we have been spared from the imminent curse of skyrocketing consumer prices, thanks to the falling money multiplier, it is blatantly untrue that the trillion-plus dollars the Fed created have been rendered inconsequential.
Not only has the huge buildup in the monetary base put pressure on the US dollar and caused gold to soar, but it has also broadcast an egregious and distortive price signal for US debt securities. The 10-year note is now trading just above 2.5%. That yield is near its all time record low, nearly 5 percentage points below its 40-year average, and 13 percentage points below its record high of September 1981.
US sovereign debt should only enjoy such historically low yields due to an overabundance of savings, low inflation, and low debt. None of those preferable conditions currently exist. Hence, US Treasuries are the most over-supplied, over-owned, and over-priced asset in the history of the planet! Once the debt dam breaks, it will send the dollar and bond prices cascading lower, and consumer prices and bond yields through the roof.
While Wall Street and Washington are petrified of the deflation boogieman, the real menace lurking in the shadows is the Fed's bond bubble - and it's going to eat small investors alive.
-- Michael Pento, Senior Economist of Euro Pacific Capital
The State's "Inception" Fails
The State's "Inception" Fails
Two years ago, the economy was seriously dragged down amidst an amazing banking crisis that spread throughout the world. The illusion created by loose credit — that housing could go up in price forever and we could enjoy permanent prosperity due to monetary expansion — was shattered by events. Reality had dawned. We found ourselves in the midst of an economic depression.
At that point in policy, we were at a fork in the road. The wise direction was to let the depression happen. Let the bad investments wash out of the system. Let housing prices fall. Let banks go broke. Let wages fall and permit the market to reallocate all resources from bubble projects to projects that make economic sense. That was the direction chosen by the Reagan administration in 1981, and by the Harding administration in 1921. The result in both cases was a short downturn followed by recovery.
The Bush administration, in a policy later followed by the Obama administration, instead attempted a tactic of dream incubation as portrayed in the recent film Inception. The idea was to inject artificial stimulus into the macroeconomic environment. There were random spending programs, massive buyouts of bad debt using phony money, gargantuan tax tricks, incentive programs for throwing good money after bad, and hiring strategies to weave illusions about how all is well.
In the movie, the goal of the dream incubation was to implant an idea into an unsuspecting subject's head that would cause him to act differently than he otherwise would have. In the real-life version of inception, the state tried to implant in all our heads the idea that there was no depression, no economic collapse, no housing crisis, no pushback on real-estate prices, and really no serious problem at all that the state cannot fix provided we are obedient subjects and do what we are told.
In the movie version, the attempted inception is on a time clock. The dream weavers can only keep the subject in a state of slumber so long. In the real-life version, things are much messier. The headlines have spoken about the impending recovery every day for all this time, and yet the evidence has never really been there. All the stimulus really did was forestall events a bit longer, but it hasn't prevented them.
Now, with the stock markets melting and the near-universal consensus that we are back in recession, everyone is awake. It is pretty clear that the inception did not take. The unemployment data look absolutely terrible. As the Wall Street Journal points out, only 59 percent of men age 20 and over have a full-time job (in the 1950s, that figure was 85 percent). Only 61 percent of all people over 20 have any kind of job now.
That's only the most conspicuous problem. No one really knows just how much further the real-estate market would fall under market-clearing conditions. The actual status of the car industry is anyone's guess. Business borrowing is going nowhere. Total industrial and commercial loans are actually at their lowest point of the whole depression. Payrolls generally are still sweeping downwards.
With an economy like ours, and a population to support with its long-held expectations of material investment, an environment like this can produce despair. People are talking about the death of the American dream, perhaps even the collapse of the American empire along the lines of Rome in days of old. Evidence is emerging by the day, as municipalities shut down street lamps and cut back on the hours at public schools. Governments that do not have access to the printing press are curbing everything.
Meanwhile, the state, as if it is trying to keep us hooked up to its failed machine, has its central bank trying to pump in more money and credit, with interest rates nearly zero. No matter how much this tactic has failed, our money masters still can't seem to face the fact that it is not working. There are very few takers these days for the phony-money loans. There is a widespread perception that inflation is on a hair trigger, so that if the expansion campaign ever really does stick, we could find ourselves in a ghastly disaster of hyperinflation.
The only really good trends exist in two worlds right now. In the digital world, we see growth and expansion and progress. This sector is not as heavily hooked up to manipulations of the Keynesian elite, and its development has proceeded at a clip even in a depression.
The other sector that shows great improvement is the intellectual sector. The Austrian School of economics is sweeping away Keynesian fallacies. The Keynesians took on this depression and they have lost the battle. That much is obvious to everyone but the most dedicated New York Times economics columnist. For anyone with an open mind, the economics of the Austrian School has become the prevailing mode of thinking for our time.
I wish Murray Rothbard were around to see this. Ludwig von Mises, F.A. Hayek, and Henry Hazlitt, too. Their ideas on economics were forged against great resistance from the mainstream. Today, they are becoming the new mainstream among anyone who is not engaged in lucid dreaming of prosperity, made possible by the printing press.
The Critics of Marxism
The Critics of Marxism
The materialism of Marx and Engels differs radically from the ideas of classical materialism. It depicts human thoughts, choices, and actions as determined by the material productive forces — tools and machines. Marx and Engels failed to see that tools and machines are themselves products of the operation of the human mind. Even if their sophisticated attempts to describe all spiritual and intellectual phenomena, which they call superstructural, as produced by the material productive forces had been successful, they would only have traced these phenomena back to something which in itself is a spiritual and intellectual phenomenon. Their reasoning moves in a circle. Their alleged materialism is in fact no materialism at all. It provides merely a verbal solution of the problems involved.
Occasionally even Marx and Engels were aware of the fundamental inadequacy of their doctrine. When Engels at the grave of Marx summed up what he considered to be the quintessence of his friend's achievements, he did not mention the material productive forces at all. Said Engels,
As Darwin discovered the law of evolution of organic nature, Marx discovered the law of mankind's historical evolution, that is the simple fact, hitherto hidden beneath ideological overgrowths, that men must first of all eat, drink, have shelter and clothing before they can pursue politics, science, art, religion, and the like, that consequently the production of the immediately required foodstuffs and therewith the stage of economic evolution attained by a people or an epoch constitute the foundation out of which the governmental institutions, the ideas about right and wrong, art, and even the religious ideas of men have been developed and by means of which they must be explained — not, as hitherto had been done, the other way round.[1]
Certainly no man was more competent than Engels to provide an authoritative interpretation of dialectic materialism. But if Engels was right in this obituary, then the whole of Marxian materialism fades away. It is reduced to a truism known to everybody from time immemorial and never contested by anybody. It says no more than the worn-out aphorism: Primum vivere, deinde philosophari.
As an eristic trick, Engels's interpretation turned out very well. As soon as somebody begins to unmask the absurdities and contradictions of dialectical materialism, the Marxians retort: Do you deny that men must first of all eat? Do you deny that men are interested in improving the material conditions of their existence? Since nobody wants to contest these truisms, they conclude that all the teachings of Marxian materialism are unassailable. And hosts of pseudo philosophers fail to see through this non sequitur.
The main target of Marx's rancorous attacks was the Prussian state of the Hohenzollern dynasty. He hated this regime not because it was opposed to socialism but precisely because it was inclined to accept socialism. While his rival Lassalle toyed with the idea of realizing socialism in cooperation with the Prussian government led by Bismarck, Marx's International Workingmen's Association sought to supplant the Hohenzollern. Since in Prussia the Protestant church was subject to the government and was administered by government officials, Marx never tired of vilifying the Christian religion too. Anti-Christianism became all the more a dogma of Marxism in that the countries whose intellectuals first were converted to Marxism were Russia and Italy. In Russia the church was even more dependent on the government than in Prussia. In the eyes of the Italians of the nineteenth century anti-Catholic bias was the mark of all who opposed the restoration of the pope's secular rule and the disintegration of the newly won national unity.
The Christian churches and sects did not fight socialism. Step by step they accepted its essential political and social ideas. Today they are, with but few exceptions, outspoken in rejecting capitalism and advocating either socialism or interventionist policies which must inevitably result in the establishment of socialism. But, of course, no Christian church can ever acquiesce in a brand of socialism which is hostile to Christianity and aims at its suppression. The churches are implacably opposed to the anti-Christian aspects of Marxism. They try to distinguish between their own program of social reform and the Marxian program. The inherent viciousness of Marxism they consider to be its materialism and atheism.
However, in fighting Marxian materialism the apologists of religion have entirely missed the point. Many of them look upon materialism as an ethical doctrine teaching that men ought only to strive after satisfaction of the needs of their bodies and after a life of pleasure and revelry, and ought not to bother about anything else. What they advance against this ethical materialism has no reference to the Marxian doctrine and no bearing on the issue in dispute.
No more sensible are the objections raised to Marxian materialism by those who pick out definite historical events — such as the rise of the Christian creed, the crusades, the religious wars — and triumphantly assert that no materialist interpretation of them could be provided. Every change in conditions affects the structure of demand and supply of various material things and thereby the short-run interests of some groups of people. It is therefore possible to show that there were some groups who profited in the short run and others who were prejudiced in the short run. Hence the advocates of Marxism are always in a position to point out that class interests were involved and thus to annul the objections raised. Of course, this method of demonstrating the correctness of the materialist interpretation of history is entirely wrong. The question is not whether group interests were affected; they are necessarily always affected at least in the short run. The question is whether the striving after lucre of the groups concerned was the cause of the event under discussion. For instance, were the short-run interests of the munitions industry instrumental in bringing about the bellicosity and the wars of our age?
In dealing with such problems the Marxians never mention that where there are interests pro there are necessarily also interests con. They would have to explain why the latter did not prevail over the former. But the "idealist" critics of Marxism were too dull to expose any of the fallacies of dialectical materialism. They did not even notice that the Marxians resorted to their class-interest interpretation only in dealing with phenomena which were generally condemned as bad, never in dealing with phenomena of which all people approve. If one ascribes warring to the machinations of munitions capital and alcoholism to machinations of the liquor trade, it would be consistent to ascribe cleanliness to the designs of the soap manufacturers and the flowering of literature and education to the maneuvering of the publishing and printing industries. But neither the Marxians nor their critics ever thought of it.
The outstanding fact in all this is that the Marxian doctrine of historical change has never received any judicious critique. It could triumph because its adversaries never disclosed its fallacies and inherent contradictions.
How entirely people have misunderstood Marxian materialism is shown in the common practice of lumping together Marxism and Freud's psychoanalysis. Actually no sharper contrast can be thought of than that between these two doctrines. Materialism aims at reducing mental phenomena to material causes. Psychoanalysis, on the contrary, deals with mental phenomena as with an autonomous field. While traditional psychiatry and neurology tried to explain all pathological conditions with which they were concerned as caused by definite pathological conditions of some bodily organs, psychoanalysis succeeded in demonstrating that abnormal states of the body are sometimes produced by mental factors. This discovery was the achievement of Charcot and of Josef Breuer, and it was the great exploit of Sigmund Freud to build upon this foundation a comprehensive systematic discipline. Psychoanalysis is the opposite of all brands of materialism. If we look upon it not as a branch of pure knowledge but as a method of healing the sick, we would have to call it a thymological branch (geisteswissenschaftlicher Zweig) of medicine.
Freud was a modest man. He did not make extravagant pretensions regarding the importance of his contributions. He was very cautious in touching upon problems of philosophy and branches of knowledge to the development of which he himself had not contributed. He did not venture to attack any of the metaphysical propositions of materialism. He even went so far as to admit that one day science may succeed in providing a purely physiological explanation of the phenomena psychoanalysis deals with. Only so long as this does not happen, psychoanalysis appeared to him scientifically sound and practically indispensable. He was no less cautious in criticizing Marxian materialism. He freely confessed his incompetence in this field.[2] But all this does not alter the fact that the psychoanalytical approach is essentially and substantially incompatible with the epistemology of materialism.
Psychoanalysis stresses the role that the libido, the sexual impulse, plays in human life. This role had been neglected before by psychology as well as by all other branches of knowledge. Psychoanalysis also explains the reasons for this neglect. But it by no means asserts that sex is the only human urge seeking satisfaction and that all psychic phenomena are induced by it. Its preoccupation with sexual impulses arose from the fact that it started as a therapeutical method and that most of the pathological conditions it had to deal with are caused by the repression of sexual urges.
The reason some authors linked psychoanalysis and Marxism was that both were considered to be at variance with theological ideas. However, with the passing of time theological schools and groups of various denominations are adopting a different evaluation of the teachings of Freud. They are not merely dropping their radical opposition as they have already done before with regard to modern astronomical and geological achievements and the theories of phylogenetic change in the structure of organisms. They are trying to integrate psychoanalysis into the system and the practice of pastoral theology. They view the study of psychoanalysis as an important part of the training for the ministry.[3]
As conditions are today, many defenders of the authority of the church are guideless and bewildered in their attitude toward philosophical and scientific problems. They condemn what they could or even should endorse. In fighting spurious doctrines, they resort to untenable objections which in the minds of those who can discern the fallaciousness of the objections rather strengthen the tendency to believe that the attacked doctrines are sound. Being unable to discover the real flaw in false doctrines, these apologists for religion may finally end by approving them. This explains the curious fact that there are nowadays tendencies in Christian writings to adopt Marxian dialectical materialism. Thus a Presbyterian theologian, Professor Alexander Miller, believes that Christianity "can reckon with the truth in historical materialism and with the fact of class-struggle." He not only suggests, as many eminent leaders of various Christian denominations have done before him, that the church should adopt the essential principles of Marxian politics. He thinks the church ought to "accept Marxism" as "the essence of a scientific sociology."[4] How odd to reconcile with the Nicene Creed a doctrine teaching that religious ideas are the superstructure of the material productive forces!
How the Stock Market and Economy Really Work
How the Stock Market and Economy Really Work
The stock market does not work the way most people think. A commonly held belief — on Main Street as well as on Wall Street — is that a stock-market boom is the reflection of a progressing economy: as the economy improves, companies make more money, and their stock value rises in accordance with the increase in their intrinsic value. A major assumption underlying this belief is that consumer confidence and consequent consumer spending are drivers of economic growth.
A stock-market bust, on the other hand, is held to result from a drop in consumer and business confidence and spending — due to inflation, rising oil prices, high interest rates, etc., or for no reason at all — that leads to declining business profits and rising unemployment. Whatever the supposed cause, in the common view a weakening economy results in falling company revenues and lower-than-expected future earnings, resulting in falling intrinsic values and falling stock prices.
This understanding of bull and bear markets, while held by academics, investment professionals, and individual investors alike, is technically correct if viewed superficially but is substantially misconceived because it is based on faulty finance and economic theory.
In fact, the only real force that ultimately makes the stock market or any market rise (and, to a large extent, fall) over the longer term is simply changes in the quantity of money and the volume of spending in the economy. Stocks rise when there is inflation of the money supply (i.e., more money in the economy and in the markets). This truth has many consequences that should be considered.
Since stock markets can fall — and fall often — to various degrees for numerous reasons (including a decline in the quantity of money and spending), our focus here will be only on why they are able to rise in a sustained fashion over the longer term.
The Fundamental Source of All Rising Prices
For perspective, let's put stock prices aside for a moment and make sure first to understand how aggregate consumer prices rise. In short, overall prices can rise only if the quantity of money in the economy increases faster than the quantity of goods and services. (In economically retrogressing countries, prices can rise when the supply of goods diminishes while the supply of money remains the same, or even rises.)
When the supply of goods and services rises faster than the supply of money — as happened during most of the 1800s — the unit price of each good or service falls, since a given supply of money has to buy, or "cover," an increasing supply of goods or services. George Reisman offers us the critical formula for the derivation of economy-wide prices:[1]
In this formula, price (P) is determined by demand (D) divided by supply (S). The formula shows us that it is mathematically impossible for aggregate prices to rise by any means other than (1) increasing demand, or (2) decreasing supply; i.e., by either more money being spent to buy goods, or fewer goods being sold in the economy.
In our developed economy, the supply of goods is not decreasing, or at least not at enough of a pace to raise prices at the usual rate of 3–4 percent per year; prices are rising due to more money entering the marketplace.
The same price formula noted above can equally be applied to asset prices — stocks, bonds, commodities, houses, oil, fine art, etc. It also pertains to corporate revenues and profits. As Fritz Machlup states:
It is impossible for the profits of all or of the majority of enterprises to rise without an increase in the effective monetary circulation (through the creation of new credit or dishoarding).[2]
To return to our focus on the stock market in particular, it should be seen now that the market cannot continually rise on a sustained basis without more money — specifically bank credit — flowing into it.
There are other ways the market could go higher, but their effects are temporary. For example, an increase in net savings involving less money spent on consumer goods and more invested in the stock market (resulting in lower prices of consumer goods) could send stock prices higher, but only by the specific extent of the new savings, assuming all of it is redirected to the stock market.
The same applies to reduced tax rates. These would be temporary effects resulting in a finite and terminal increase in stock prices. Money coming off the "sidelines" could also lift the market, but once all sideline money was inserted into the market, there would be no more funds with which to bid prices higher. The only source of ongoing fuel that could propel the market — any asset market — higher is new and additional bank credit. As Machlup writes,
If it were not for the elasticity of bank credit … a boom in security values could not last for any length of time. In the absence of inflationary credit the funds available for lending to the public for security purchases would soon be exhausted, since even a large supply is ultimately limited. The supply of funds derived solely from current new savings and current amortization allowances is fairly inelastic.… Only if the credit organization of the banks (by means of inflationary credit) or large-scale dishoarding by the public make the supply of loanable funds highly elastic, can a lasting boom develop.… A rise on the securities market cannot last any length of time unless the public is both willing and able to make increased purchases.[3] (Emphasis added.)
The last line in the quote helps to reveal that neither population growth nor consumer sentiment alone can drive stock prices higher. Whatever the population, it is using a finite quantity of money; whatever the sentiment, it must be accompanied by the public's ability to add additional funds to the market in order to drive it higher.[4]
Understanding that the flow of recently created money is the driving force of rising asset markets has numerous implications. The rest of this article addresses some of these implications.
The Link between the Economy and the Stock Market
The primary link between the stock market and the economy — in the aggregate — is that an increase in money and credit pushes up both GDP and the stock market simultaneously.
A progressing economy is one in which more goods are being produced over time. It is real "stuff," not money per se, which represents real wealth. The more cars, refrigerators, food, clothes, medicines, and hammocks we have, the better off our lives. We saw above that, if goods are produced at a faster rate than money, prices will fall. With a constant supply of money, wages would remain the same while prices fell, because the supply of goods would increase while the supply of workers would not. But even when prices rise due to money being created faster than goods, prices still fall in real terms, because wages rise faster than prices. In either scenario, if productivity and output are increasing, goods get cheaper in real terms.
Obviously, then, a growing economy consists of prices falling, not rising. No matter how many goods are produced, if the quantity of money remains constant, the only money that can be spent in an economy is the particular amount of money existing in it (and velocity, or the number of times each dollar is spent, could not change very much if the money supply remained unchanged).
This alone reveals that GDP does not necessarily tell us much about the number of actual goods and services being produced; it only tells us that if (even real) GDP is rising, the money supply must be increasing, since a rise in GDP is mathematically possible only if the money price of individual goods produced is increasing to some degree.[5] Otherwise, with a constant supply of money and spending, the total amount of money companies earn — the total selling prices of all goods produced — and thus GDP itself would all necessarily remain constant year after year.
The same concept would apply to the stock market: if there were a constant amount of money in the economy, the sum total of all shares of all stocks taken together (or a stock index) could not increase. Plus, if company profits, in the aggregate, were not increasing, there would be no aggregate increase in earnings per share to be imputed into stock prices.
In an economy where the quantity of money was static, the levels of stock indexes, year by year, would stay approximately even, or drift slightly lower[6] — depending on the rate of increase in the number of new shares issued. And, overall, businesses (in the aggregate) would be selling a greater volume of goods at lower prices, and total revenues would remain the same. In the same way, businesses, overall, would purchase more goods at lower prices each year, keeping the spread between costs and revenues about the same, which would keep aggregate profits about the same.
Under these circumstances, capital gains (the profiting from the buying low and selling high of assets) could be made only by stock picking — by investing in companies that are expanding market share, bringing to market new products, etc., thus truly gaining proportionately more revenues and profits at the expense of those companies that are less innovative and efficient.
The stock prices of the gaining companies would rise while others fell. Since the average stock would not actually increase in value, most of the gains made by investors from stocks would be in the form of dividend payments. By contrast, in our world today, most stocks — good and bad ones — rise during inflationary bull markets and decline during bear markets. The good companies simply rise faster than the bad.
Similarly, housing prices under static money would actually fall slowly — unless their value was significantly increased by renovations and remodeling. Older houses would sell for much less than newer houses. To put this in perspective, consider that if our rate of inflation were high enough, used cars would rise in price just like new cars, only at a slower rate — but just about everything would increase in price, as it does in countries with hyperinflation The amount by which a home "increases in value" over 30 years really just represents the amount of purchasing power that the dollars we hold have lost: while the dollars lost purchasing power, the house — and other assets more limited in supply growth — kept its purchasing power.
Since we have seen that neither the stock market nor GDP can rise on a sustained basis without more money pushing them higher, we can now clearly understand that an improving economy neither consists of an increasing GDP nor does it cause the overall stock market to rise.
This is not to say that a link does not exist between the money that companies earn and their value on the stock exchange in our inflationary world today, but that the parameters of that link — valuation relationships such as earnings ratios and stock-market capitalization as a percent of GDP — are rather flexible, and as we will see below, change over time. Money sometimes flows more into stocks and at other times more into the underlying companies, changing the balance of the valuation relationships.
Forced Investing
As we have seen, the whole concept of rising asset prices and stock investments constantly increasing in value is an economic illusion. What we are really seeing is our currency being devalued by the addition of new currency issued by the central bank. The prices of stocks, houses, gold, etc., do not really rise; they merely do better at keeping their value than do paper bills and digital checking accounts, since their supply is not increasing as fast as are paper bills and digital checking accounts.
The fact that we have to save for the future is, in fact, an outrage. Were no money printed by the government and the banks, things would get cheaper through time, and we would not need much money for retirement, because it would cost much less to live each day then than it does now. But we are forced to invest in today's government-manipulated inflation-creation world in order to try to keep our purchasing power constant.
To the extent that some of us even come close to succeeding, we are still pushed further behind by having our "gains" taxed. The whole system of inflation is solely for the purpose of theft and wealth redistribution. In a world absent of government printing presses and wealth taxes, the armies of investment advisors, pension-fund administrators, estate planners, lawyers, and accountants associated with helping us plan for the future would mostly not exist. These people would instead be employed in other industries producing goods and services that would truly increase our standards of living.
The Fundamentals are Not the Fundamentals
If it is, then, primarily newly printed money flowing into and pushing up the prices of stocks and other assets, what real importance do the so-called fundamentals — revenues, earnings, cash flow, etc. — have? In the case of the fundamentals, too, it is newly printed money from the central bank, for the most part, that impacts these variables in the aggregate: the financial fundamentals are determined to a large degree by economic changes.
For example, revenues and, particularly, profits, rise and fall with the ebb and flow of money and spending that arises from central-bank credit creation. When the government creates new money and inserts it into the economy, the new money increases sales revenues of companies before it increases their costs; when sales revenues rise faster than costs, profit margins increase.
Specifically, how this comes about is that new money, created electronically by the government and loaned out through banks, is spent by borrowing companies.[7] Their expenditures show up as new and additional sales revenues for businesses. But much of the corresponding costs associated with the new revenues lags behind in time because of technical accounting procedures, such as the spreading of asset costs across the useful life of the asset (depreciation) and the postponing of recognition of inventory costs until the product is sold (cost of goods sold). These practices delay the recognition of costs on the profit-and-nloss statements (i.e., income statements).
Since these costs are recognized on companies' income statements months or years after they are actually incurred, their monetary value is diminished by inflation by the time they are recognized. For example, if a company recognizes $1 million in costs for equipment purchased in 1999, that $1 million is worth less today than in 1999; but on the income statement the corresponding revenues recognized today are in today's purchasing power. Therefore, there is an equivalently greater amount of revenues spent today for the same items than there was ten years ago (since it takes more money to buy the same good, due to the devaluation of the currency).
Another way of looking at it is that, with more money being created through time, the amount of revenues is always greater than the amount of costs, since most costs are incurred when there is less money existing. Thus, because of inflation, the total monetary value of business costs in a given time frame is smaller than the total monetary value of the corresponding business revenues. Were there no inflation, costs would more closely equal revenues, even if their recognition were delayed.
In summary, credit expansion increases the spreads between revenue and costs, increasing profit margins. The tremendous amount of money created in 2008 and 2009 is what is responsible for the fantastic profits companies are currently reporting (even though the amount of money loaned out was small, relative to the increase in the monetary base).
Since business sales revenues increase before business costs, with every round of new money printed, business profit margins stay widened; they also increase in line with an increased rate of inflation. This is one reason why countries with high rates of inflation have such high rates of profit.[8] During bad economic times, when the government has quit printing money at a high rate, profits shrink, and during times of deflation, sales revenues fall faster than do costs.
It is also new money flowing into industry from the central bank that is the primary cause behind positive changes in leading economic indicators such as industrial production, consumer durables spending, and retail sales. As new money is created, these variables rise based on the new monetary demand, not because of resumed real economic growth.
A final example of money affecting the fundamentals is interest rates. It is said that when interest rates fall, the common method of discounting future expected cash flows with market interest rates means that the stock market should rise, since future earnings should be valued more highly. This is true both logically and mathematically. But, in the aggregate, if there is no more money with which to bid up stock prices, it is difficult for prices to rise, unless the interest rate declined due to an increase in savings rates.
In reality, the help needed to lift the market comes from the fact that when interest rates are lowered, it is by way of the central bank creating new money that hits the loanable-funds markets. This increases the supply of loanable funds and thus lowers rates. It is this new money being inserted into the market that then helps propel it higher.
(I would personally argue that most of the discounting of future values [PV calculations] demonstrated in finance textbooks and undertaken on Wall Street are misconceived as well. In a world of a constant money supply and falling prices, the future monetary value of the income of the average company would be about the same as the present value. Future values would hardly need to be discounted for time preference [and mathematically, it would not make sense], since lower consumer prices in the future would address this. Though investment analysts believe they should discount future values, I believe that they should not. What they should instead be discounting is earnings inflation and asset inflation, each of which grows at different paces.)[9]
Asset Inflation versus Consumer Price Inflation
Newly printed money can affect asset prices more than consumer prices. Most people think that the Federal Reserve has done a good job of preventing inflation over the last twenty-plus years. The reality is that it has created a tremendous amount of money, but that the money has disproportionately flowed into financial markets instead of into the real economy, where it would have otherwise created drastically more price inflation.
There are two main reasons for this channeling of money into financial assets. The first is changes in the financial system in the mid and late 1980s, when an explosive growth of domestic credit channels outside of traditional bank lending opened up in the financial markets. The second is changes in the US trade deficit in the late 1980s, wherein it became larger, and export receipts received by foreigners were increasingly recycled by foreign central banks into US asset markets.[10] As financial economist Peter Warburton states,
a diversification of the credit process has shifted the centre of gravity away from conventional bank lending. The ascendancy of financial markets and the proliferation of domestic credit channels outside the [traditional] monetary system have greatly diminished the linkages between … credit expansion and price inflation in the large western economies. The impressive reduction of inflation is a dangerous illusion; it has been obtained largely by substituting one set of serious problems for another.[11]
And, as bond-fund guru Bill Gross said,
what now appears to be confirmed as a housing bubble, was substantially inflated by nearly $1 trillion of annual reserve flowing back into US Treasury and mortgage markets at subsidized yields.… This foreign repatriation produced artificially low yields.… There is likely near unanimity that it is now responsible for pumping nearly $800 billion of cash flow into our bond and equity markets annually.[12]
This insight into the explanation for a lack of price inflation in recent decades should also show that the massive amount of reserves the Fed created in 2008 and 2009 — in response to the recession — might not lead to quite the wild consumer-price inflation everyone expects when it eventually leaves the banking system but instead to wild asset price inflation.
One effect of the new money flowing disproportionately into asset prices is that the Fed cannot "grow the economy" as much as it used to, since more of the new money created in the banking system flows into asset prices rather than into GDP. Since it is commonly thought that creating money is necessary for a growing economy, and since it is believed that the Fed creates real demand (instead of only monetary demand), the Fed pumps more and more money into the economy in order to "grow it."
That also means that more money — relative to the size of the economy — "leaks" out into asset prices than used to be the case. The result is not only exploding asset prices in the United States, such as the NASDAQ and housing-market bubbles but also in other countries throughout the world, as new money makes its way into asset markets of foreign countries.[13]
A second effect of more new money being channeled into asset prices is, as hinted above, that it results in the traditional range of stock valuations moving to a higher level. For example, the ratio of stock prices to stock earnings (P/E ratio) now averages about 20, whereas it used to average 10–15. It now bottoms out at a level of 12–16 instead of the historical 5. A similar elevated state applies to Tobin's Q, a measure of the market value of a company's stock relative to its book value. But the change in relative flow of new money to asset prices in recent years is perhaps best seen in the chart below, which shows the stunning increase in total stock-market capitalization as a percentage of GDP (figure 1).
The changes in these valuation indicators I have shown above reveal that the fundamental links between company earnings and their stock-market valuation can be altered merely by money flows originating from the central bank.
Can Government Spending Revive the Stock Market and the Economy?
The answer is yes and no. Government spending does not restore any real demand, only nominal monetary demand. Monetary demand is completely unrelated to the real economy, i.e., real production, the creation of goods and services, the rise in real wages, and the ability to consume real things — as opposed to a calculated GDP number.
Government spending harms the economy and forestalls its healing. The thought that stimulus spending, i.e., taking money from the productive sector (a de-accumulation of capital) and using it to consume existing consumer goods or using it to direct capital goods toward unprofitable uses, could in turn create new net real wealth — real goods and services — is preposterous.
What is most needed during recessions is for the economy to be allowed to get worse — for it to flush out the excesses and reset itself on firm footing. Broken economies suffer from a misallocation of resources consequent upon prior government interventions and can therefore be healed only by allowing the economy's natural balance to be restored. Falling prices and lack of government and consumer spending are part of this process.
Given that government spending cannot help the real economy, can it help the specific indicator called GDP? Yes it can. Since GDP is mostly a measure of inflation, if banks are willing to lend and lenders are willing to borrow, then the newly created money that the government is spending will make its way through the economy. As banks lend the new money once they receive it, the money multiplier will kick in and the money supply will increase, which will raise GDP.
As for the idea that government spending helps the stock market, the analysis is a bit more complicated. Government spending per se cannot help the stock market, since little, if any, of the money spent will find its way into financial markets. But the creation of money that occurs when the central bank (indirectly) purchases new government debt can certainly raise the stock market. If new money created by the central bank is loaned out through banks, much of it will end up in the stock market and other financial markets, pushing prices higher.
Summary
The most important economic and financial indicator in today's inflationary world is money supply. Trying to anticipate stock-market and GDP movements by analyzing traditional economic and financial indicators can lead to incorrect forecasts. To rely on these "fundamentals" is to largely ignore the specific economic forces that most significantly affect those same fundamentals — most notably the changes in the money supply. Therefore, following monetary indicators would be the best insight into future stock prices and GDP growth.
The Failure of the Liberal Economic Experiment?
The Failure of the Liberal Economic Experiment?
A majority of Americans believe that President Obama's economic policies have run up a record federal deficit while failing to end the recession or slow job losses.
JAMES K. GLASSMAN
From Commentary Magazine
The plunge in the U.S. economy in 2008 and 2009 became an irresistible opportunity to pronounce the failure of the form of capitalism that emerged at the end of the 20th century. "One had expected competition and abundance for everyone, but instead one got scarcity, the triumph of profit-oriented thinking, speculation and dumping," said Nicolas Sarkozy, the president of France. The current crisis, he noted with a certain pleasure, signaled the end of the "illusion of public impotence" and the "return of the state."
There was ample reason for such grave-dancing. Between July 1, 2008, and June 30, 2009, total U.S. economic output, adjusted for inflation, dropped at an annual rate of 3.8 percent—the worst 12-month decline since 1946. The unemployment rate, which started 2008 at 5 percent, had doubled by the fall of 2010. The number of jobs fell for 21 months in a row, and by May 2010 the median unemployed worker had been out of work for 23 weeks—compared with 10 weeks in the depths of the 1973-75 recession.
The quarter-century that began shortly after Ronald Reagan's election had been widely viewed as a period in which a free-market approach had proved its superiority to state direction of economies. In the United States, cutting top income tax rates in half, reducing regulatory burdens, and spreading free trade seemed to have produced significant prosperity and remarkable stability. Between 1983 and 2008, gross domestic product grew at an average of 3.2 percent annually. Only once did output fall in a calendar year, and that was by just two-tenths of a percentage point. Inflation, interest rates, and unemployment were tame.
Then, suddenly, an asset bubble in real estate exploded, the growth and stability vanished, and the United States suffered its worst economic misery in (take your pick) 34, 53, or 71 years. So you would expect that the American public, following President Sarkozy, would see the recession as a severe setback—or even a death blow—to conservative economic policies that were aimed at limiting the power of government and liberating the private sector.
You would have expected that, and you would have been right—but only briefly. Since the beginning of 2010, a surprising reversal has occurred. Rather than supporting and encouraging government intervention to mitigate an economic calamity caused by "profit-oriented thinking," Americans have come to believe that government has failed to fix the problem and may, in fact, have made it worse. Now it is liberal, not conservative, economic policies that are suddenly in jeopardy.
While the recession has at least bottomed out and appears technically to have ended, the recovery, by historic standards, has been anemic. Within two years of the start of every one of the three previous recessions, GDP had rebounded significantly—to 4 percentage points above where it was when the downturn began. But 31 months after the start of the current recession, GDP was still below its starting point. The employment situation is even worse. In the nasty recession of 1981-82, the economy had regained the jobs it lost within just 26 months. This time around, we still have 5 percent fewer jobs than at the recession's start in December 2007.
What bothers the public, plain and simple, is that the steps that were taken to mitigate the recession—which involved greater government involvement, including ownership of the largest auto and insurance companies, and vastly more federal spending—have not worked.
Worse, the public believes federal action was especially unhelpful to the mass of Americans. Only 27 percent of respondents to a Pew Research Center/National Journal survey in July agreed that "government economic policies have helped [the] middle class." A poll in June by Greenberg Quinlan Rosner Research for Democracy Corps, a Democratic organization, asked American adults to choose between two statements:
1: President Obama's economic policies helped avert an even worse crisis and are laying the foundation for our eventual recovery.
or
2 : President Obama's economic policies have run up a record federal deficit while failing to end the recession or slow job losses.
By 49 percent to 44 percent, respondents chose Statement No. 2, and for those who identified themselves as independents, the margin was 52-38. Among independents, the results for backing a statement "strongly" were 42 percent for No. 2 and just 22 percent for No. 1.
Some politicians and economists, notably Paul Krugman of Princeton and the New York Timesop-ed page, have argued that the persistent sluggishness of the economy is the result of not doing enough. Again, the public disagrees. As Jodie Allen of Pew wrote about her organization's study: "Far from demanding that the government reinforce its efforts so as to help neglected middle and lower-income groups, a majority of the public views cutting the federal budget deficit as more important than stimulating the economy." In June 2009, Pew found that, by 48 percent to 46 percent, Americans favored "spending more to help [the] recovery" over "reducing the budget deficit." But in July 2010, deficit-cutting was favored over spending by an 11-point margin, 51-40.
Government played two distinct roles during and after the crisis. The first was shoring up shaky financial institutions. On March 24, 2008, the Federal Reserve Bank of New York issued JPMorgan Chase a $29 billion non-recourse loan that allowed it to buy Bear Stearns, an investment bank on the verge of collapse. Six months later, the Fed provided $85 billion (more came later) to save AIG, the insurance giant with assets of more than $1 trillion. Congress then enacted the comprehensive Troubled Asset Relief Program, or TARP, which authorized loans and equity purchases for hundreds of institutions (mainly banks but also auto companies).
By June 30, 2010, the U.S. Treasury had disbursed $386 billion in TARP funds. Another $145 billion went to keep afloat the two government-sponsored (though ostensibly private) institutions that provide lenders with mortgage money, Fannie Mae and Freddie Mac.
How did all that work out? The Bear Stearns, AIG, Fannie Mae, and TARP dispositions were far from perfect. Robert Pozen argues in his book Too Big to Save? that too much of the federal money injected into AIG was used to bail out banks—many of them foreign—that AIG had insured against mortgage losses through credit default swaps. Those banks, he writes, could have taken a severe haircut without jeopardizing the global financial system. Also questionable was giving General Motors and Chrysler more than $80 billion (though President Bush acted honorably in keeping the automakers alive until the start of the Obama administration.) A good case can be made that automakers should have been allowed to go bankrupt through the normal legal process, with their assets passing from weak hands to strong. As for Fannie and Freddie, had perfectly sensible warnings from experts like Peter Wallison been heeded, they might not have collapsed at all, and the entire subprime-mortgage meltdown might not have occurred. So far, Congress and the president have simply kicked the Fannie-Freddie can down the road, delaying a long-term solution.
Overall, however, it has to be said that the TARP and the other financial rescues were necessary and efficient. The global financial network did face systemic failure, mainly because of a lack of liquidity, or cash to meet immediate demands. The U.S. government was able to provide that liquidity, using its authority as lender of last resort, and most of the direct beneficiaries could eventually repay their loans, with interest, as they recovered. In fact, within a year and a half after the TARP was launched, the Treasury had been repaid $211 billion—or more than half what it had put out.
The second role government played, however, was far more questionable. Instead of lender of last resort, it determined to be the spender of last resort. And this decision, more than any other, is what has led to the crisis in the liberal economic experiment.
John Maynard Keynes argued in 1933 that in a deep recession, consumers and businesses were too frightened and broke to spend and invest, so it was up to government to do the job with massive public-works projects and short-term tax cuts. Following Keynes's theory, Congress and the White House enacted the American Reinvestment and Recovery Act of 2009, which allotted $787 billion to a potpourri of stimulus programs to invigorate the economy.
In an article in Commentary ("Stimulus: A History of Folly") in March 2009, I recounted the discouraging history of Keynesian stimulus and predicted its failure this time out as well. The surprise, both to me and I'm sure to those who planned, advocated, voted for, and implemented the stimulus package, is just how quickly the American public came to recognize the sweeping nature of the failure.
The reasons for the failure, and for the literally depressing pessimism that the failure seems to herald, were first described 160 years ago by Frederic Bastiat in his essay "The Seen and the Unseen." Bastiat was describing the effects of economic actions, including public spending. That spending leads to results that are "seen," meaning, in the case of the current stimulus, the jobs of medical residents, teachers, road builders, and the like—jobs created or preserved by stimulus dollars. Then there is the matter of what is "unseen"—meaning all the money government used for those projects that has been diverted, through taxes or borrowing, from other uses.
Usually, the public is too dazzled by the seen to take account of the unseen. So politicians often get away with saying they have "created" this or that many jobs by spending taxpayers' money. Few follow the trail back to where the money came from or project it forward to divine the consequences. That was not the case this time. Quite the opposite, in fact.
In the current crisis, advocates of stimulus and of government intervention in general have been badly hurt by two developments. First, the short-term effects of the stimulus—the "seen"—have been extremely disappointing. The stimulus was signed into law on February 17, 2009. In the preceding month, unemployment stood at 7.7 percent. A study released at the time by Christina Romer, who shortly thereafter became chair of the President's Council of Economic Advisers, and Jared Bernstein, economic adviser to Vice President Biden, predicted that unemployment would never exceed 8 percent and would fall to 7.5 percent by June 30, 2010, if the stimulus were enacted. Without the stimulus, they claimed, unemployment would rise to 9 percent.
Instead, unemployment rose above 10 percent and was a still horrific 9.5 percent in June 2010. Perhaps a lack of stimulus spending would have made matters even worse. No one knows. You can't do a controlled experiment. But you can understand the public reaction: We spent all this money, and got almost nothing.
Bastiat would have appreciated one of the obvious explanations for the impotence of the stimulus. In 1957, Milton Friedman argued that attempts to increase consumer demand through government spending are doomed. The reason, Friedman wrote, is that individuals make their decisions about consumption by looking at their likely income and wealth far into the future. (He called it the "permanent income hypothesis.") If the government starts spending huge sums today, consumers foresee higher taxes and, by inference, presume that their lifetime incomes will drop because of the increased level of their tax burden.
If government spending is short-term or one-time-only, which is what the stimulus was supposed to be, then individuals might be expected to take a more benign view. But the 2009 stimulus did not take place in a vacuum. It was soon accompanied by other economic policies and proposals of the Obama administration and the Democratic Congress: health-care reform extending public coverage to 30 million new people, cap-and-trade energy proposals featuring vastly higher taxes, and the imminent expiration of the Bush tax cuts at the end of 2010.
Because of these policies, the "unseen" became "seen" in a fashion devastating to the politicians supporting them. Americans judged that the party in power intends the radical expansion of the size of government in perpetuity. That expansion will have to be paid for. There is no reason to expect very much good from the future if you are the sort of person who generates income and creates jobs. Your "permanent income" is going to decline, and your gut response will be to husband your resources.
More disastrously for the Democrats, the "unseen" became "seen" almost immediately, in the form of metastasizing budget deficits. In order to spend all that money it didn't have, the federal government was, of course, forced to borrow. So Treasury debt held by the public has grown from an easily manageable 36 percent of GDP at the end of fiscal 2007 to a troubling 62 percent at the end of 2010. Only once in U.S. history—during and right after World War II—has the debt-to-GDP ratio ever exceeded 50 percent.
With the new health-care law and other increased spending on the horizon, the debt-to-GDP ratio will keep rising—to 66 percent in 2020 and 79 percent in 2035, under what the Congressional Budget Office calls its "extended-baseline" scenario. In a worst-case scenario (using reasonable assumptions of spending growth), the ratio may jump to about 100 percent in 2020 and nearly 200 percent in 2035, predicted the CBO.
Americans are worried about this rising debt, and they have reason to be. As the CBO puts it, "Unless policymakers restrain the growth of spending, increase revenues significantly as a share of GDP, or adopt some combination of those two approaches, growing budget deficits will cause debt to rise to unsupportable levels."
What does "unsupportable" mean? Interest rates—and thus borrowing costs—could rise significantly as lenders worry about America's ability to repay. And if history is a guide, a debt-to-GDP ratio in the 100 percent range will seriously constrain the economy, according to This Time It's Different: Eight Centuries of Financial Folly, a 2009 book by Carmen Reinhart and Kenneth Rogoff that may turn out to be the most influential analysis of the current crisis.
For the public, the worry extends beyond the debt itself to the very role of the federal government. According to Gallup, by a margin of 57 percent to 37 percent, Americans say there is "too much" rather than "not enough regulation of business by government." Big business is unloved, but more and more, government is seen as clumsy, venal, and self-serving.
There is no denying that the narrative about how greedy financiers caused the economic crisis still has currency. But another narrative now looms larger. It is that the government's attempts to fix the problem through spending have been ineffectual at best and, more likely, dangerous to our economic health.
When the financial meltdown occurred, it seemed almost certain that Americans would judge that the conservative economic experiment of 1981-2008 had failed. Instead, they seem to be leaning in the opposite direction—toward a conclusion that it was the liberal economic experiment of 2009-10 that has failed.
This conclusion is not being warmly embraced so much as reluctantly conceded. Things could change. Conservatives will face a challenge later this year over whether to extend tax cuts that, at least from a "seen" viewpoint, will further increase the debt. Still, when you consider that a repudiation of free-market capitalism and what President Sarkozy called a "return of the state" appeared almost certain when the crisis broke, we should be both humbled by and thankful for this strange and constructive turn of events.
The decline in GDP came in 1991. On inflation: Between 1992 and 2007, the Consumer Price Index never increased more than 3 percent in any calendar year. By comparison, between 1967 and 1982, annual inflation was always over 3 percent and 12 times over 5 percent. Despite two recessions, annual unemployment exceeded 7 percent only once between 1986 and 2008 (7.5 percent in 1992) and was below 6 percent in 17 of the 23 years—including every full year of the George W. Bush presidency.
Mr. Glassman, former undersecretary of state for public diplomacy and public affairs, is executive director of the George W. Bush Institute in Dallas and host of the weekly program Ideas in Action on public television.
Dear Patients: Vote to Repeal ObamaCare
Don't believe Democrats who promise to fix the bill once they're re-elected.
By HAL SCHERZ
Facing a nationwide backlash, Democratic congressional candidates have a new message for voters: We know you don't like ObamaCare, so we'll fix it.
This was the line offered by Democrat Mark Critz, who won a special election in Pennsylvania's 12th congressional district after expressing opposition to the law and promising to mend it—but not to repeal it. As a doctor I know something about unexpected recoveries, and this latest attempt to rescue ObamaCare from repeal needs to be taken seriously.
For Democrats who voted for ObamaCare, this tactic is an escape route, a chance to distance themselves from the president with a vague promise to fix health-care reform in the next Congress.
To counter this election-year ruse, my colleagues and I at Docs4PatientCare are enlisting thousands of doctors in an unorthodox and unprecedented action. Our patients have always expected a certain standard of care from their doctors, which includes providing them with pertinent information that may affect their quality of life. Because the issue this election is so stark—literally life and death for millions of Americans in the years ahead—we are this week posting a "Dear Patient" letter in our waiting rooms.
[Scherz] Associated Press
Andy Griffith pitches President Barack Obama's health care law to seniors.
The letter states in unambiguous language what the new law means:
"Dear Patient: Section 1311 of the new health care legislation gives the U.S. Secretary of Health and Human Services and her appointees the power to establish care guidelines that your doctor must abide by or face penalties and fines. In making doctors answerable in the federal bureaucracy this bill effectively makes them government employees and means that you and your doctor are no longer in charge of your health care decisions. This new law politicizes medicine and in my opinion destroys the sanctity of the doctor-patient relationship that makes the American health care system the best in the world."
Our doctor's letter points out that, in addition to "badly exacerbating the current doctor shortage," ObamaCare will bring "major cost increases, rising insurance premiums, higher taxes, a decline in new medical techniques, a fall-off in the development of miracle drugs as well as rationing by government panels and by bureaucrats like passionate rationing advocate Donald Berwick that will force delays of months or sometimes years for hospitalization or surgery."
We cite the brute facts of ObamaCare's passage:
"Despite countless protests by doctors and overwhelming public opposition—up to 60% of Americans opposed this bill—the current party in control of Congress pushed this bill through with legal bribes and Chicago style threats and is determined now to resist any 'repeal and replace' efforts. This doctor's office is non-partisan—always has been, always will be. But the fact is that every Republican voted against this bad bill while the Democratic Party leadership and the White House completely dismissed the will of the people in ruthlessly pushing through this legislation."
Then we address the Democrats' evasive campaign maneuver:
"In the face of voter anger some Democratic candidates are now trying to make a cosmetic retreat, calling for minor modifications or pretending they are opposed to government-run medicine. Once the election is over, however, they will vote with their party bosses against repealing this bill."
The letter's final lines are the most important:
"Please remember when you vote this November that unless the Democratic Party receives a strong negative message about this power grab our health care system will never be fixed and the doctor patient relationship will be ruined forever."
This message is going out to an electorate that is already frustrated over what they see happening to health care. Missouri voters rejected ObamaCare overwhelmingly in August, voting by a margin of 71%-29% to reject the federal requirement that all individuals purchase health insurance. Democratic pollster Douglas Schoen has assessed that ObamaCare is "a disaster" for Democrats. And around the country many little-noticed primaries have reflected voter rage—including the Republican primary victory of surgeon, political newcomer, and advocate of repeal Daniel Benishek in Michigan's first district.
Meanwhile, the Obama administration's damage-control efforts have fallen flat. The latest round of pro-ObamaCare television spots targeting the elderly and starring veteran actor Andy Griffith have not only failed to move the polling numbers. They have caused five U.S. Senators to ask for an investigation of the ads as a violation of federal laws barring the use of tax dollars ($750,000) for campaign purposes.
America's doctors have millions of personal interactions each week with patients. We have political power. And we intend to use it by working to defeat those who have disrupted and gravely endangered the best health-care system in the world.
Dr. Scherz, a pediatric urological surgeon at Georgia Urology and Children's Healthcare of Atlanta, serves on the faculty of Emory University Medical School and is president and cofounder of Docs4PatientCare.
Mexico Under Siege
Mexico Under Siege
Business Heads Plead as Drug Gangs Terrorize Wealthy City
NICHOLAS CASEY
MONTERREY, Mexico—A surge of drug violence in Mexico's business capital and richest city has prompted an outcry from business leaders who on Wednesday took out full-page ads asking President Felipe Calderón to send in more soldiers to stem the violence.
'Es momento de hacer un alto y decidir sobre la mejor forma de responder a las bandas de criminales que ... buscan establecer un nuevo parámetro de terror.'
'It's time to stop and decide the best way to respond to criminal bands ... looking to establish a new boundary of terror.'
– Excerpt from newspaper ad by Mexican business leaders
Soldiers secure a crime scene where the body of the mayor of a tourist town near Monterrey was found Wednesday.
The growing violence in Monterrey, long one of Mexico's most modern and safe cities, is a sign that the country's war against drug gangs is spreading ever further from poorer battlegrounds along the border and into the country's wealthiest enclaves.
Residents opened their newspapers Wednesday morning to find the ads taken out by Mexican business leaders, begging the government to send more military into the city. "Enough already," said the notice that ran in national and local papers, criticizing what it said was a slow response of police against "criminal bands that in every act look to establish a new boundary of terror."
Later that day, the body of Edelmiro Cavazos, mayor of the Monterrey suburb of Santiago, was found beside a highway. Mr. Cavazos had been abducted Sunday night, the latest in a string of attacks against politicians in Mexico's north.
His killing is another incident in a terrifying spell for Monterrey residents that began Saturday when armed gangs set up more than a dozen roadblocks on key boulevards of the city, paralyzing traffic for hours. The next day, a grenade was lobbed at the offices of an important television broadcaster. On Tuesday night, grenades were also hurled at several small businesses on the city's outskirts.
Mexico's War on Drugs
Review key events in the fight to break the grip of Mexico's drug cartels.
Mexico's Drug Killings
Nearly 23,000 people have died in drug-related violence since 2006, according to the government, with northern border states experiencing the worst of the violence.
"The security environment in Monterrey has turned, in just a few months, from seeming benevolence to extreme violence," U.S. Ambassador to Mexico Carlos Pascual said at a recent conference on drug trafficking in El Paso, Texas.
Monterrey is only the latest sign of mounting problems in Mexico's war on organized crime. The official toll since President Calderón took power in December 2006 is more than 28,000, according to government figures through July. Mr. Calderón recently acknowledged the government's inability to check the violence with brute force alone and has invited lawmakers to debate measures such as legalizing drugs.
The brutality of the conflict is escalating. Alleged gang hit men broke into the home of a Chihuahua state policeman this week and strangled to death his 4-year-old brother, authorities said. Across the country, mutilated and decapitated bodies turn up virtually every day, sometimes hanging from bridges.
It wasn't always this way in Monterrey. Mexicans know the city of 2 million as "The Sultan of the North," a nickname stemming from its wealth, generated by corporations such as Mexico's beverage titan Femsa S.A.B. de C.V. and U.S. businesses such as Whirlpool Corp. and General Electric Co., which have large offices in Monterrey. International architects built the city's skyline, which is framed by dramatic mountains.
Security forces find the body of a mayor days after he was abducted by hit men in the latest attack on a public official by increasingly bold drug gangs. Video courtesy of Reuters.
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The wealth created a sense that Monterrey was impervious to the drug war. "People just didn't think it was going to happen here," said Carlos Jáuregui, who until March was the top security officer in Nuevo León state where Monterrey is. "Now most of our police corps have been infiltrated by organized crime."
In April, hooded men raided a Holiday Inn in Monterrey taking several hostages, who remain missing. The month before, two doctorate students were killed as bystanders in a shootout at Mexico's most prestigious university, the Monterrey Institute of Technology and Higher Education, known as Monterrey Tech.
Soldiers stand guard around stolen trailers used by gunmen to block a main road in Monterrey earlier this month.
Monterrey is different from other places that have typically been embroiled in the drug war. Unlike cross-border transit points like Reynosa and Ciudad Juárez, where many drug traffickers operate freely a stone's throw from Texas, Monterrey is a four-hour drive from the Mexican border. The city isn't near a port where cocaine enters Mexico in transit to the U.S., nor is it in the mountains where marijuana and opium poppies are grown.
But authorities say Monterrey's high-end neighborhoods have drawn some of country's richest drug lords, particularly from Los Zetas, one of the country's most violent crime groups. In the past, these hideouts were considered "off-limits" to rival gangs. But now it appears the violence has become so out of hand that the drug bosses themselves can no longer control it.
Meanwhile, Monterrey's other well-heeled residents have become targets for violent car theft and kidnappings for ransom—alternative sources of income for crime groups. Fernando GarcÃa, 62, said he was driving in the city's wealthy suburb of San Pedro Garza GarcÃa one afternoon in June when he and his son were approached by armed men who ordered them out of their vehicle. One of the men sped off with their car, while two others held Mr. GarcÃa and his son in a second vehicle for the next seven hours, forcing them to withdraw cash from various automated teller machines, until the cards were blocked after $1,000 in withdrawals. "There were people driving by when it happened, and no one helped us," Mr. GarcÃa said. Police have made no arrests for the crime.
Another frightening development is the emergence of so-called narcobloqueos, or drug blockades, the tactic used last weekend by drug gangs to snarl traffic in the city. The first occurred at the beginning of this year, and now the city has become known for them.
Several men were found dead in July in a wealthy suburb of the city.
During a narcobloqueo, members of a crime group commandeer buses or commercial trucks carrying tractor trailers, block major highways with the vehicles and leave the scene, disrupting traffic for hours. Officials say the tactic is aimed at keeping police and military from circulating through the city, though it is also used as a show of power.
City leaders recently assembled an emergency towing team to clear the streets after blockades.
As Monterrey's roads have become danger zones, so has its esteemed university, the Monterrey Tech. In March, Javier Arredondo and Jorge Antonio Mercado were killed on the campus after a shootout with soldiers. Initially, the military said the two were hit men. It later surfaced they were unarmed students. Last week, Mexico's National Human Rights Commission said the military had planted weapons on the students. Mexico's military denies having done so.
Ernesto Canales, an attorney from Monterrey, said such incidents undermine public trust. "Now we feel like we're caught between the bad guys and the military," he said.
Javier Treviño, Nuevo León's lieutenant governor since October, said the military presence is necessary because drug cartels have infiltrated local police. Escalating violence in the city shouldn't be interpreted as a sign that drug traffickers are winning, he said, but is rather often the painful result of the state's capture of big cartel leaders this year. "As we dismantle these organizations, there are some consequences. Every time you have new bosses of the different cells, you have new violence associated with that," he said in an interview.
Richard Hildreth, a director at New York-based security consultant Altegrity Risk International, said companies are increasingly seeking advice on how to fend for themselves in the city. "U.S. companies see Monterrey as high-risk now," Mr. Hildreth said. Polaris Industries, a large maker of snowmobiles and all-terrain vehicles in Medina, Minn., that plans to open a manufacturing facility in Monterrey is going ahead with the plant, a spokeswoman says, but recent violence has become a "serious concern."
The consequences of violence drag on into everyday life. Locals say they host parties in the afternoon now, so guests can avoid driving at night. Many Monterrey residents say they won't travel to South Padre Island, a popular resort on the coast of Texas, for fear of passing through Reynosa, a city where hundreds of murders have occurred this year. This summer, Monterrey's high-end Palacio de Hierro shopping mall was held up by gunmen for the third time this year.
"We're defenseless here. Who do we call for help?" said a local hotel owner who used to own the Holiday Inn stormed by masked gunmen in April, asking that his name not be used.
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